Tag: Core Scientific

Bitcoin mining: Riot Platforms’ 10-K is full of tentacles

  • By Amy Castor and David Gerard

We were going to do a quick news update on the world of bitcoin mining —then we got hold of Riot’s 10-K filing for 2023. Hoo boy.

Extreme noise terror

Bitcoin mining in Arkansas is making everyone miserable. The 24/7 noise caused by cooling fans is keeping residents up at night, chasing away wildlife, and lowering property values. 

The Satoshi Action Fund, led by Dennis Porter, is making matters worse for homeowners. The advocacy group, founded by climate denier and former Trump EPA chief of staff Mandy Gunasekara, has been pushing policies that offer greater legal protections for bitcoin miners. [NYT]

In a world where scientists widely hold that the impact of climate change will range from bad to really bad, Gunasekara thinks the impact will be “mild and manageable.” She is unable to come up with any scientific evidence to support this claim. [NPR, 2023] 

In Hood County, Texas, homeowners living near a Marathon Digital mining facility are equally pissed about the noise and environmental damage wrought by crypto mines. “It’s like sitting on the runway of an airport where jets are taking off, one after another.” [Time; WFAA, archive] 

The Texas Coalition Against Crypto Mining, led by Jackie Sawicky, is now doing a weekly email newsletter: Proof Of Waste. We’ve been finding it super-useful already. [Issue 1; Issue 2; subscription form]

Bitcoin is a battery of unspecified size

Bitcoin miners really don’t want anyone to know how much power they use. February 23, was the deadline for 82 bitcoin mining companies to cough up details of their energy use to the Energy Information Administration, the statistical arm of the US Department of Energy. The results were to be made public later this year to better inform policymakers about the climate impacts of bitcoin mining.

At the last moment, Riot Platforms and their lobbying arm, Texas Blockchain Council, filed a complaint in Waco, Texas, to delay the deadline. They claimed that the survey was rushed through on an “emergency” basis without a public comment period. The court granted a temporary restraining order on the data collection until a preliminary injunction hearing could be held. [Doc 13, PDF; Semafor]

The EIA reached an agreement with Riot and the Texas Bitcoin Blockchain Council. It will publish a notice on its planned survey and begin collecting public comments over 60 days. The notice will replace the previous survey. [Agreement, PDF]

The Sierra Club filed an amicus brief. “An outcome in this proceeding that prevents EIA from collecting data for months will materially increase the risk of rolling blackouts in extreme weather events or — as in Texas during Winter Storm Uri — cost customers tens of millions of dollars in payments to cryptocurrency miners to keep their lights on.” [Press release; Amicus brief, PDF] 

As far as we presently know, bitcoin mining in the US consumes as much energy as the state of Utah.

Climate change is an emergency. In return for all the misery and destruction they bring, bitcoin miners contribute zero to their communities.   

A history of flawless repute 

Riot is the largest crypto mining company in the US with facilities in Rockdale and Corsicana, Texas. It trades publicly on the Nasdaq with the ticker symbol RIOT.

Riot used to be a failing biotech under various names — Aspen Biopharma, Venaxis, Bioptix — whose stock traded under $5. In October 2017, in the heat of a crypto bubble, CEO John O’Rourke and Florida businessman Barry Honig figured out a way to pump the stock: blockchain!

The company rebranded as Riot Blockchain and BIOP became RIOT. The stock shot up from $5 to $46 in a matter of months. Fortunately, O’Rourke and Honig were well-invested!

They picked a good time to divest, too. In December 2017, after Riot’s stock hit a high of $46.80 — coinciding with the peak of the 2017 bitcoin bubble — O’Rourke dumped 30,383 shares for over $800,000. Honig dumped 500,000 shares for an undisclosed amount. 

The SEC was not happy with companies adding “blockchain” to their names without any blockchain business. So Riot bought a two-week-old company called Karios, paying more than $11 million for mining equipment worth only $2 million. Honig just happened to be a shareholder of Karios as well.  

