Nigeria has been deeply unhappy with Binance for a while. Now two Binance officials have been held in Nigeria after they arrived in Abuja on February 26.
Also, Binance is going to have to pay the first installment of its $4.3 billion fine to US regulators real soon. Where will it get the cash?
Our latest is over on David’s blog. [David Gerard]
It’s not over until withdrawals are temporarily paused due to unusual market activity.
— Jacob Silverman
Tether’s been under some regulatory heat after the reports of how useful USDT is for financing terrorists and other sanctioned entities. Even Cynthia Lummis, the crypto-pumping senator from Wyoming, loudly declared that Tether had to be dealt with.
The US government isn’t entirely happy with Tether’s financial shenanigans. But they’re really unhappy about sanctions violations, especially with what’s going on now in the Middle East.
So Tether has announced that it will now be freezing OFAC-sanctioned blockchain addresses — and it’s onboarded the US Secret Service and FBI onto Tether! [Tether, archive; letter, PDF, archive]
Tether doesn’t do anything voluntarily. We expect they were told that they would allow this or an extremely large hammer would come down upon them.
There’s more to Tether’s criminal use case than sanctions violation. The most jaw-dropping chapter in Zeke Faux’s excellent book Number Go Up (US, UK) is when he traced a direct message scammer to a human trafficking operation in Cambodia that favored tethers as its currency. South China Morning Post follows up on this with an in-depth report on how Cambodian organized crime uses tethers. [SCMP]
Credit rating firm S&P Global rated eight stablecoins for risk. Tether and Dai got the lowest marks. S&P notes in particular the lack of information on Tether’s reserves. [press release; S&P; Tether report, PDF]
At least some of the claimed Tether backing in treasuries is held in the US with Cantor Fitzgerald — exposing Tether to US touchability. This has been known since February 2023, and was proudly confirmed in December 2023 by Cantor CEO Howard Lutnick: “I hold their Treasuries, and they have a lot of Treasuries. I’m a big fan of Tethers.” [Ledger Insights; Forbes]
Cointelegraph had a fascinating story on a company called Exved using tethers for cross-border payments from Russia! Then they deleted it, for some reason. Exved was founded by Sergey Mendeleev, who also founded the OFAC-sanctioned crypto exchange Garantex, which was kicked out of Estonia. Exved is working with InDeFi Bank, another Mendeleev venture. We’re not so sure the new OFAC-compliant Tether will be 100% on board with this. [Cointelegraph, archive; Telegram, in Russian; Protos]
In July 2022 — just after crypto crashed — Coinbase wrote to the SEC proposing new regulatory carveouts for crypto.
The SEC took its sweet time responding. Eventually, Coinbase sued in April 2023 with a writ of mandamus, demanding a bureaucratic response. The court told the SEC to get on with it, or at least supply a date by which it would answer.
Finally, the SEC has responded: “the Commission concludes that the requested rulemaking is currently unwarranted and denies the Petition.” The SEC thinks existing securities regulations cover crypto securities just fine, and there’s no reason for special rules for Coinbase. [SEC rejection, PDF; Coinbase letter to court, PDF; Gensler statement]
Coinbase general counsel Paul Grewal welcomed the opportunity to challenge Coinbase’s dumb and bad proposal being turned down. [Twitter, archive]
Binance founder and former CEO Changpeng Zhao will not be returning home to Dubai anytime soon. US District Judge Richard Jones ordered CZ to remain in the US until his sentencing on February 24. He can travel within the US, but he cannot leave. [Order, PDF]
After being busted hard, Binance is still behaving weird. At the FT Crypto and Digital Assets Summit in London, the exchange’s new CEO Richard Teng refused to answer even basic questions, like where Binance is headquartered and whether it’s had an audit. “Why do you feel so entitled to those answers?” Teng said when pushed. “Is there a need for us to share all of this information publicly? No.” [FT]
CZ and Binance have been trying to dismiss the SEC charges against them. This is mostly loud table pounding, wherein Binance claims that what the SEC argued were securities are not really securities. [Doc 190, PDF, Doc 191, PDF]
France was the first country in Europe to grant Binance regulatory approval. State-endorsed blockchain courses for the unemployed and NFT diplomas helped push the country’s most vulnerable into crypto. Since the collapse of FTX and Binance’s $4.3 billion fine for money laundering, French President Emmanuel Macron’s relationship with CZ has fallen under scrutiny. [FT, archive]
London law firm Slateford helped to cover up Binance’s crimes and attempted to intimidate media outlet Disruption Banking from writing about Binance’s sloppy compliance hiring practices. (Disruption Banking told Slateford to get knotted and didn’t hear from them again.) [Disruption Banking]
Binance is finally removing all trading pairs against Great British pounds. [Binance, archive]
FTX filed a reorganization plan in mid-December. The plan is 80 pages and the disclosure statement is 138 pages, but there’s a notable lack of detail on what happens next. None of the talk of starting a new exchange has made it into the current plan — this appears to just be a liquidation.
The plan treats crypto claims as their value in cash at the time of the bankruptcy filing on November 11, 2022, back when bitcoin was at $17,000 — less than half of what it is now.
Creditors will vote on the plan in 2024. The court must approve the plan before it is implemented. [Bloomberg, archive; Plan, PDF; Disclosure statement, PDF]
The IRS is demanding $24 billion in unpaid taxes from the corpse of FTX. John Jay Ray wants to know how the IRS came up with that ludicrous number — the exchange never earned anything near those amounts. The IRS originally wanted $44 billion, but brought the number down. Judge John Dorsey has told the IRS to show its working. [Doc 4588, PDF; Bloomberg, paywalled]
Three Arrows Capital was the overleveraged crypto hedge fund that blew up in 2022 and took out everyone else in crypto who hadn’t already been wrecked by Terra-Luna. After months of dodging culpability, co-founder Zhu Su was finally arrested in Singapore in September as he was trying to skip the country.
Zhu was released from jail and appeared before the Singapore High Court on December 13, where he had to explain to lawyers for the liquidator Teneo what happened when 3AC went broke. The information will be shared with creditors. [Bloomberg, archive]
A British Virgin Islands court froze $1.1 billion in assets of Zhu and his co-founder Kyle Davies and Davies’ wife Kelly Chen. [The Block]
Teneo expects a 46% recovery rate for 3AC creditors on $2.7 billion in claims. [The Block]
Crypto news outlet Decrypt has merged with “decentralized media firm” Rug Radio. No, we’d never heard of them either. The two firms will form a new holding company chaired by Josh Quittner. Decrypt had spun out from Consensys in May 2022, just before everything crashed. It’s reportedly been profitable since then — though crypto sites always say that. [Axios; Axios, 2022]
Forkast News in Hong Kong has merged with NFT data provider CryptoSlam and fired most of its staff. Forkast was founded in 2018 by former Bloomberg News anchor Angie Lau; it shut down editorial operations on November 30. [The Block]
Crypto news outlets ran seriously low on cash in 2019 and 2020, just before the crypto bubble, and they’re struggling again. We expect more merges and buyouts of top-tier (such as that is in crypto) and mid-tier crypto outlets. We predict news quality will decline further.
Amy recalls the old-style crypto media gravy train and eating in five-star restaurants every night in Scotland and London while embedded with Cardano in 2017. Thanks, Charles! Nocoining doesn’t pay nearly as well, but these days crypto media doesn’t either. There’s probably a book in those Cardano stories that nobody would ever read.
The Financial Stability Oversight Council, which monitors domestic and international regulatory proposals, wants more US legislation to control crypto. FSOC’s 2023 annual report warns of dangers from:
crypto-asset price volatility, the market’s high use of leverage, the level of interconnectedness within the industry, operational risks, and the risk of runs on crypto-asset platforms and stablecoins. Vulnerabilities may also arise from token ownership concentration, cybersecurity risks, and the proliferation of platforms acting outside of or out of compliance with applicable laws and regulations.
Yeah, that about covers it. FSOC recommends (again) that “Congress pass legislation to provide for the regulation of stablecoins and of the spot market for crypto-assets that are not securities.” [Press release; annual report, PDF]
IOSCO, the body of international securities regulators, released its final report on how to regulate DeFi, to go with its November recommendations on crypto markets in general. IOSCO’s nine recommendations for DeFi haven’t changed from the draft version — treat these like the instruments they appear to be, and pay attention to the man behind the curtain. These are recommendations for national regulators, not rules, but look at the DeFi task force — this was led by the US SEC. [IOSCO press release, PDF; IOSCO report, PDF]
London-based neobank Revolut is suspending UK crypto services — you can no longer buy crypto with the app — citing a new raft of FCA regulations, which go into force on January 8. [CityAM; CoinDesk]
Crypto exchange KuCoin has settled with New York. The NY Attorney General charged KuCoin in March for violating securities laws by offering security tokens — including tether — while not registering with NYAG. KuCoin has agreed to pay a $22 million fine — $5.3 million going to the NYAG and $16.77 million to refund New York customers. KuCoin will also leave the state. [Stipulation and consent order, PDF; Twitter, archive]
Montenegro plans to extradite Terraform Labs cofounder Do Kwon to either the US or South Korea, where he is wanted on charges related to the collapse of Terra’s stablecoin. Kwon was arrested in Montenegro in March. Originally it looked like Montenegro was going to pass him off to the US, but the case has been handed back to the High Court for review. [Bloomberg, archive; Sudovi, in Montenegrin]
Anatoly Legkodymov of the Bitzlato crypto exchange, a favorite of the darknet markets, has pleaded guilty in the US to unlicensed money transmission. Legkodymov was arrested in Miami back in January. He has agreed to shut down the exchange. [Press release]
The SEC posted a new investor alert on crypto securities with a very lengthy section on claims of proof of reserves and how misleading these can be. [Investor.gov; Twitter, archive]
It’s been nearly ten years, but Mt. Gox creditors are reportedly starting to receive repayments — small amounts in Japanese yen via PayPal. [Cointelegraph; Twitter, archive]
Some payouts are apparently bitcoin payouts — with the creditors not receiving a proportionate share of the remaining bitcoins, but instead the yen value of the bitcoins when Mt. Gox collapsed in February 2014. This means a 100% recovery for creditors! — but much less actual money.
There are still 140,000 bitcoins from Mt. Gox waiting to be released. If payouts are made in bitcoins and not just yen, we expect that claimants will want to cash out as soon as possible. This could have adverse effects on the bitcoin price.
In the Celsius Network bankruptcy, Judge Martin Glenn has approved the plan to start a “MiningCo” bitcoin miner with some of the bankruptcy estate. He says that “the MiningCo Transaction falls squarely within the terms of the confirmed Plan and does not constitute a modification.” [Doc 4171, PDF]
Bitcoin miners are racing to buy up more mining equipment before bitcoin issuance halves in April or May 2024. Here’s to the miners sending each other broke as fast as possible [FT, archive]
Riot Platforms subsidiary Whinstone sent its private security to Rhodium Enterprise’s plant in Rockdale, Texas, to remove Rhodium employees and shut down their 125MW bitcoin mining facility. The two mining companies have been brawling over an energy agreement they had made before prices went up. [Bitcoin Magazine]
The UK is setting up a crypto hub! ’Cos that’s definitely what the UK needs, and not a working economy or something. [CoinDesk]
Liquid is a bitcoin sidechain set up by Blockstream at the end of 2018. It was intended for crypto exchange settlement, to work around the blockchain being unusably slow. It sees very little use — “On a typical day, there are more tweets about Liquid than there are transactions on its network.” [Protos]
A16z, Coinbase, and the Winklevoss twins say they’ve raised $78 million as part of a new push to influence the 2024 elections. [Politico]
Little-known fact: coiners can donate to the PAC in tethers. All they have to do is send them via an opaque Nevada trust structure to hide the origins of the funds. And this is perfectly legal! [FPPC, PDF, p. 85, “nonmonetary items”]
Ahead of the SEC’s deadline to rule on a bitcoin ETF, Barry Silbert, CEO of Digital Currency, has quietly stepped down from the board of DCG subsidiary and ETF applicant Grayscale and is no longer chairman, according to a recent SEC filing. Silbert will be replaced by Mark Shifke, the current DCG senior vice president of operations. US regulators are suing DCG over the Gemini Earn program co-run by its subsidiary Genesis. [Form 8-K]
Ordinals are an exciting new way to create NFTs on bitcoin! ’Cos who doesn’t want that? The bitcoin blockchain immediately clogged when it was actually used for stuff. Now TON, the blockchain that is totally not Telegram’s, no, no no, has ordinals — and it’s getting clogged too. [The Block]
Image: Mark Karpeles with aggrieved bitcoin trader outside Mt. Gox in Tokyo in 2014.
“EXCLUSIVE: IT’S RUMORED THAT GARY GENSLER HAD A BLT FOR LUNCH TODAY. EXPERTS BELIVE THIS IS BULLISH FOR A POSSIBLE SPOT BITCOIN ETF APPROVAL”
— Sean Tuffy
Patreon changed its billing for this month from California to Dublin. So a lot of banks rejected the transactions as possible fraud.
This would easily be reversible … except that Patreon’s systems automatically wiped all patron relationships where a transaction bounced! [Twitter thread, archive]
If you sponsor anyone on Patreon, not just us: please check your transactions for August, re-send them if they bounced, and rejoin as a patron if you need to. The “retry” link should be located in your billing history. Your creators will be most grateful!
We also have Ko-Fi links where you can send us casual tips — here’s Amy’s and here’s David’s.
Bitcoin rapper Heather “Razzlekhan” Morgan and her husband Ilya Lichtenstein were arrested in February 2022 for hacking Bitfinex in 2016. They agreed to a plea deal a couple of weeks ago. [DOJ press release; Reuters]
The plea hearings were today, Thursday, August 3. Morgan pleaded guilty to money-laundering conspiracy and conspiracy to defraud the United States. The BBC says that “Morgan masqueraded as a rapper.” [BBC]
Lichtenstein pleaded guilty to money-laundering conspiracy. He also admitted to being the original perpetrator of the Bitfinex hack!
Lichtenstein stashed some of the hacked funds as buried gold coins. Arrr. [Bloomberg, archive; CNBC]
“Smart contracts” are small programs that run right there inside a blockchain. In enterprise computing, these would be called “database triggers” or “stored procedures.”
You never use triggers or stored procedures unless you absolutely have to, because they’re very easy to get wrong and a pain in the backside to debug. In the real world, you keep your financial data and the programs working on it separate.
So, of course, crypto uses programs embedded in the database for everything and touts the difficulty in working with them as a feature and not evidence of the idea’s incredible stupidity.
A smart contract full of crypto can reasonably be treated as a piñata, just waiting for you to whack it in the right spot and get the candy.
Today’s piñata is Curve Finance, a DeFi exchange used for trading stablecoins and other tokens. Curve was hacked on July 30 due to a bug in the Vyper language compiler. Smart contracts that were using Vyper versions 0.2.15, 0.2.16, and 0.3.0 were vulnerable. About $70 million in funds was drained from liquidity pools whose smart contracts used these versions. [Twitter, archive; Twitter, archive]
Vyper, which is inspired by Python, was supposed to have been an improvement over the hilariously awful Solidity — a.k.a. “JavaScript with a concussion” — that most Ethereum Virtual Machine smart contracts are written in. Unfortunately, the Vyper compiler had a bug that meant compiled code was exploitable. So you could mathematically prove your smart contract program was correct … and the compiled version could still be exploited. This could hit any Vyper smart contract using vulnerable versions. [Twitter, archive]
Some have suggested that the Vyper exploit and subsequent Curve hack were “state-sponsored” — which is quite possible, given that we already know that North Korea actively seeks to launder money using crypto.
If North Korea is caught cashing out from the Curve hack, then we suspect large DeFi protocols may get a call from OFAC soon for the same reasons that Tornado Cash did.
David wrote an entire book chapter on all the ways that smart contracts were stupid back in 2017. He foolishly thought that this would knock the idea firmly on the head.
The bankruptcy of Genesis left Genesis owner Digital Currency Group scrambling to sell off the silverware. DCG’s news site CoinDesk was rumored in January to be up for sale. CoinDesk is now being bought for $125 million by an investor group led by Matthew Roszak (Tally Capital) and Peter Vessenes (Capital6). [WSJ]
DCG bought the failing media outlet in 2016 for $500,000. It’s been shoveling money into CoinDesk ever since. DCG wants to keep the CoinDesk conference business, which is the only part of the site that makes any money.
Bitcoin old-timers will remember Vessenes from the Bitcoin Foundation of the early 2010s. He was the CEO of CoinLab, which was functionally a US agent for the Mt Gox exchange. CoinLab and Mt Gox sued each other repeatedly over alleged contractual breaches. After Mt Gox went bankrupt, CoinLab escalated its claims against the dead exchange from $75 million to an amazing and implausible $16 billion. [Bitcoin Magazine, 2013; Cointelegraph, 2019]
We don’t know what Vessenes wants with a media outlet that only loses money, even from a commercial propaganda perspective. We suppose he could alienate the site’s expensive hires of the past couple of years.
Terraform Labs issued the TerraUSD and Luna coins, which triggered the crypto crash of May 2022, which popped the 2021 bubble.
We were surprised to hear that Terraform is not dead! It has a new CEO, Chris Amani, who was previously the firm’s COO and CFO. Amani’s hot plan is to revive the Terra blockchain. Amani says that Terraform won’t be launching a new stablecoin. Founder Do Kwon, who is in jail in Montenegro, is still Terraform’s majority shareholder. [WSJ]
The SEC’s case against Terraform proceeds. Terraform filed in May to dismiss the SEC’s complaint, using similar arguments as Coinbase and Ripple. Terraform recently filed that the bizarre July finding in the Ripple case supports dismissing the SEC complaint.
The SEC responded to Terraform and confirmed that it’s appealing the Ripple ruling because it’s nuts: “Ripple’s reasoning is impossible to reconcile with all of these fundamental securities laws principles … SEC staff is considering the various available avenues for further review and intends to recommend that the SEC seek such review.” So we can look forward to that appeal in Ripple. [Doc 29, PDF; Doc 47, PDF; Doc 49, PDF; case docket]
Judge Rakoff concurred with the SEC and got quite pointed about the very dumb and bad ruling in Ripple: [Doc 51, PDF]
Howey makes no such distinction between purchasers. And it makes good sense that it did not. That a purchaser bought the coins directly from the defendants or, instead, in a secondary re-sale transaction has no impact on whether a reasonable individual would objectively view the defendants’ actions and statements as evincing a promise of profits based on their efforts.
… Simply put, secondary-market purchasers had every bit as good a reason to believe that the defendants would take their capital contributions and use it to generate profits on their behalf.
We don’t expect the Ripple ruling to stand.
Crypto trading is illegal in China — technically, anyway. The Wall Street Journal says that Binance users coming in from China still trade $90 billion a month — it’s “Binance’s biggest market by far,” with over 900,000 users. [WSJ]
The importance of China is “openly discussed internally.” In fact, “the exchange’s investigations team works closely with Chinese law enforcement to detect potential criminal activity.”
Binance denies the reports, with the very specific wording: “The Binance.com website is blocked in China and is not accessible to China-based users.” Good thing nobody in China uses a VPN, hey. The WSJ says that Binance directs its Chinese users to “visit different websites with Chinese domain names before rerouting them to the global exchange.” [Cointelegraph]
Binance CEO Changpeng “CZ” Zhao responded “4” — meaning that it’s all FUD. [Twitter, archive]
The US Department of Justice is considering charges against Binance, but worries about causing a run on the exchange — or so says Semafor, which says the DoJ is considering fines or a deferred prosecution agreement instead. We think that any Binance user who hasn’t already priced in yet more US government action against Binance, particularly an indictment, just doesn’t want to be told. [Semafor]
Binance is cutting employee benefits, citing a decline in its profits — which suggests its customers are running away screaming. The non-US employees laid off in June were offered severance of two months’ salary paid in BNB tokens. [WSJ]
If Binance has a drop in profits, it’s likely the large institutional traders — Binance’s “VIPs” — jumping ship while they can. Where can they be going? Is there a good casino left for the VIPs with an ample supply of suckers to milk? Or was Binance the end of the line?
CZ has filed a motion to dismiss the CFTC complaint against him. He holds that Binance just doesn’t do business in the US, so the CFTC doesn’t have jurisdiction. Also, the securities aren’t securities, apparently. [Doc 59, PDF]
CZ wanted to just shut Binance US earlier this year because of the regulatory heat, two people told The Information. The BAM board voted, but the lone holdout was Binance US CEO Brian Shroder. CZ also considered selling Binance US to Gemini or a sovereign wealth fund. Binance told Cointelegraph that it was “not commenting” on this issue. [The Information, paywalled; Cointelegraph]
In June, the SEC Nigeria ruled that Binance Nigeria had to stop operating in the country. Binance claimed that “Binance Nigeria” had nothing to do with them. SEC Nigeria has now reiterated that they really do mean binance.com. Nigeria has also told all other crypto platforms to desist: “all platform providers, making such solicitations, are hereby directed to immediately stop soliciting Nigerian investors in any form whatsoever.” [SEC Nigeria]
On July 26, Binance listed a new coin, FDUSD — a “1:1 USD-backed stablecoin issued by First Digital Labs. Reserves of FDUSD are held by First Digital Trust Limited.” Its trading pairs are BNB, USDT, and BUSD — with zero fees. [Twitter, archive; Binance]
Binance has been going through the stablecoins lately. Binance’s own BUSD has shut down, Binance doesn’t seem to be on such solid terms with Tether, and it tried pumping out a few billion questionably backed TrueUSD after that coin’s main custodian, Prime Trust, had collapsed. First Digital — previously known as Legacy Trust — just happens to be the remaining custodian for TrueUSD.
FDUSD was launched on June 1. Data Finnovation wonders why millions of dollars of deposits to and minting of FDUSD started a week before its supposed launch. “If you believe these are strongly linked to real usd you deserve what you’re gonna get.” [press release; Twitter, archive]
Vincent Chok, CEO of First Digital, has a storied history in business. Before Chok’s move to Hong Kong, he was selling real estate in Canada with Platinum Equities in 2014 — a company that was sanctioned by the Alberta Securities Commission for fraud (though Chok wasn’t named). Chok’s previous company was Intreo Wealth Alliance in Calgary. [press release]
Wyoming is trying to do a stablecoin again with their Stable Token Commission! The total budget for the initiative: $500,000. We wrote before about Caitlin Long’s crypto bank Custodia and what a disaster that was. Custodia also hoped to launch a national stablecoin backed by the Fed, but the Fed was having none of it. So good luck, guys. [Wyoming Truth]
Michel de Cryptadamus notices that Tether’s attestations show its actual cash on hand is getting quite low. On December 31, 2022, they claimed to have $5.31 billion in cash. On March 31, 2023, they claimed $481 million. On June 30, 2023, they claimed just $90 million. This is as the issuance of tethers keeps going up. But we’re sure it’s all fine. [Twitter, archive]
The New York Fed wrote about “Runs on Stablecoins” — concerning the Terra-Luna collapse of May 2022. David Rosenthal contextualizes the New York Fed paper: “Note in particular that traders don’t actually believe that USDT is safe, it is just that its size makes it convenient for traders to use USDT unless, like Wile E. Coyote, they look down at it as they did last May.” [NY Fed; blog post]
The White House has told Rep. Patrick McHenry’s stablecoin bill to go away, at least according to McHenry. [The Block]
Coinbase wants regulatory clarity. The SEC was happy to give it to them. Brian Armstrong of Coinbase told the Financial Times that prior to the SEC suing Coinbase in June, the commission told them to delist all cryptocurrencies other than bitcoin. [FT, archive]
The SEC told CoinDesk that “SEC staff does not ask companies to delist crypto assets. In the course of an investigation, the staff may share its own view as to what conduct may raise questions for the Commission under the securities laws.” [CoinDesk]
Coinbase told CoinDesk that the FT report “lacks critical context” but was somehow unable to also say what the context was.