Riot also acquired a majority stake in a “blockchain development company” called Tess based in Ontario, Canada. Tess was a shell company associated with bitcoin phishing sites, including a fake Mt Gox website. 

O’Rourke’s stint as Riot CEO was short-lived. He stepped down in 2018, after he, Honig, and a fellow called Mark Groussman were named in a penny stock scam involving three companies. (Riot was not mentioned in the complaint.) Honig was the alleged “primary strategist.” 

In 2018, short-seller Hindenburg advised investors to steer clear of RIOT and said the company was “hurtling toward the abyss.” An investigative piece by CNBC in February 2018 saw RIOT shares drop 33%. The CNBC report is comedy gold. [Hindenburg; CNBC; YouTube]

RIOT 2023 10-K: Extreme accounting

Riot has filed its full-year financials for 2023. The company reported “all-time highs of $281 million in total revenues, 6,626 Bitcoin produced, and $71 million in power credits earned.” [Press release; 10-K]

The company had no analyst call. This is not at all usual. But it’s not illegal! 

As always, Riot made no profit. The company posted a net loss of $49.5 million in 2023. It’s hard to compare this to their net loss of $509.6 million in 2022 — a large part of that number was goodwill write-offs and bitcoin and mining rig value impairment. 

RIOT reduced its losses on the books by $184.7 million by booking the rise in bitcoin price — that is, capital gains on the bitcoins they are holding, and not any sort of actual income — as “cash on hand, earned.”

Their “selling, general and administrative expenses” — mostly payroll — for 2023 totaled $100.3 million. That’s up $32.9 million from 2022.

Riot’s entire bitcoin mining revenue in 2023 was $189 million — only 2% higher than in 2021. Of that mining revenue, $71 million is subsidies from Texas for not mining bitcoin. That’s ordinary citizens paying to keep this company afloat.

Riot changed its name from “Riot Blockchain” to “Riot Platforms” in January 2023,  hoping to diversify into anything that wasn’t bitcoin mining — such as using its supposed expertise in running large data centers. Nobody cared — almost all Riot’s revenue came from mining. Or from not mining.

Adding water to soup

Bitcoin miner accounting is very special, as we covered a couple of years ago.

The scheme is for the executives to leverage being a public company in a bubble to pay themselves money — e.g., as company shares that the C-suite prints and awards to themselves. The suckers are naïve institutional investors who want in on a bubble. The rug pull is when they go bankrupt.

Money comes into Riot from investors who should know better, and it goes out to insiders and operating expenses. This generates a small stream of income — which relies on past spending on mining rigs and the physical plant.

Riot pays its executives well beyond the company’s carrying capacity. Riot CEO Jason Les is getting $21.5 million a year, mainly in bonuses and stock. Executives awarded themselves another $213.6 million in stock and options as of January 2024 — but it’s performance-based! They’re really efficient at setting money on fire.

The company has a history of diluting stock. They’ve gone from 15 million shares in 2019 to 250 million shares in 2024. In 2023, the company netted $517.6 million from selling 45.8 million new shares. [Ycharts]

One of Riot’s big problems is that even the institutional investors who thought RIOT was a way to get bitcoin exposure have ETFs now instead.

Risk factors

Riot has been telling folks in Navarro County, where it’s building a massive one-gigawatt mining facility, that its servers will be immersion-cooled with oil to reduce noise pollution. A demonstration facility seriously impressed Navarro County commissioners with how quiet it was.

But in the 10-K, Riot admits they have no idea if immersion cooling will even work at scale: 

Immersion-cooling is an emerging technology in Bitcoin mining, which is not in widespread use, and has yet to be deployed at this scale. As such, there is a risk we may not succeed in deploying immersion cooling at such a large scale to achieve sufficient cooling performance. All Bitcoin mining infrastructure, including immersion-cooling and air-cooling, is an evolving study.