This is pretty rich given that it was literally Armstrong who told this to the FT, presumably hoping to gin up the crypto crowd — which he certainly did.
Coinbase concurred that the SEC did not, in fact, formally tell the exchange to delist everything except bitcoin.
We strongly suspect the actual conversation was Coinbase asking “Well how can we absolutely avoid breaking any laws then, smart guy?” and then the SEC fellow suggesting the very safest possible option.
Kyle Davies from Three Arrows Capital (3AC) has gone sovereign citizen. Davies holds that renouncing his US citizenship in October 2020 means that he can’t be held in contempt of court for not responding to 3AC liquidators Teneo in their US action. Davies’ lawyers also claimed that he hadn’t been properly served, as if he could claim not to know about the proceeding while arguing it in court. [Doc 106, PDF; Doc 107, PDF; case docket]
The SEC suggests that crypto “attestations” that aren’t audits might be a worry … for the accountants. Subheadings in the SEC’s statement on “The Potential Pitfalls of Purported Crypto ‘Assurance’ Work” include “The Accounting Firm’s Potential Liability for Antifraud Violations.” The footnotes mention that “liability for fraud may extend to “attorneys, engineers, and other professionals or experts.” This means that the SEC will look at what the developers were doing. [SEC]
Swift is running a pilot program that lets you make instant payments across different currency zones! So what backend do you need to use for instant remittances across currency zones? It turns out the answer is: a database. [FinExtra]
Kuwait has banned cryptocurrency for payments or investments. The National Committee for Combating Money Laundering and Terrorism Financing says it’s doing this to implement FATF requirements. Crypto mining is also banned. Securities under the Central Bank of Kuwait or Capital Markets Authority regulation are exempt. [Arabian Business; Al Jarida, in Arabic]
FedNow, the Federal Reserve’s real-time retail settlement system, has gone live, dragging US retail banking kicking and screaming into the 2000s. This puts a Fed CBDC into the trash can, as the White House had already noted. The hard part is getting thousands of banks to sign up. But the Fed has its ways of asking for things. [Federal Reserve]
David told the Moscow Times — who are not fans of Mr. Putin and who are currently banned in Russia — that a CBDC ruble wouldn’t do anything new to help evade sanctions that Russia can’t already do with rubles: “The problem is that nobody wants rubles.” [Moscow Times]
I’m still wading through grief and dealing with a mountain of estate stuff after my father’s passing. Normally, David and I take turns posting, but our latest is once again on his site.
In part 3 of SEC sues Binance:
“Every single one of these news updates from the slow motion implosion of the great fake tech money pyramid scheme is like reading headlines that say: ‘Man confused as to why his clothing caught fire after dousing self with kerosene.’ Every one.”
— A Shiny Blue Thing
A day before the SEC sued Coinbase, the agency also filed a suit against Binance, the world’s largest offshore crypto casino, and its affiliate Binance.US. Binance founder Changpeng Zhao, better known as “CZ,” was also named in the suit.
CZ tweeted “4,” which means he is dismissing the complaint as “FUD, fake news, attacks, etc.” If you have a single-digit shorthand for this sort of thing, you may already be in trouble. [Twitter, archive; Twitter, archive]
The 136-page complaint, filed in the District of Columbia on June 5, outlines 13 charges. Unlike the Coinbase suit, this one alleges fraud. The complaint comes with nearly 100 exhibits, some of which are incendiary. [Press release, Complaint, PDF; Docket]
CZ has his hands full these days. The US Department of Justice is currently investigating Binance over money laundering. In March, the CFTC filed its own enforcement action against Binance and CZ — which Binance has until July 27 to respond to. [CFTC docket]
The SEC complaint covers some of what’s in the CFTC complaint. But there’s a pile of new stuff. This is a huge amount to cover, so we’ll be doing it over a few posts.
The lawsuit is against Binance Holdings Limited, BAM Trading Services Inc., BAM Management US Holdings Inc., and Changpeng Zhao. (BAM Trading runs Binance.US; BAM Management is a holding company that owns BAM Trading.) Summons were served to listed company addresses and to an address for CZ in Malta. [defendant list, PDF]
The SEC comes out of the gate loud:
This case arises from Defendants’ blatant disregard of the federal securities laws and the investor and market protections these laws provide.
Among the accusations:
The SEC wants Binance and BAM permanently enjoined from doing any of this ever again, disgorgement of ill-gotten gains with interest, civil money penalties, and equitable relief.
The SEC has also sought to freeze customer assets on Binance.US — specifically to protect US customers from CZ and Binance.com.
CZ launched Binance in July 2017 to rapid popularity. He evaded accountability from the start, moving his headquarters from China to Japan to Malta.
Per the complaint, CZ denies that Binance has an office at all: “Wherever I sit is the Binance office. Wherever I meet somebody is going to be the Binance office.”
A month after launching in China, Binance revealed that the US and China together made up nearly half of its customer base. [Binance, archive]
But how to keep the ball rolling? Crypto trading was banned in China in 2019. It continued online through foreign exchanges until September 2021, when China declared all cryptocurrency transactions illegal.
CZ needed US customers — especially “VIP” ones — but not US regulation. So, starting in 2018, he worked on how to surreptitiously evade US securities laws. As his chief compliance officer Samuel Lim admitted: “we do not want [Binance].com to be regulated ever.” [Doc 17-5, PDF]
The trouble was, as Lim put it to fellow Binance employee Alvin Bro: “we are operating as a fking unlicensed securities exchange in the USA bro.”
Lim was keenly aware of the hazards of US law enforcement:
there is no fking way in hell i am signing off as the cco for the ofac shit
theres a certain point where money is totally useless, and that is making a declaration to the USA that you are clean
when shanghai is totally cowboy
there is no fking way we are clean
i have zero visibility on our VIP clients
ZERO
the strategy of bnb is to survive for 2 years and f off
and in this 2 yrs try ur bestest to not land in jail
An unnamed “consultant” who ran “a crypto asset trading firm in the United States” suggested options to CZ and his team. One option was low-risk: settle the regulators’ concerns in an orderly manner. But if they went that route, they might be shut out of the US market entirely for months or years. The second option was risker, but more profitable: create a separate US entity that would head off the regulators.
The consultant suggested engaging with the SEC on how to comply but “with no expectation of success and solely to pause potential enforcement actions.” The new entity would “become the target of all built-up enforcement tensions” and “reveal, retard, and resolve built-up enforcement tensions.”
The new entity would also give Binance better access to US dollars without Binance.com needing its own banking relationships.
Binance would still need to insulate the new entity from US enforcement: “Key Binance personnel continue to operate from non-US locations to avoid enforcement risk” and “Cryptocurrency wallets and key servers continue to be hosted at non-US locations to avoid asset forfeiture.”
This was the “Tai Chi plan,” first reported in Forbes in October 2020. Binance filed a defamation suit against Forbes for this report, though they withdrew it a few months later. Binance then tried to buy equity in Forbes in a SPAC deal that later fell through — though this didn’t hold Forbes back from going in hard against Binance. The SEC complaint includes the original Tai Chi documents. [Forbes, 2020; Doc 17-2, PDF; Doc 17-3, PDF]
CZ opted to go ahead with the Tai Chi plan. Binance.US launched in July 2019, run by a separate entity, BAM Trading. Binance announced it would begin restricting US customers from transacting on Binance.com and they should use the US site instead.
Binance.US was a supposedly independent US affiliate of Binance.com, run by BAM Trading, incorporated in Delaware. In practice, CZ reportedly ran BAM himself with an iron hand.
Catherine Coley and Brian Books — “BAM CEO A” and “BAM CEO B” in the complaint — sang like birds to the SEC. Brooks detailed to the SEC how CZ was not merely the chairman of BAM, but exercised CEO-level close control.
Even BAM’s accountants cautioned their client that the lack of information around money movements “makes it very difficult to ensure the Company is fully collateralized at specific points in time.”
Only two people — CZ and another person, Guangying Chen, who nobody seems to admit much about — controlled all of the flows of cash and cryptos.
Coley and her team were extremely unhappy after reading the Forbes article on the Tai Chi plan:
As BAM CEO A [Coley] explained to the Binance CFO shortly after the article was released, BAM Trading employees “lost a lot of trust with the article” and “the entire team feels like they’ve been duped into being a puppet.”
The SEC was very concerned about the status of Binance.US customer funds all through early 2023 and couldn’t get straight answers out of BAM or Binance.com as to where the funds were held and who controlled the purse strings.
On June 6, the SEC filed a motion seeking an emergency temporary restraining order and preliminary injunction against Binance and BAM. Customer assets at Binance.US are largely controlled by non-US entities, and Binance has allegedly siphoned a pile of cash out of BAM. Motions like this are what the SEC does when it suspects huge fraud.
The SEC specifically wants to let Binance.US customers withdraw their funds, but not allow Binance to transfer money outside the US. [SEC press release; Doc 4, PDF; Memorandum of law, PDF]
A hearing on the matter is set for Tuesday, June 13 at 2:00pm. It’s expected that Judge Amy Berman will rule on the day as to whether to put the TRO into place.
The SEC’s investigation into Binance and Binance.US started on August 17, 2020 — before Forbes told the world about the Tai Chi plan. [Doc 12, PDF]
The first SEC contact with BAM was a December 17, 2020, subpoena for documentation of BAM’s control of Binance.US crypto assets.
The SEC requested more information in September 2022. BAM finally answered in February 2023, but “its answers were not reassuring.”
BAM had a “wallet custody agreement” such that Binance would custody Binance.US crypto — the part of the Tai Chi plan where the crypto would be held outside the US. BAM told the SEC that the wallet custody agreement “was never operationalized.”
The SEC sent Binance Holdings Limited (Binance.com) a Wells notice, indicating that an enforcement action was imminent, on February 21. BHL responded on March 15 that “BHL does not, and has not, served as the custodian of the digital assets on Binance.US.” [Doc 19-13, PDF]
But the SEC already knew this was not true — based on information it had gotten from Signature Bank, conversations with former BHL and BAM employees, and reports to BAM from BAM’s auditor Armanino.
In the two weeks leading up to filing the June 5 complaint, the SEC was still trying to resolve the custody issue — with “numerous written and oral exchanges concerning custody of Binance.US Platform customers’ assets and, more importantly, who is in ultimate control of those assets.” [Doc 19-15, PDF; Doc 19-16, PDF]
BAM now “disputes its own auditor’s conclusion of past Binance custody over customer assets” (emphasis SEC’s) and “admits that Zhao and Binance continue to possess substantial control over at least some of BAM Trading’s crypto assets.”
BHL and CZ have not been helpful:
Zhao’s attorneys have continued to maintain that Zhao is not subject to the jurisdiction of the United States — despite setting up a crypto trading platform in the United States that has made hundreds of millions from trading with U.S. customers, and despite his beneficial ownership of accounts held at banks in the United States through which billions of dollars flowed to some of his foreign domiciled companies like Merit Peak and Sigma Chain.
As recently as June 4, BHL was begging the SEC not to freeze BAM assets. [Doc 19-14, PDF]
Binance is a network of shell companies. These entities hypothetically have different roles, but in practice, money flows between them in vast amounts — mostly via transfers between the entities’ accounts at Silvergate Bank, and some at Signature. We know this because Silvergate, Signature, and FedWire told the SEC all about it. [Doc 21, PDF]
How much money are we talking about? Sachin Verma, an SEC forensic accountant, says:
At times the amounts being credited and debited during a single month amounts to movement of more than a billion dollars.
… On January 1, 2023, eight Binance/Zhao-owned companies had $58.7 million on deposit. During that same time frame, $840 million was deposited into, and $899 million was withdrawn, from those accounts
Binance could and did transfer funds without BAM’s knowledge. At one point, while she was CEO, Coley had to ask where $1.5 billion in daily transfers was coming from — neither she nor her team had the access needed to verify them.
Coley also had to ask why on earth $17 million in BUSD was moving from Merit Peak (Binance) to Sigma Chain (Binance) via BAM, and where Merit Peak got the money from. [Doc 19-2, PDF]
The billions of dollars flowed in from Binance.US customers, through the various Binance companies’ checking accounts, into a Merit Peak account, to Paxos Singapore (for $21.6 billion of BUSD between 2019 and 2021), and out to … somewhere:
Binance Holdings Limited and Binance Capital Management show large deposits and withdrawals from and to Signature accounts for some Zhao-owned companies, and hundreds of millions of dollars have been transferred.
Per the SEC’s request to freeze Binance.US assets:
During 2022, a U.S. bank account for Swipewallet (beneficially owned by Zhao) sent $1.5 billion offshore in foreign exchange, or “FX,” wires … Between January and March 2023, multiple Binance accounts wired more than $162 million offshore for further credit of a foreign account belonging to the company beneficially owned by the Binance Back Office Manager.
That manager was Guangying Chen.
CZ ran billions of dollars through Silvergate every month. None of it ever stayed in one place for long — all the accounts were just checking accounts where money sat for a moment before being shuffled under another shell.
Unlike Sam Bankman-Fried, CZ seems from all this to have had the good sense to stash away billions of dollars in actual money. He also purchased a home in Dubai in 2021 — a coincidentally non-extradition jurisdiction.
Where did the money end up? Where’s CZ keeping the dollars? Following the money trail is confusing — which appears to be the point.
It’s not clear whether Silvergate filed suspicious activity reports on all these dubious transfers. They certainly should have.
__________________
Also read:
“All financial complexity is a footnote to ‘don’t hand all your money to some random guy promising high returns.’”
— Matt Levine on Celsius Network
Crypto bitterly resents any possible regulation. It’s an industry of proud scofflaws. This presents some difficulties to regulators, who are used to financial firms that listen to them.
Coinbase keeps demanding “regulatory clarity.” What this means is that they want special permission to do things that are presently just illegal.
FTX blew up spectacularly in November, and its CEO and top execs were indicted for fraud. In the wake of FTX’s collapse, the SEC has the political backing it needs to get much more serious about making crypto exchanges comply with rules that have always been there.
In the meantime, the SEC’s lack of jackbooted statist enforcement over the last decade has allowed Coinbase to grow larger and larger — which means that Coinbase has bigger guns to challenge the regulator with.
In July 2022, Coinbase petitioned the SEC to make a clear framework for crypto asset trading. Coinbase handwaved that putting unregistered securities on a blockchain was “a paradigm shift from existing market practices, rendering many of the Commission rules that govern the offer, sale, trading, custody, and clearing of traditional assets both incomplete and unsuitable for securities in this market.” [Petition, 2022, PDF]
The SEC didn’t respond — because this claim is just stupid — and in the time since have stated repeatedly that they think the Howey test of what is a security in the US is just fine.
In March, the SEC sent Coinbase a Wells notice saying that they were going to file an enforcement action. Coinbase promptly filed a petition for a writ of mandamus to try to force the SEC to respond to their July 2022 letter. [CNBC; Writ of Mandamus, PDF]
The petition pounds on the table and cites an extensive range of blog posts as legal authorities. The introduction sets the tone:
“Contrary to the prior actions and statements of the Commission and its officials, the SEC Chair now claims that it is ‘clear’ the securities laws already apply to digital assets and platforms.”
Never mind the DAO Report from 2017, let alone the past century of judicial precedent that securities laws apply to what you do, not what you call the assets you are trading. A security is a security is a security.
And the SEC has been very clear — it’s saying that most crypto tokens are securities. There are rules for trading in those securities, and Coinbase needs to comply — or stop trading in them.
As Gary Gensler’s latest dad joke video puts it: “Many crypto platforms are just pretending that these investment contracts that they offer are more like goldfish … It’s not a lack of regulatory clarity.” [Twitter, video]
Coinbase has also put up its response to the SEC’s Wells notice. [Response, PDF]
The exchange claims that the SEC approving the company’s S-1 filing to go public surely constitutes approval of all its possible business lines — a claim that crypto pumpers have been promoting heavily. This theory is, in legal jargon, on crack.
Coinbase also confidently asserts that none of what’s listed on the exchange is a security. None of it! Coinbase’s theory is that a given asset is a security only if and when it’s determined in court to be one — despite extensive legal precedent that something can be a security before it’s registered or has come to the SEC’s attention.
It’s just not possible to run a digital assets exchange trading in securities that follow SEC rules, Coinbase pleads. Apparently, this is a problem for the SEC, not for the violators.
Coinbase has threatened the SEC with a scorched earth legal battle: “if the Commission pursues this matter, it will face a well-resourced adversary that will necessarily be motivated to exhaust all avenues” — much as Ripple has been. We think this is unlikely to get the SEC to back down.
So confident is Coinbase in its legal position in the Wells notice that it’s making videos to reassure its user base that all is well. This just makes Coinbase look desperate and clownish — winners don’t make promotional videos for their legal filings. [YouTube]
Why is Coinbase so insistent on trading unregistered securities? Because Coinbase’s business is in deep trouble. Trading volume on the exchange is through the floor — it’s dropped to $26.8 billion so far in April. March was $49 billion in total. This is the lowest volume on the exchange since the crypto crash. [FT]
Binance US pulled out of its $1 billion purchase of Voyager Digital. On Tuesday, April 25, Binance sent Voyager a letter canceling the sale. [Twitter; Doc 1345, PDF]
Voyager will now proceed to liquidation — as it probably should have when it first declared bankruptcy in July 2022 — and give the creditors whatever’s left.
Voyager’s lawyers said in a Wednesday hearing that they were surprised by the letter — Binance was still talking with them about the deal up to the previous Friday. Likely recoveries for Voyager creditors are in the range of 40% to 65%. [CoinDesk]
Imagine how much creditors’ money Voyager could have saved on expensive bankruptcy professionals if they’d just gone straight for liquidation nine months ago. Recoveries would have been on the order of 70%.
Terraform Labs has answered the SEC’s February suit, which claims that the collapsed UST stablecoin and its free-floating twin LUNA were offered as securities. The SEC’s case asserts that UST was part of Terraform’s Anchor Protocol investment scheme because you had to first buy UST to get into Anchor.
Terraform wants the suit dismissed on the grounds that digital assets can’t be securities — good luck with that one, guys! — and even if they can, UST was a stablecoin, and therefore can’t be a security. Terraform’s motion appears to be written in crayon. [Notice of motion, PDF; Memorandum, PDF]
Crypto VC firm Paradigm submitted an amicus brief in support of Terraform’s very stupid theory. Paradigm argues that SEC’s premise for treating stablecoins as securities would “radically and impermissibly” expand the definition of a security. [Amicus, PDF; Docket]
Terraform Labs co-founder Daniel Shin was finally indicted in South Korea along with nine others. Shin is facing charges that include violating capital markets laws. Do Kwon, the other co-founder of Terra, was arrested in Montenegro last month. [YNA; Bloomberg]
The legal net around Binance tightens. Last month the CFTC filed a civil suit against them. A long-running criminal investigation is being led by the Justice Department’s Money Laundering and Asset Recovery Section and prosecutors in the US attorney’s office in Seattle. The SEC is conducting a parallel investigation.
Binance and CZ have lawyered up and are in discussion with regulators and the Justice Department: [NYT, archive]
“In February, Patrick Hillmann, its chief strategy officer, revealed the exchange was in talks with regulators about a settlement to resolve the various legal investigations with a fine or some other penalty. He said the company was ‘highly confident and feeling really good’ about the discussions. A month later, the C.F.T.C. filed its lawsuit.”
David Silver thinks Binance is screwed: “The truth will come out,” he said. “And Binance will be held culpable.”
Binance has resumed its support for Russian-issued credit and debit cards after Russian cards were cut off for the past year. Payments go via Qiwi. The withdrawal limit is 200,000 RUB (about $2,486). [Meduza]
The FBI has searched the Washington, DC, home of former FTX executive Ryan Salame on the morning of Thursday, April 27. It’s not clear what they were looking for. Salame was the first FTX insider to turn on Sam Bankman-Fried. [NYT]
Gemini wants to set up a non-US crypto derivatives exchange. Their first product would be BTC-GUSD perpetual futures, with ETH-GUSD to follow. [Bloomberg; Gemini]
The US Justice Department has charged North Korean bank official Sim Hyon Sop for his role in two crypto laundering conspiracies. “The IT workers gained employment at U.S. crypto companies using fake identities and then laundered their ill-gotten gains.” [Press release; Sop indictment, PDF; Sop et al indictment, PDF]
Digital Currency Group subsidiary Genesis is bankrupt. Creditors have noticed that DCG is substantially cashed-up compared to Genesis and are insisting that DCG put more money toward the bankruptcy estate — particularly given how much control DCG clearly exercised over Genesis. So Genesis has filed for mediation over the amount that DCG will need to contribute to the reorganization. [CoinDesk]
Bloomberg writes about Celsius Network creditors and how they’re feeling. Their money is just gone, and it’s not coming back. Mashinsky et al. stole some of it and set the rest on fire through ineptitude. All the creditors have left is hope. Celsius really should have liquidated rather than declared Chapter 11. [Bloomberg]
David Rosenthal has written a marvelous summary of his decades in the world of blockchains: “Crypto: My Part In Its Downfall.” [blog post]
Image: Coinbase CEO Brian Armstrong. Photo by Steve Jennings (Getty Images for TechCrunch) enhanced for (regulatory) clarity.
due to a mistake in the internal reporting system, it didn’t tell him that he’d taken all the customers’ money and given it to his hedge fund to gamble with
— Qwertycoatl on SomethingAwful
Binance is broke. It’s got the same problem as the rest of crypto — the assets are imaginary, but the liabilities are real.
Remember the 2 billion BUSD bailout fund for distressed crypto enterprises that Binance announced in November? Bitfinex’ed suggested it was for a hole in Binance’s accounts — and now we’re seeing that Binance is sure behaving like there’s a huge hole in their books.
But Binance got an audit! Well, not an audit as such. But it was done by accountants who sometimes audit other things!
The “proof of reserves,” issued by Paris-based accounting firm Mazars, specifically disclaims being anything meaningful. But it makes sure to use the word “proof.”
The report didn’t address any of the tricky bits — it didn’t include non-crypto liabilities, it didn’t assess the effectiveness of internal financial controls, and it didn’t actually vouch for the numbers. Michael Burry: “The audit is essentially meaningless.” [Mazars, archive; WSJ; Twitter, archive]
Mazars has been issuing these “proofs of reserves” for Crypto.com and Kucoin as well. But now Mazars has abruptly halted all work for crypto firms — and scrubbed all mention of such work from its website. This is Mazars running like hell to get as far away from the bomb as possible before it goes off. [Bloomberg]
Meanwhile, users have been taking their cryptos off Binance and going home. Binance outflows hit $6 billion in the week Mazars halted its work for crypto. [FT]
Binance cut off USDC withdrawals again, claiming a “wallet upgrade.” It just looks a bit like a “wallet inspector.” [Twitter]
CZ went on CNBC Squawk Box to reassure everyone that everything is fine … though he didn’t seem as at ease as he usually does:
CZ: “We are financially okay.”