The company also admits they’re absolutely screwed without the power subsidies from the state of Texas:

… our plans and strategic initiatives for the Rockdale Facility and Corsicana Facility are based, in part, on our understanding of current environmental and energy regulations, policies, and initiatives enacted by federal and Texas regulators. If new regulations are imposed, or if existing regulations are modified, the assumptions we made underlying our plans and strategic initiatives may be inaccurate, and we may incur additional costs to adapt our planned business, if we are able to adapt at all, to such regulations.

From the extreme bingo hall

Denton in Texas used to have Core Scientific, who went bankrupt in late 2022 to the cheers of the townsfolk — but now the city is welcoming more of these bozos. The miner, whoever it is, appears to be pitching itself to the town as a “modular data center.”  [DRC, archive; DRC, archive]

This is the latest swindle we’re seeing from miners — they pitch themselves as “high-speed computing” or “modular data centers,” as if they could use their computing power for something other than mining. They can’t. ASICs are specialized and run for about eighteen months before becoming e-waste.

Jaime Leverton, the CEO of bitcoin miner Hut 8, has stepped down after that short-seller report from J Capital we mentioned previously. Her resignation sent the stock (Nasdaq: HUT) down 8%. Leverton is succeeded by President Asher Genoot. [CoinDesk] 

Analysts for the Bitfinex crypto exchange say that miners are dumping their bitcoins ahead of the halving. We think this means the miners are desperate for cash, they don’t think the current pump in price will hold, or they’re getting ready to exit the business. [Bitfinex, archive] 

Ethiopia is suffering a plague of crypto miners, lured by cheap energy. A wave of Chinese miners brought their container data centers to the country after they were kicked out of China in 2021. Several Chinese companies have now invested in a $4.8 billion dam, which the miners would draw power from. Ethiopia has signed a preliminary agreement to establish a $250 million bitcoin mining and AI (apparently) data center, led by the Russian bitcoin miner BitCluster. While all this is going on, about 40% of Ethiopia’s population of 120 million have no electricity. [South China Morning Post, archive; Bloomberg, archive] 

We hear tell that the bitcoin mining rigs in El Salvador, which President Bukele set up outside the LaGeo plant in Berlín, Usulután, are no longer running, which is unsurprising in a country where power is 15c-20c/kWh — the container mining rig data centers have been left rusting in the sun. There are rumors that much of the setup has been stripped for scrap metal. We look forward to the rest of bitcoin mining going the same way.

Bingo masters break out

Bitcoin miners in the US don’t run on the naïve model of making bitcoins and selling them — they’re creatures of fabulously questionable financial engineering in public markets. And with leverage comes weirdness.

These companies are in an unprofitable business. The only ones making money are the executives, who treat company stock like their personal ATM. 

We expect the US miners to finally admit they’re broke at some point soon — hopefully this year. Apart from mining income halving in a couple of months, the bitcoin price can’t be pumped with billions of tethers forever — ultimately, the retail dollars just aren’t there.

Bitcoin miners could be saved with another crypto bubble.  Any moment now! We don’t think a fresh bubble will kick off this year — it would require a fresh influx of retail dollars that just aren’t in evidence — but we don’t want to bet against human foolishness.

When the companies go bankrupt, the shareholders will end up holding the bag. It’s hard to feel that sorry for them — most of these were institutional investors who really should have known better.

States like Texas will be left figuring out what to do with the mountains of e-waste they leave behind.

Posted on by Amy Castor 5

Crypto collapse: BlockFi even deader, crypto miners going broke, Sam will not shut up, Binance and Tether are fine

the wonderful thing about bitcoin is that ‘sorry i was too dumb to do things properly so it all collapsed’ is not only a feasible explanation but historically likely

— Boxturret on SomethingAwful

Shut up, Sam

If you may be in legal trouble, any lawyer has one piece of advice: stop talking. If you’ve just filed a high-profile bankruptcy with maybe billions of dollars missing: stop talking. If you’ve got prosecutors sniffing around your activities: stop talking.