Rebecca Quick: “Can you have a 2.1 billion withdrawal?”
CZ: “We will let our lawyers handle that.”
CZ was asked why he wouldn’t engage a Big Four auditor to pick up where Mazars left off. CZ said most of these big firms “don’t even know how to audit crypto exchanges.” Andrew Ross Sorkin then pointed out that Coinbase has a Big Four auditor, Deloitte. Quick rolls her eyes at the end of CZ’s stumbling explanation (0:26 in the Twitter link). [YouTube; Twitter]
When FTX bought out Binance’s share in the company, Binance got paid $2.1 billion in funny money. CZ told Squawk Box that “it was all in FTT tokens, which are now worthless.” [Twitter]
70% of Binance’s reserves are in BUSD, Tether, and BNB — the last of which is their internal exchange token, akin to supermarket loyalty card points, in the style of FTX’s FTT.
The BNB token has crashed in the past week, from $290 to $240, according to Coingecko.
Keep in mind that BUSD on Binance is internal magic beans, and absolutely not the same as Paxos dollar-backed BUSD. If Binance thinks it could get away with cashing in the bridged BUSD at Paxos, that’s $2 billion of actual US dollars Binance could secure for itself.
BUSD on Binance is on their own BNB blockchain, formerly known as Binance Smart Chain — a very hacked-up fork of the Geth software for Ethereum. The idea is to have a platform that runs the Ethereum Virtual Machine, lets you rug pull, and so on. This “blockchain” features transactions that seem to parachute assets into the system from space with no verifiable history. Data Finnovation digs into the weird bits. “It’s probably not fair to call this a ‘blockchain’ anymore.” [Twitter, archive]
And there’s still no verifiable evidence that tethers can actually be cashed in for dollars — even if you’re Binance.
Confidence men are called that because they can say the most outlandish things and not bat an eye. CZ has mostly come across in media as fundamentally being on the ball.
But remember that Sam Bankman-Fried projected being smart as well — until we got a look inside FTX, and saw how incredibly stupid every single smart guy in FTX really was.
After Reuters published multiple reports of money laundering at Binance — including Binance letting Iran cash out bitcoins in violation of international sanctions — the U.S. Justice Department is “split” over charging Binance with money laundering. The split seems to be whether to charge them now or later: “Some of the at least half dozen federal prosecutors involved in the case believe the evidence already gathered justifies moving aggressively against the exchange and filing criminal charges against individual executives including founder Changpeng Zhao, said two sources.” The DoJ has discussed various plea deals with Binance’s lawyers. The investigation has been going on since 2018. [Reuters]
Binance was also slashing staff in late November. [Twitter, archive]
It’s only a matter of time before Binance starts freezing withdrawals — just like FTX, Voyager, Celsius, and so many other crypto exchanges in the last seven months.
Who can bail out Binance? Only Tether is left. Perhaps some new crypto exchange will pop up and achieve improbable volumes in a remarkably short time. There should be some Jane Street wunderkind on hand to front the operation.
The FTX liquidation proceedings in the Bahamas are distinctly odd and in direct conflict with FTX’s Chapter 11 proceedings in the U.S. [Bloomberg]
FTX froze withdrawals on November 8. The Bahamas government placed FTX Digital Markets, FTX’s Bahamas subsidiary, into liquidation on November 10. And John Jay Ray III, who took over as CEO of FTX Trading, filed for Chapter 11 in the US on November 11.
The joint provisional liquidators (JPLs), the three men in charge of liquidating FTX Digital Market’s assets, now want dynamic access to FTX systems — they don’t want just lists of specific data, they want to be able to go fishing through the system themselves.
Ray, who cut the JPLs off from the system on November 12, is saying “no way.” He and his team are pissed because of all the pillaging of FTX that occurred after FTX froze withdrawals.
FTX objected to the Bahamas motion saying there was no urgency and the other side was being utterly uncooperative: [Objection, PDF]
“Debtors have made repeated overtures to JPLs and Commission to meet and those overtures were met with avoidance and obfuscation. The JPLs and the Commission have refused to provide responses to Debtors’ questions about the assets ‘secured’ by the Commission. Instead, the JPLs file baseless motions seeking extraordinary relief on an unnecessarily truncated timeframe.”
Ray thinks FTX cofounders Bankman-Fried and Gary Wang, the JPLs, and the Bahamas Securities Commission are all in cahoots. He told Congress: [Twitter, archive]
“The process in the Bahamian islands is not a transparent process. We have opened up the ability to share everything we have with the Bahamian government, similar to how we share with other liquidators around the world not only in this case but in other cases. It’s meant to be a very cooperative situation. The pushback that we’ve gotten is sort of extraordinary in the context of bankruptcy. It raises questions, it seems irregular to me, there are lots of questions on our part, and obviously, we’re investigating.”
James Bromley, one of FTX’s attorneys in the bankruptcy, has filed a declaration with rancorous correspondence between FTX and the Bahamas liquidators attached as exhibits. [Declaration, PDF]
Judge Michael Dorsey, who is presiding over the Chapter 11 proceedings in Delaware, told lawyers for the JPLs and Ray to try to find a middle ground. (His job is to be a referee, after all.) If they can’t work things out, they’ll be facing off in an evidentiary hearing tentatively scheduled for January 6, 2023. [Doc 197, PDF; Doc 203, PDF]
So that you can understand FTX’s concerns, here’s a rundown of all the questionable stuff that’s happened so far:
On November 9, the day after FTX froze withdrawals, SBF told Bahamas attorney general Ryan Pinder that he would open withdrawals for Bahamian customers. Pinder previously worked at Deltec Bank — Tether’s banker since 2018 — but we’re sure that hasn’t influenced his decision-making, probably. [Doc 203, PDF]
From November 10 to 11, roughly 1,500 individuals, who claimed to be Bahamian residents, withdrew $100 million in crypto from FTX. Every other FTX customer in the world remained locked out of the system.
SBF said the Bahamas Securities Commission had told him to let the local customers in. The BSC denied this. [Twitter, archive]
SBF later told Tiffany Fong that he let the locals get their cryptos out because “you do not want to be in a country with a lot of angry people in it.” Could he have had in mind, not a mob, but particular individuals who might have had very robust opinions about not getting their cryptos back? [YouTube]
Separately from these withdrawals, at least two actors accessed FTX systems and withdrew another $477 million — hours after Ray filed for Chapter 11 on November 11. They also minted new FTT tokens. [Elliptic]
Ray and his lawyers say that SBF and Wang, who, acting on orders from the Bahamas Security Commission, minted FTT and transferred funds to a cold wallet under the control of the Commission. Ray still hasn’t figured out who the other actor was, but he’s working on it.
The JPLs have been tight-lipped as to what assets the Commission seized or how the assets were transferred.
There’s also the issue of the $256 million that FTX spent on 35 properties in the Bahamas — including land for a massive headquarters that never got built. The Bahamas regulators want to claim the properties back and they want the sale of the properties administered locally. Ray is likely to push back on this as well. [CNBC]
It’s hard to say for sure what’s going on here. We are beginning to suspect that FTX was a money-laundering chop shop, with some crypto businesses on the side. This would further suggest possible bribery of some local authorities. But the dots aren’t yet joined up.
After four days, SBF has decided that Bahamas prisons aren’t so great, and he would rather be in a nice U.S. jail instead. [Reuters]
Ryan Salame, co-chief executive of FTX Digital Markets, is the first FTX insider on record as spilling the beans on SBF. He told the Bahamas Security Commission on November 9 that FTX customer funds had been used to cover losses at Alameda Research. [Doc 225, PDF, page 34; FT, archive]
In 2021, Salame was a budding megadonor to U.S. Republican Party candidates — in step with SBF donating to Democratic candidates. Salame took out a $55 million loan from FTX, paid cash for a $4 million home in Maryland, and was buying up restaurants in Lenox, a town in Western Massachusetts. [NYT]
We’re not saying that’s what he used it for — but restaurants are notorious as a vehicle for laundering dubious cash.
Total donations by FTX to US politicians seem to be about $89 million when you trace all the darkish money as best as possible. [Institute for New Economic Thinking]
$73 million of those political donations are at risk of being clawed back in the bankruptcy proceedings. [Bloomberg]
Molly White live-tooted the Senate hearing on FTX and summarized it in her newsletter. [Mastodon; Substack]
Here are all of the written testimonies. [Senate Housing Committee, PDFs]
John Jay Ray III wants to sell FTX subsidiaries, starting with LedgerX, FTX Japan, and FTX Europe AG. [Doc 233, PDF]
FTX now has an official creditors’ committee of nine firms or individual investors, including crypto trading firm Wintermute. They still need to pick counsel, which should happen any day now. One of the first matters they will be weighing in on is a proposal to redact personal information rather than publishing a full list of creditors. [Doc 231, PDF]
When the Ontario Teachers’ Pension Plan invested in FTX, it asked the company a slew of questions related to their financial affairs — but received answers only to a few of them. OTPP put in $95 million anyway. [Globe and Mail, archive]
How a crypto exchange can inveigle itself into the banking system — and how FTX seems to have done this with its Farmington equity purchase. Buy a bank, convert to a Federal Reserve member bank, notify the Fed that you’re going into digital assets and you’ve determined it’ll all be fine and you’re totally going to set up risk management. “If you’re lucky, your bank won’t be examined for a year or two. By then, you might have cranked up quite a dumpster fire.” [American Banker; Wall Street on Parade]
Canada has tightened crypto regulation even further in the wake of FTX. Client cryptos must be stored with a custodian and have no margin or leverage for Canadian customers. Non-Canadian platforms with Canadian customers will also be required to follow these rules. The Ontario Securities Commission had already refused FTX permission to operate in the province, but other provinces didn’t — and many Canadian FTX customers got caught up in the bankruptcy. [Leader Post]
Eliezer Yudkowsky, the AI risk guy who named “Effective Altruism,” advises his fellow Effective Altruists to take the FTX money and run. For the sake of charity, you understand. Others mention that clawbacks in bankruptcy exist — but ehh, it’ll probably be fine, right? [Effective Altruism forum, archive]
David spoke on CBC on Tuesday about FTX. It went pretty well. “TWO AND TWO MAKES FOUR! GRAVITY WORKS! MAGIC DOESN’T HAPPEN!” [Twitter; Yahoo News]
There’s no interesting news in the Celsius Network or Voyager Digital bankruptcies. Looking through the filings, it’s all procedural sports ball and not matters of real import. Everyone’s on holiday and nothing is going to happen until January. Perhaps Celsius won’t have run out of cash by then.
The next report of the examiner on Celsius was supposed to be out in December — but the court still hasn’t resolved the question of who investigates whether Celsius was Ponziing, which is the big bomb here.
Voyager is just sitting around and giving money to expensive bankruptcy professionals. Binance was talking about buying Voyager’s assets — but frankly, that’s a deal we suggest the creditors not take. They only just escaped being caught up in FTX’s bankruptcy.
Celsius has filed a motion to commence a $7.7 million clawback action against Voyager, as well as an extension of time to file a claim against Voyager’s estate. The Voyager Unsecured Creditors’ Committee is reviewing Celsius’ motion with the intention to object. [Twitter, archive]
Bankruptcy professionals will cost Celsius $115 million in the three months leading up to mid-February. [Doc 1676, PDF]
Crypto broker Genesis owes the Gemini exchange $900 million. Gemini has now formed a creditors’ committee to recoup the funds from Genesis and its parent DCG. [FT]
Did you know that 80% of the current market cap (613 million) of Gemini’s dollar stablecoin GUSD was printed in the weeks before the FTX collapse? Even odder, one unlabeled wallet appears to have minted 460 million GUSD. [Twitter, archive]
On September 30, 2022, Gemini sought to incentivize GUSD adoption by increasing GUSD deposits to MakerDAO’s PSM (peg stability mechanism). MakerDAO was unimpressed. [The Defiant]
Tether’s accountant, BDO Italia, is reconsidering whether it wants to do crypto attestations. “In common with several other professional service firms, we are currently evaluating our approach to this sector and the work we undertake for our clients.” Tether only hired them in August. [WSJ, paywalled]
In the lead-up to FTX going down, CZ from Binance was very upset that SBF appeared to be destabilizing Tether’s peg with … a mere $250,000 trade. We know this because there’s a secret chat group for the exchanges to conspire, er, sort out issues. SBF also put screenshots from these chats into the Congressional Record in his bizarre written testimony before the hearing, which he didn’t manage to attend. [WSJ; Forbes]
The secret ingredient is still crime. Police in China have arrested a gang who laundered $1.7 billion via crypto, including Tether — even after Beijing’s crackdown on crypto. [CNBC]
Three Arrows Capital (3AC)’s liquidator Teneo estimates 3AC’s assets at $1 billion as of July. That’s $37 million of actual money, $238 million in cryptos, $22 million in NFTs, and $502 million in venture and other investments. A lot of those “assets” are obviously imaginary. 3AC’s liabilities, which are extremely real, are over $3 billion. [The Block]
Grayscale wanted to turn GBTC into an exchange-traded bitcoin fund. The SEC said “LOL, no.” Grayscale sued claiming unequal treatment compared to the bitcoin futures ETFs, and even questioning whether the SEC had the right to decide against its ETF proposal. Now the SEC has written a 73-page response to Grayscale’s dumb lawsuit. [SEC, PDF]
Argo Blockchain Plc, a UK-incorporated bitcoin miner, has had trading in its shares suspended by the Financial Conduct Authority. The company is planning to file for bankruptcy. [Twitter; Bloomberg]
MicroStrategy is still going down the toilet. Bitcoin prices fell well below the “low watermark” for carrying value in Q3 2022. The company will likely face a new record digital-asset impairment charge in Q4. [Marketwatch]
Dump on retail managed: Coinbase founder Brian Armstrong no longer holds any Coinbase stock. But he’s very bullish on crypto, he wants to make clear! [Protos]
Image: Robyn Damianos for the Wall Street Journal
The 2021–2022 crypto bubble made a lot of traders look like geniuses. Then the bubble popped, the tide went out, and the traders turned out to be hugely overleveraged formerly-lucky idiots.
Sociologists know that when a cult prophecy fails, most cultists exit the cult, and the remaining factions turn on each other.
Crypto watchers know that this can also be exceedingly funny.
Sam Bankman-Fried’s boosters compare him to the legendary banker J. P. Morgan. He’s spent the crypto collapse bailing out ailing companies to keep the entire market afloat.
Bankman-Fried runs three large crypto enterprises:
On November 2, Coindesk’s Ian Allison posted an explosive story on a partially leaked balance sheet for Alameda. [CoinDesk]
Of Alameda’s $14.6 billion in claimed assets, $5.8 billion is FTT — FTX’s internal exchange token. You can use FTT for cheaper trading fees and increased commissions. FTT is also traded outside FTX.
Allison also noted that $5.8 billion is actually 180% of the circulating supply of FTT!
Alameda’s liabilities are listed at $8 billion, most of which is $7.4 billion of loans — quite a bit of that from FTX.
Alameda is super cashed-up … if you account for FTX’s own FTT token at mark-to-market, and not what you could actually get for that much of their private illiquid altcoin.
To make matters worse, Dirty Bubble notes that a lot of Alameda’s other assets are crypto tokens from other Sam Bankman-Fried enterprises. [Dirty Bubble Media]
Alameda and FTX seem to have printed FTT, pumped its price using customer assets — FTX was quite open that it was the FTT market maker, and there’s no other real demand — and used the mark-to-market value of their illiquid made-up token as collateral for loans, or as evidence that pension funds should invest in crypto companies.
This works great while number is going up!
Regular readers will know that this sort of flywheel scheme is precisely what Celsius Network tried to run with their CEL token and Nexo with their NEXO token. Celsius is bankrupt, and regulators have noticed that Nexo is only solvent if you allow them this particular tricky bit of accounting.
Alameda CEO Caroline Ellison said the leaked balance sheet Coindesk got a hold of was “incomplete,” and there were $10 billion in assets not listed there. [Twitter, archive]
The crypto world spent a few days wondering if Alameda was the next Three Arrows Capital.
Large flows of FTT were noticed on the blockchain on November 6. Binance CEO Changpeng Zhao confirmed that this was Binance selling off its FTT: [Twitter, archive]
“As part of Binance’s exit from FTX equity last year, Binance received roughly $2.1 billion USD equivalent in cash (BUSD and FTT). Due to recent revelations that have came to light, we have decided to liquidate any remaining FTT on our books.”
The remaining FTT that Binance sold was worth $530 million. [Bloomberg]
CZ was also annoyed at Bankman-Fried’s lobbying efforts for crypto regulation in Washington: “We won’t support people who lobby against other industry players behind their backs.” [Twitter, archive]
The crypto market is incredibly shaky. Alameda and FTX operate as separate corporations, but the market seems to think they’re closely entwined. Trouble at Alameda leads to worry about FTX.
So panicked holders, thinking Alameda might be insolvent, started withdrawing funds from FTX as fast as possible — and hardly deposited anything at all.
FTX paused all withdrawals on the Ethereum, Solana, and Tron blockchains around 11:37 a.m. UTC on November 8, according to Steven Zheng at The Block. [The Block]
Finally, just after 4 p.m. UTC, Bankman-Fried and CZ announced that Binance was buying FTX. Specifically, they have a non-binding letter of intent, pending due diligence. [Twitter, archive; Twitter, archive]
Essentially, CZ started a bank run on FTX, then swooped in to buy his competitor after breaking it. CZ did to Bankman-Fried what Bankman-Fried has been accused of doing to a string of others.
At present, this is only a letter of intent, not a done deal — CZ is making Bankman-Fried suffer. He could just let FTX go hang.
CZ said FTX was in a “significant liquidity crunch.” This is the sort of “liquidity crunch” that everyone else calls “insolvency.” If it were just liquidity, FTX could have borrowed against its assets and found another way out of this. [Twitter, archive]
We don’t know for sure that Alameda was trading with FTX customer funds — but this sort of fractional reserve operation is the only not-entirely-fraudulent reason that FTX could have run out of customer funds in this way.
Bankman-Fried claimed on November 7 that “FTX has enough to cover all client holdings. We don’t invest client assets (even in treasuries).” This appears not to have been true, and he later deleted the tweet. [Twitter, archive]
If FTX couldn’t get its funds back from Alameda quickly, that would have then led to the liquidity crunch.
Bankman-Fried was quick to reassure customers that FTX US was not affected and that it was “fully backed 1:1, and operating normally.” So at least FTX US explicitly claims it isn’t playing the markets with your deposits. [Twitter, archive]
FTX US is also attempting to buy the remains of the bankrupt Voyager Digital, a deal that we think is likely to go through.
The separation of customer funds and platforms is the whole point of FTX US versus FTX. It’s there to make Sam look good to regulators.
But it’s all Sam Bankman-Fried. It’s Sam’s left pocket versus his right pocket.
We think that if your paycheck goes into FTX US, you probably want to stop doing that immediately.
Alameda has likely been borrowing against the FTT it held — the FTT that is now crashing. (Earlier today, FTT was worth $19; as we post this, it’s trading at $4.60.)
Binance might rescue FTX, but it’s sure not going to rescue Alameda.
This means a series of margin calls by everyone who’s lent to Alameda. If Alameda defaults, those lenders will likely end up with worthless FTT.
BlockFi and Genesis have a pile of money in Alameda. BlockFi is or will be owned in some unspecified manner by FTX US, but that doesn’t make the books balance — there’s already a rumor of a 24-hour margin call by BlockFi against Alameda. [Twitter]
Remember that Three Arrows Capital collapsed when their UST turned out to be worthless. This then took out a pile of other crypto trading firms — most notably Celsius Network and Voyager Digital.
We’re left with two questions:
The crypto market is not happy. Bitcoin has been up and down like a yo-yo today, from $19,500 just before 4 p.m. UTC to a peak of $20,500 and a trough of $17,500.
We predict more market excitement to come — specifically, a possible Alameda collapse, a chain reaction of lender failures, and attempts to cover sudden balance-sheet holes, much as we saw after the Terra-Luna and Three Arrows collapses.
But Caroline Ellison from Alameda insists there’s another $10 billion behind the sofa or something. Maybe it’s all fine!
Image: FT Alphaville
“Bitcoin Widow” went on sale this week. Jennifer Robertson was busy giving interviews to promote her book. It’s the first time we’ve gotten to see her live and hear her voice.
Robertson was married to Gerald Cotten, who ran QuadrigaCX like a Ponzi. He mysteriously died in India just before things fell apart. Robertson was clever enough to go to college and start a business, but somehow remained completely clueless when it came to her partner’s shenanigans. The lavish vacations, the houses, and private plane trips were nice, though.
Globe and Mail interviewed Robertson. Actually, they interviewed the journalists who interviewed her. You still get to hear a little of Jen’s voice. The interview is pretty dry. No tough questions. (Globe and Mail)
The National, CBC’s flagship current affairs program, was a lot tougher. As politely as possible, they asked why she wouldn’t simply allow Cotten’s body to be exhumed and checked to make sure it’s really him. I make an appearance on the show. (YouTube)
Matt Galloway on The Current spoke with Robertson at length. (The Current)
Galloway: “Did you ever ask why hundred dollar bills were scattered around your house?”
Robertson: “It was kind of a Gerry thing.”
As a follow-up to Galloway’s interview, CBC On The Coast interviewed me about QuadrigaCX and asked me what I thought about the book. Worth a listen! (CBC, My review of the book)
Bitcoin is down to $35,000 from its November record of nearly $70,000. The sell-off has outpaced that of the U.S. stock market. David Gerard opines his thoughts on what is driving down the price. (blog post)
He notes the crypto miners are holding on to their bitcoin. If they sell, they know they will crash the markets, so they’ve got to sit tight on their piles of BTC.
There are still $78 billion tethers out there. Tether hasn’t minted any new tethers in 2022, for some reason. And the Tether transparency page has a new look and feel.
The Grayscale Bitcoin Trust is now trading at 28% below NAV, its lowest ever. (YCharts)
MicroStrategy stock is dropping in tandem with the price of BTC. MSTR tumbled nearly 18% this week. (And the SEC doesn’t care much for the company’s crypto accounting methods, either.) (CNBC)
Fortune favors the brave, or does it? Maybe not.
Crypto.com, the fourth largest crypto exchange, was hacked on Jan. 17 in a 2FA compromise. All told, the thieves got away with $34 million in crypto — 4,836 ETH, 443 BTC, and about $66,000 in another crypto. All funds are SAFU.
The hack was confirmed by Crypto.com CEO Kris Marszalek, but otherwise, the company has been murky on the details, noting “suspicious activities,” and referring to the event as an “incident.” (Crypto.com announcement, Techcrunch)
Crypto derivatives trading platform BitMEX aspires to become a “regulated crypto powerhouse” in Europe. Its European arm BXM Operations AG wants to purchase Bankhaus von der Heydt, a bank in Munich. BaFin, Germany’s financial watchdog, has yet to approve the transaction. The purchase price is undisclosed. (Bitmex blog, Decrypt)
Last summer, BitMEX agreed to a $100 million settlement with FinCEN and the CFTC. Regulators accused the Seychelles-based exchange of failing to maintain a compliant AML program.