Sam Bankman-Fried never got the memo, or he did and threw it in the trash. In reference to his lawyers, he told Tiffany Fong: “they know what they’re talking about in an extremely narrow domain of litigation. They don’t understand the broader context of the world.” [YouTube; Twitter]

Despite producing reams of potential “evidence” that could one day be used against him, SBF will talk to any reporter, anywhere, any time of day. On Wednesday, November 29 he spoke on an NYT DealBook panel. On Thursday, November 30, he spoke to Good Morning America.

He loves the camera. But he still can’t tell you where the money went.

In the DealBook interview with Andrew Ross Sorkin, SBF said he “never tried to commit fraud,” and he didn’t knowingly commingle $10 billion in customer funds. He frames the whole matter as he seemingly lent Alameda customer funds from FTX as a risk management problem that got out of hand. Well, it sure did that. [Video; Transcript] 

George Stephanopoulos from Good Morning America, who actually flew to the Bahamas to talk to SBF, was a lot tougher on him. SBF again denied “improper use of customer funds,” saying he failed at oversight. “You said one of your great talents in a podcast was managing risk.” “That’s right.” “Well, it’s obviously wrong.” [GMA; Twitter]

As Lying for Money author Dan Davies points out, prosecutors just have to show that SBF intentionally deceived clients as to what was happening to their money. When you tell people their money is segregated and it’s not, that’s fraud. “The offence was committed the minute it went in the wrong account.” [Twitter]

If you ignore your lawyer because you’re smarter than everyone, no lawyer is going to work with you. Martin Flumenbaum at Paul Weiss already dumped SBF. We’re hearing unconfirmed rumors that David Mills, his father’s colleague at Stanford, who was advising SBF, is also refusing to work with him further. [Semafor; Twitter]

A lot of FTX employees bailed after the company filed for bankruptcy. But a few have soldiered on — likely so they can nail SBF, who screwed them over about as much as he screwed over all of his customers and investors. While SBF is telling his side of the story to reporters, FTX employees are leaking emails. NYT wrote about the absolute chaos that FTX lawyers and execs endured in wresting power away from the deluded SBF in the wee hours of November 11. [NYT]

If Sam’s lawyer had jumped in front of the camera and ripped Sam’s larynx out with his bare hands, he could reasonably bill it as extremely valuable and important legal services to his client.

Extremely predictably, there goes BlockFi 

In January, there were three big crypto lenders — Celsius, Voyager, and BlockFi. Now all three are bankrupt, and our emails are clogged with new bankruptcy filings.

After weeks of frozen withdrawals, BlockFi filed for voluntary Chapter 11 on November 28 in New Jersey. [Petition, PDF; bankruptcy docket on Kroll; CNBC; press release]

BlockFi was already a dead firm walking. They were dead after Three Arrows blew up in May. FTX kept BlockFi’s head above water with a $400 million credit facility — but then FTX imploded. [Twitter] 

The New Jersey firm doesn’t just have more liabilities than assets — a lot of the assets are missing too. All of BlockFi’s cryptos were in FTX. They were using FTX as their crypto bank.

BlockFi has over 100,000 creditors. Assets and liabilities range between $1 billion and $10 billion. There’s $1.3 billion in unsecured loans outstanding and $250 million in customer funds locked on the platform.

BlockFi has $256.5 million cash on hand — after selling their customers’ crypto:

In preparation for these chapter 11 cases, BlockFi took steps to liquidate certain of its owned cryptocurrency to bolster available cash to fund its business and administrative costs. Through the process, BlockFi was able to raise $238.6 million of additional cash, for a total unencumbered cash position as of the Petition date of $256.5 million.

Ankura Trust is BlockFi’s largest unsecured creditor to which it owes $729 million. Ankura is typically brought in to represent the interest of others in bankruptcy. If so, who are those creditors? We’d love to know.

FTX US is BlockFi’s second-largest unsecured creditor, with a $275 million stablecoin loan. This is the credit facility that SBF “bailed out” BlockFi with in June.