In an effort to clean up its image, BitMEX has hired former Coinbase managing director Marcus Hughes as its chief risk officer. (Bitmex blog, WSJ)
Everybody still despises Binance.
Armed with fake credentials, journalist Hary Clynch went undercover to interview for a top position at Binance. Naturally, he was offered the job. Part two of his three-part story is up. (Disruption Banking)
In her latest blog post, Carol Alexander, professor of finance at Sussex, provides visual proof that price manipulation bots on Binance caused massive liquidations on July 25-26, 2021. (blog post)
In public, Binance CEO CZ welcomes regulatory oversight and boasts about his sparkly AML program. Behind the scenes, he withholds information about finances and corporate structure from regulators, according to a report in Reuters.
Everything is “FUD,” says CZ. (Twitter)
The SEC shot down a spot market Bitcoin ETF from First Trust Advisors and SkyBridge. The ETF didn’t meet “the requirement that the rules of a national securities exchange be ‘designed to prevent fraudulent and manipulative acts and practices’ and ‘to protect investors and the public interest,’” the regulator said.
In other words, all the things that the SEC previously objected to—wash trading, whale manipulation, mining manipulation, manipulative activity involving Tether, fraud and manipulation on exchanges, and so on—were never addressed in the proposal. (SEC, p. 15; Decrypt)
Meanwhile, in Europe, regulators are clamping down on crypto advertising.
Spain’s market regulator issued a mandate that ads for crypto assets must carry a warning that investors risk losing all their money. (Bloomberg)
In Singapore, the city-state is getting rid of bitcoin ATMs as it moves to dramatically limit consumer marketing of crypto. (Bloomberg)
In Italy, Consob, the country’s financial services regulator, has warned of risks linked to an increasing number of financially illiterate Italians investing in crypto. (FT)
And in the UK, the Treasury wants to bring advertising for the crypto industry under the same standards as other types of financial products. (Official statement, FT)
The bitcoin network consumes vast amounts of energy, mainly fossil fuels. As countries in Eastern Europe struggle to rein in electricity use in the coldest months of winter, they want the miners out.
The Bank of Russia is doing all it can to pull the plug on crypto and make bitcoin mining and crypto trading illegal. (Bloomberg)
In Kosovo, where the government has temporarily banned bitcoin mining, miners are now rushing to get out of the business, selling their mining equipment at bargain-basement prices. (Guardian)
And in the Ukraine, authorities bust another crypto mining farm illegally stealing power from the grid. (SSU)
Every celebrity and big business wants to get into the NFT market, it seems.
Gamers won’t have it. They don’t like NFTs because they’re already familiar with broadly similar exploitative paid weapons, skins, loot, etc. When their favorite online games announce plans to incorporate NFTs, gamers push back. (NYT)
If only consumers would push back on this nonsense with a similar passion as gamers.
Dan Davies, author of “Lying for Money,” says gamers are more aware than most of AML compliance issues. He pointed out that Tencent shut down its online version of Call of Duty, after discovering the platform was being widely abused by criminals. (Twitter)
Scammers set up a new server at the URL previously used by Ozzy Osbourne’s NFT project, stealing over a hundred thousand dollars in ETH. (The Verge)
Flyfish Club is an exclusive NFT restaurant in New York City. When it opens in 2023, you can only enter if you buy an NFT. You still have to pay for your food in dirt fiat, because they won’t accept crypto in the establishment. Parent company Crypto VC Group has raised $14 million selling Flyfish tokens, which are being flipped on OpenSea. (Fortune)
What would you expect from an NFT restaurant? Stephen Colbert investigates. (YouTube)
I see a new trend developing, and the SEC is not going to like it. BrewDAO just announced it wants to start a brewery. (Twitter)
Coinbase is teaming with Mastercard, so you can purchase NFTs with your credit card on its soon-to-launch NFT marketplace. (Coinbase blog, CNBC)
Walmart is considering creating its own crypto and selling NFTs. Of course, it is. (Bloomberg)
Meta wants to profit on NFTs as well. Facebook and Instagram are prepping a feature that will allow users to display their NFTs on their profiles. Meta is also working on a prototype for minting NFTs. (FT)
After spending $3 million on a rare Dune book, SpiceDAO is still looking for a way to justify the expense. It failed to negotiate IP rights. Now it wants to develop an entirely independent animated series. (Twitter)
RatDAO, which wants to accumulate blue-chip art, says it’s bought an unsigned Banksy print. Most DAOs I’ve looked at tend to focus on NFTs. (Twitter)
Cryptoland’s plans to buy a $12 million Fijian island have fallen through. The real estate agent selling Nananu-i-cake said the contract to sell it to Cryptoland’s backers fell through and the island is back on the market. Here is the listing, in case you’re interested. (Guardian)
One Jan. 18, Cryptoland founders Max Olivier and Helena López did an AMA. Molly White uploaded it to YouTube. It’s hysterical if you can stand to listen. If not, Molly has threaded the highlights.
Wikipedia editors have voted not to classify NFTs as art, sparking outrage in the crypto community. Beeple and Pak will not be included on its list of the most expensive art sales by living artists. (Artnet)
A women-led NFT project, Famed Lady Squad, is actually being led by guys, the same guys who are behind a bunch of failed NFT projects. (Input magazine)
President Nayib Bukele, thinking Moody’s had downgraded El Salvador’s credit rating, said he “DGAF.” It turns out, Moody’s had not downgraded his country’s credit rating. Moody’s has rated El Salvador Caa1, a very high credit risk, since a downgrade in July. (Bloomberg)
Crypto media outlet CoinDesk is offering employees an equivalent of stock in its parent company DCG, which has its hands in hundreds of crypto companies. David Gerard notes that DCG has a history of pressuring CoinDesk employees to pump company interests. (Blog post)
VC firm A16z wants more money for crypto investments. It’s seeking another $4.5 billion—more than double than what it raised less than a year ago. VCs are fueling the boom in everything crypto. (FT)
MetaMask founder Dan Finlay acknowledges they’ve failed to remedy an IP address leak vulnerability that’s been “widely known for a long time.” (Twitter)
A flood of crypto rich are moving to Puerto Rico for the tax breaks, driving up real estate prices and making the natives unhappy (CNBC)
Ethereum founder Vitalik Buterin and Elon Musk exchange tweets about synthetic wombs. (Twitter)
Dan Olsen posted a two-hour YouTube video explaining NFTs and the problems with blockchain in general. The video is going viral. (YouTube)
Martin Walker explains Web 3.0 in a 20-minute interview. (YouTube)
Crypto promoters often tell us it’s still “early days.” Molly White says the nauseating phrase sounds like it’s coming from people with too much money sunk into a pyramid scheme. (blog post)
Stephen Diehl has a great take on Web3, if you haven’t read it yet. (blog post)
Cryptocurrency is a giant Ponzi scheme. (Jacobin)
Fais Khan illustrates that Coinbase Ventures-backed coins tend to underperform bitcoin after an initial pop on crypto exchange Coinbase—when the VCs cash out. (blog post)
Laura Shin’s book “Cryptopians” is coming out next month. It’s nearly 500 pages long. Public Affairs is the publisher. If you don’t have the time to read it, Patrick McGinty, who teaches in the English Department at Slippery Rock University, wrote up a great review. (Baffler)
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Encrypted messaging app Signal made its new payments feature, which uses MobileCoin (MOB), available to the world in mid-November. Signal made no big announcement at the time, but the stories are coming out now. (Wired)
I wrote about MobileCoin back in April 2020 — and so did David Gerard — when Signal first announced the feature. MobileCoin was a side hustle for Signal creator Moxie Marlinspike. He was an advisor to the project and then got Signal to integrate the token.
I suspect Marlinspike was paid in MOB — advisors to crypto projects typically are paid in shitcoins — and is now looking to dump his bags. (My blog; David Gerard)
Other messaging apps, like Whatsapp and Facebook, have payments built in. What sets Signal apart is it wants to combine end-to-end encryption in messaging and a cryptocurrency with privacy features designed to make any transactions anonymous.
That has Signal employees worried. They’re concerned anonymous payments will attract criminals and thus draw regulator scrutiny, ruining everything that’s good about Signal. Signal supporters warned Signal this was a terrible idea. Signal went ahead with its plans anyway. (Verge)
Anyone can use MobileCoin via the Signal mobile app to make payments — the directions are here. The problem is getting MOB to put in your wallet. MOB is listed on Bitfinex and FTX, but it’s not available to U.S. consumers. You would have to use a VPN to get around that.
Marlinspike wrote a blog post about Web3 that’s gotten a lot of attention. (Fortune)
The story is good; he blasts Web3. However, in it, he says he was “never particularly drawn” to crypto. That’s not quite accurate. He simply put his crypto into his messaging app.
On Jan. 11, only a few days after word of Signal’s shitcoin hit the whirling blades of the fan, Marlinspike stepped down as CEO of Signal — with no notice and no replacement. Executive chairman Brian Acton will serve as acting CEO until someone new is found. (Moxie’s blog post)
Signal, which was introduced in 2014, gets its support via donations. With 40 million active users, the project is now poised to transition into a sustainable and profitable model, so it will be telling to see who steps in to take over.
In the meantime, Signal supporters are losing confidence in the app.
Nicholas Weaver, an infosec expert and staff researcher at UC Berkeley, says that even by shitcoin standards, MobileCoin is “high on the fraud factor.” (Twitter Thread).
MobileCoin’s primary privacy mechanism is that the ledger runs inside the SGX enclave (a separate and encrypted region on the Intel chip for code and data), which means privacy rests entirely on the hardware — not the blockchain. You have to trust the nodes in the system.
Marlinspike is a cryptographer and a computer security researcher. He should know better.
“Put bluntly, the only way as a security professional you would endorse this as a valid ‘privacy coin,’ let alone push it out to your huge user base, is if you were faced with a dump-truck full of money,” Weaver said. “I hope Moxie’s dump-truck was suitably large.”
El Salvador President Nayib Bukele has been day trading public bitcoin, and he is not very good at it. Bloomberg says he is probably losing money. (Bloomberg)
The country is about $1 billion in debt already. It doesn’t help that bitcoin took a nosedive recently, losing 40% of its value since its early November high of $69,000.
I know of someone else who gambled away other people’s money: Gerald Cotten, the CEO of failed Canadian crypto exchange QuadrigaCX. The exchange carried the seeds of its demise for two years before the Ponzi was exposed. Cotten died mysteriously in India just before things fell apart.
I don’t see Bukele disappearing, so who will he blame when things fall apart? Probably his adoring bitcoin supporters.
We know Bukele doesn’t like the press. Turns out he has been spying on them. Since mid-2020, dozens of journalists in El Salvador have been subjected to phone hacks using Pegasus software, according to Citizen Lab and Access Now. Pegasus is the spyware developed by Israeli company NSO Group for governments. It can infect phones running either iOS or Android. (Project Torogoz, Reuters)
If you can get past the bitcoin boosterism, this story in Bitcoin Magazine by Anita Posch has a wealth of information in it about Bukele’s plans for bitcoin in El Salvador.
I wrote before about “volcano bonds” — bonds Bukele is using to lure $1 billion from outside investors he will use to buy more bitcoin and build a crypto metropolis. Bitcoin City is set to go near the Conchagua volcano, so geothermal energy can power the city. It is uncertain whether the volcano is even active. “I was told that the volcano is dead, and there is no geothermal energy left to be used,” said Posch.
We don’t hear much from Strike CEO Jack Maller on El Salvador anymore. Rumor has it, the reason he didn’t build the government’s official Chivo wallet is because he wanted $300 million for the job, and because Algorand or Cardano or Koibanx paid the government $20 million to get the contract.