BlockFi’s fourth-largest unsecured creditor is the SEC — BlockFi still owes $30 million of its $50 million in penalties from February. The total settlement was $100 million, with half owed to the SEC and half owed to state regulators. [SEC; Twitter]

All the other creditors’ names are redacted. Very crypto.

BlockFi is entangled in FTX in multiple ways. BlockFi had a $680 million loan to SBF’s Alameda Research. This was collateralized by SBF’s personal shareholding in popular day-trading broker Robinhood — just days before FTX filed for bankruptcy. BlockFi is suing SBF for his stake in Robinhood. It doesn’t help that SBF was shopping his Robinhood shares around as collateral after he’d pledged them to the BlockFi loan. [Filing, PDF; Complaint, PDF; Bloomberg] 

Crypto miners — we told you so

We set out in detail in August this year how publicly traded bitcoin mining companies were always going to leave their lenders and investors as the bag holders.

We predicted that the miners would default on billions of dollars in loans, leaving the lenders with worthless mining rigs and unsaleable piles of bitcoins. They would then go bankrupt — with all the paperwork in order.

The miners depreciated their mining rigs over five years — and not the 15 months they should have — to make their companies look like better investments.

And miners are now defaulting on their rig-backed loans. Lenders — New York Digital Investment Group, Celsius, BlockFi, Galaxy Digital, NYDIG, and DCG’s Foundry — are getting stuck with worthless e-waste. [Bloomberg]

Iris Energy (IREN) faced a default claim from its lender NYDIG on $103 million “worth” of mining equipment. The company’s miners aren’t making enough money to service their debt. So Iris defaulted! And NYDIG now owns some obsolete mining rigs. [SEC filing, Global Newswire; Coindesk; CoinTelegraph]

Shares in Argo Blockchain (ARBK) dropped 40% after the firm announced that its plans to raise $27 million by selling shares were no longer happening. [Twitter; Decrypt]

Core Scientific hired law firm Weil, Gotshal & Manges and financial advisors PJT Partners to help figure out ways to stave off bankruptcy. The options include exchanging existing debt for equity or additional debt, asset sales, equity, or debt financing. They’re gonna go bankrupt — because that was always the exit strategy. [The Block]

Binance goes shopping

In the financial crisis of 2008, when banks were dropping like flies, some big banks would buy smaller banks that had healthy books — so they could patch the holes in their own books. Bigger and bigger shells to hide the Ponzi under. 

Crypto is doing the same. FTX was buying up, and planning to buy up, small bankrupt crypto firms to try to hide the hole in its own books. And Binance, the largest crypto exchange, just bought Sakuro Exchange BitCoin (SEBC), a Japanese exchange that is already licensed with the country’s Financial Services Agency. [Binance; Bloomberg]

Japan learned its lesson early. Tokyo-based Mt. Gox, one of the first big bitcoin exchanges, blew up in 2014. Japan went on to become one of the first countries to regulate crypto exchanges with a licensing system. Crypto exchanges in Japan are required to keep customer assets separate, maintain proper bookkeeping, undergo annual audits, file business reports, and comply with strict KYC/AML rules. They are treated almost like banks! [Bitcoin Magazine]

Binance tried to set up operations in Japan in 2018, after getting kicked out of China — but Japan’s FSA told Binance they needed to play by the rules and apply for a license or pack their bags. [Bitcoin Magazine]

Binance’s bogus bailout fund 

Binance announced a $2 billion “industry recovery fund” to prop up all of the other flailing crypto firms that have been struggling since FTX blew up. They claim that 150 crypto firms have applied for a bailout. [Bloomberg] 

Binance has its own stablecoin, BUSD, that it claims is run by Paxos and Binance, “and is one of the few stablecoins that are compliant with the strict regulatory standards of NYDFS.” The crypto bailout fund is $2 billion in BUSD.

BUSD is a Paxos-administered dollar stablecoin. Each BUSD is backed by an alleged actual dollar in Silvergate Bank, and attested by auditors. (If not actually audited as such).

That’s true of BUSD on the Ethereum blockchain. It’s not true of BUSD on Binance.

BUSD on Binance is on their internal BNB (formerly BSC) blockchain, bridged from Ethereum. It’s a stablecoin of a stablecoin. Binance makes a point of noting that Binance-BUSD is not subject to the legal controls that Paxos BUSD is under. We’re sure it’ll all be fine if there are any issues, which there totally won’t be. [Binance] 

Treating FTX’s claims about other crypto firms as confessions would have given you pretty detailed correct answers — it was all projection. FTX was accusing others of what they were doing themselves. You should look at what Binance has been saying the same way.

We’re going to go so far as to assert that Binance is a hollow shell too, and the bailout fund is most likely for a hole in its own books.

Every one of the crypto companies accounts for their value in dollars by calculating their mark-to-market value. “We have a billion dollars of $CONFETTI!” Even if they couldn’t get $10,000 in actual money for it.

All of crypto is bankrupt if you account for the crypto assets at realizable value rather than mark-to-market. Realizable value depends on the inflow of actual dollars into crypto — and that inflow has plummeted because the retail suckers went home. 

All crypto companies are Quadriga. Pull back the curtain and you’ll see Celsius/FTX-style non-accounting, a Google spreadsheet if you’re lucky, and incompetence. Such utter blithering didn’t-understand-the-question incompetence. It’s been this way since 2011.

Tether is fine, you FUDster

Tether has been issuing tethers by lending out its USDT stablecoin, rather than exchanging the USDT one-to-one for dollars (LOL).

As of Tether’s attestation for September 30, 2022, 9% of USDT are loans to Tether customers. Tether claims these are collateralized — but they won’t say who the borrowers are or what the collateral is. [Tether; WSJ, paywalled]

In their long-winded response to the WSJ writeup, Tether blames …. the media. [Tether]

We know from the CFTC settlement in October 2021 that Tether was issuing USDT to its big customers with a kiss and a handshake. Now they’re admitting it publicly.

Other crypto exchanges/firms in trouble

CoinDesk’s report on the hole in Alameda’s balance sheet and Alameda’s close ties to FTX did so much damage to the crypto industry — and to Coindesk’s parent company Digital Currency Group — that the news site has attracted take-over interest. [Semafor] 

CoinDesk did not blow apart the crypto industry. This was an unexploded bomb that was set up in May.

It was all going to explode eventually as soon as someone looked inside the box. As CZ told The Block’s Larry Cermak in 2019: “some things are better left unsaid.” [Twitter] 

Japanese social media company Line is shutting down Bitfront, a US-based crypto exchange that it launched in 2020. They said the closure was unrelated to “certain exchanges that have been accused of misconduct.” [Announcement; Bloomberg]

AAX exit scam completed. Hong Kong-based exchange AAX froze withdrawals on November 13, and its executives quietly slipped away as opposed to filing bankruptcy — social media pages removed, LinkedIn profiles deleted. Sources tell us that employees have been laid off and the founders are nowhere to be found. [Hacker News; AAX]

John Reed Stark: Since the FTX debacle, Big Crypto’s SEC hit pieces and talking points calling for “regulatory clarity” are pure pretense and subterfuge, intended to distract and dissemble the truth — that the crypto-emperor has no clothes. [Duke FinReg Blog] 

Image: Sam talking on GMA

Posted on by Amy Castor 3

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

  • By Amy Castor and David Gerard

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

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

Celsius: dodge the cops by diving down the drain

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

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

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

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

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

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

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

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

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

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

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

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

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

The forlorn quest for your money

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

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

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

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

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

An inspector calls

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

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

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

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

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

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

Hosting services

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

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

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

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

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

Cold, so cold

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

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

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

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

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

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

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

Voyager Digital, FTX, and Texas

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

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

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

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

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

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

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

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

The lawyers want their money 

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

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

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

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

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

Other good news for crypto finance

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

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

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

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

Posted on by Amy Castor 0