Mallers is now boasting about how Strike is going to save the poor in Argentina. “Today, we use the world’s open monetary network, bitcoin, to give hope to the people of Argentina,” he tweeted. Only he left out the part where it only works with tethers, not bitcoin. (Decrypt)
The NFT market ballooned to $44 billion in 2021, and the IRS is on the case. It wants its cut of the profits.
It’s not clear if NFTs are taxed as regular capital gains or as “collectibles,” which means you will have to pay slightly more — but that doesn’t mean you should put off filing. (Bloomberg)
Media outfit Dirt raised money selling NFTs. Now it wants to incorporate those NFTs into a DAO, so members can vote on the editorial process. What could possibly go wrong? (Verge)
CityDAO bought 40 acres of land in Wyoming for a blockchain city. The group is offering citizenship and governance tokens in exchange for the purchase of a “land NFT,” which gives you rights to a plot of land. Everything was going swimmingly until the project’s Discord server was hacked and members’ funds were stolen. So far investors have lost 29.67 ETH, worth about $92,000. (Vice)
The news industry is struggling. The Associated Press has found a solution: It is launching a marketplace for selling NFTs of its photojournalism. (Press release; Verge)
Arthur Suszko was into Beanie Babies as a kid and began collecting them again as an adult. His current project is to create NFTs of his Beanie Babies. “It’s a merger of my childhood dreams and modern passions coming together,” he said. (Vox)
The Seattle NFT Museum is charging $175 to $200 a ticket for opening weekend, for those who want to “explore the future of art,” ensuring only the most gullible will walk through its doors. (Eventbrite)
Did you read about the woman selling fart jars as NFTs? It turns out the farts-in-a-jar story was just a big publicity stunt. The entire thing appears to be made up. (Input Mag)
Binance CEO Changpeng Zhao (aka “CZ”) has a net worth of $96 billion. This is impressive given that his company does not even have an official headquarters. (Bloomberg)
That’s okay because CZ told the AP he is giving it all away. When you are constantly on the move dodging regulators, it’s nearly impossible to buy a mansion and settle down anyway.
CZ said the only coin he holds is Binance Coin because he doesn’t like a conflict of interest and he doesn’t want to do anything unethical. Binance never does anything unethical. (AP)
An undercover journalist applied for a job at Binance under a fake name with fake credentials. Four interviews later, he was offered the senior role in Binance’s futures business. (Disruption Banking)
Crypto venture capital firm Paradigm is investing in Citadel Securities. Sequoia Capital and Paradigm will invest a total of $1.15 billion in the stock trading giant at a valuation of about $22 billion.
Citadel handles 27% of the shares that are traded in the U.S. stock market. A large part of that comes from processing trades for online brokerages such as Robinhood. (Press release, WSJ)
Citadel does not trade crypto. CEO Ken Griffin has been dismissive of crypto in the past — “I don’t see the economic underpinning of cryptocurrencies,” he told CNBC. But something changed his mind, probably the money.
After banning crypto mining in the country in an effort to deal with its energy crisis, Kosovo police seized hundreds of crypto miners. One crypto-miner admitted to paying 170 euros ($193) per month for electricity and getting 2,400 euros ($2,700) per month in profit. (Kosovo police, Balkan Insight)
Metamask is a popular browser plugin that serves as an Ethereum wallet. Matthew Green, a cryptographer and computer scientist, took a casual look at its code. He came back with “an uncomfortable feeling about the complexity and quality of MetaMask’s (current) crypto code, and some unhappy feelings about its dependency structure.” (Blog post)
Tesla now accepts dogecoin for accessories. It takes up to six hours for a transaction to go through. You cannot cancel an order. You cannot return or exchange an item bought with dogecoin. All purchases made with dogecoin are final. The future of finance! (Tesla website, Verge)
The disclaimer from Tesla’s merch store is worth a read. “..if you enter an amount MORE than the Dogecoin price, we might not be able to return the extra amount.”
Block (formerly Square) CEO Jack Dorsey is pissed off at Craig Wright’s legal nonsense. He is leading a legal defense fund for bitcoin developers, according to an email he sent to the bitcoin developers list. The fund’s first task will be to assist developers facing a lawsuit from Tulip Trading Limited, the firm associated with Wright. (Email, NYT)
Last year, Wright filed a lawsuit against bitcoin core developers after losing a pile of bitcoin in a hack, saying they refused to help him recover the lost coins.
Dorsey manages a bitcoin exchange, a bitcoin development fund, a bitcoin L2 project — and now a legal defense fund. Bitcoin is decentralized.
Cryptoland is a dream project to turn a private Fijian island into a libertarian utopia. After software engineer and Wikipedia editor Molly White made fun of them on Twitter, Cryptoland sent a cease and desist letter to her for making fun of them on Twitter. (Twitter)
They also sent a “cease and decease.” (Twitter)
After getting a lot of bad press, Cryptoland is fighting back! (FT)
As part of that, Cryptoland took down its cringe-worthy video. However, the Internet is decentralized. Someone uploaded a copy to Peertube. There is also an extended version if you really enjoy torture.
Celsius Network is a crypto lending and borrowing platform, whose former CFO was arrested last year. Network data shows CEO and founder Alex Mashinsky and his wife Krissy have sold approximately 20 million CEL since October 2020, netting at least $60 million. (blog post)
How Matt Damon thought we’d react to his crypto.com commercial. (Youtube)
Jamie Zawinski, the creator of Mozilla, who makes the Firefox web browser, wrote “Today on Sick Sad World: How The Cryptobros Have Fallen.”
Dave Troy, the creator of Mailstrom, has a great thread on the awful history of cryptocurrency. (Twitter)
(Updated on Jan. 17 to include how much money investors lost on CityDAO.)
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Last thing I remember,
~ Eagles
I was running for the door.
I had to find the passage back
To the place I was before.
Relax,” said the night man.
“We are programmed to receive.
You can check out any time you like,
But you can never leave.”
Binance customers are becoming trapped inside of Binance — or at least their funds are — as the fiat exits to the world’s largest crypto exchange close around them. You can almost hear the echoes of doors slamming, one by one, down a long empty corridor leading to nowhere.
In the latest bit of unfolding drama, Binance told its customers today that it had disabled withdrawals in British Pounds after its key payment partner, Clear Junction, ended its business relationship with the exchange.
Clear Junction provides access to Faster Payments through a UK lender called Clear Bank. Faster Payments is a major UK payments network that offers near real-time transfers between the country’s banks — the thing the US Federal Reserve hopes to get with FedNow.
In a statement on its website on Monday, Clear Junction said:
“Clear Junction can confirm that it will no longer be facilitating payments related to Binance. The decision has been made following the Financial Conduct Authority’s recent announcement that Binance is not permitted to undertake any regulated activity in the UK.
We have decided to suspend both GBP and EUR payments and will no longer be facilitating deposits or withdrawals in favor of or on behalf of the crypto trading platform. Clear Junction acts in full compliance with FCA regulations and guidance in regards to handling payments of Binance.”
The Financial Conduct Authority, or FCA, ruled on June 26 that Binance cannot conduct any “regulated activity” in the UK. Binance downplayed the ruling at the time, telling everyone the FCA notice related to Binance Markets Ltd and had “no direct impact on the services provided on Binance.com.”
Binance waited a day after learning it was cut off by Clear Junction before emailing its customers and telling them that the suspension of payments was temporary.
“We are working to resume this service as soon as we can,” Binance said. It reassured customers they can still buy crypto with British Pounds via credit and debit cards on the platform.
This is the second time in recent weeks that Binance customers have been frozen out of Faster Payments. They were also frozen out at the end of June. A few days later, the service was restored — presumably when Binance started putting payments through Clear Junction.
I am guessing that Clear Bank’s banking partners warned them that Binance was too risky and that if they wanted to maintain their banking relationships, they’d better drop them as a customer asap, so they did.
Binance talks like all of these issues are temporary snafus that it’s going to fix in due time. In fact, the exchange’s struggle to secure banking in many parts of the world is likely to intensify.
Despite numerous claims in the past about taking its legal obligations seriously, Binance has been loosey-goosey with its anti-money laundering and know-your-customer rules, opening up loopholes for dirty money to flow through the exchange. Now that the word is out, no bank is going to want to touch them.
I wrote about Binance’s global pariah status earlier this month. Since I published that story, UK high-street banks have moved to ban Binance, all following the FCA ban.
On July 5, Barclays said it is blocking its customers from using their debit and credit cards to make payments to Binance “to help keep your money safe.” Barclays customers can still withdraw funds from the exchange, however. (Since Clear Junction cut Binance off, credit cards remain the only means for UK customers to get fiat off the exchange at this point.)
Two days later, Binance told its users that it will temporarily disable deposits via Single Euro Payments Area (SEPA) bank transfers — the most used wire method in the EU. Binance blamed the move on “events beyond our control” and indicated users could still make withdrawals via SEPA.
On July 8, Santander, another high-street bank, told its customers it was also stopping payments to Binance.
“In recent months we have seen a large increase in UK customers becoming the victims of cryptocurrency fraud. Keeping our customers safe is a top priority, so we have decided to prevent payments to Binance following the FCA’s warning to consumers,” Santander UK’s support page tweeted.
As I detailed in my earlier story, regulators around the world have been putting out warnings about Binance. Poland doesn’t regulate crypto markets, but the Polish Financial Supervisory Authority also issued a caution about the exchange. Its notice included links to all the other regulatory responses.
Amidst the firestorm, Binance has been whistling Dixie. On July 6, the exchange sent a letter to its customers, saying “compliance is a journey” and drawing odd parallels between developments in crypto and the introduction of the automobile.
“When the car was first invented, there weren’t any traffic laws, traffic lights or even safety belts,” said Binance. “Laws and guidelines were developed along the way as the cars were running on the road.”
There’s a lot of unhappy people on r/BinanceUS right now complaining their withdrawals are frozen or suspended — and they can’t seem to get a response from customer support either.
Binance.US is a subsidiary of Binance Holdings Ltd. Unlike its parent company, Binance.US, does not allow highly leveraged crypto-derivatives trading, which is regulated in the US.
A quick look at the subreddit’s weekly support thread reveals even more troubling posts about lost access to funds.
This mirrors Gizmodo’s recent findings. The media outlet submitted a Freedom of Information Act request with the Federal Trade Commission asking for any customer issues filed with the FTC about Binance. The agency located 760 complaints filed since June of 2020 — presumably mainly from Binance.US customers.
In an article titled “32 Angry Complaints to the FTC About Binance,” Gizmodo uncovered some startling patterns. “The first, and arguably most alarming pattern, appears to be people who put large amounts of money into Binance but say they can’t get their money out.”
Also, Binance is known for having “maintenance issues” during periods of heavy market volatility. As a result, margin traders, unable to exit their positions, are left to watch in horror while the exchange seizes their margin collateral and liquidates their holdings.
Hundreds of traders around the world are now working with a lawyer in France to recoup their losses. In a recent front-page piece, the Wall Street Journal said it suspected that the collective complaints may be the reason why Binance has received continuous warnings from many countries.
If you still have funds on Binance, I would urge you to get them off the exchange now — while you still can. When hoards of people start complaining about lost and frozen funds, it’s usually a sign of liquidity problems.
We saw a similar pattern leading up to February 2014 when Tokyo Bitcoin exchange Mt Gox bit the dust. And also just before Canadian crypto exchange QuadrigaCX went belly up in early 2019. In both instances, users of those defunct exchanges are still waiting to recoup a portion of their lost funds. Bankruptcy cases take a long, long time, and you are lucky to get back pennies on the dollar.
In another bizarre development, folks on Twitter are wondering what happened to Catherine Coley, the previous CEO of Binance.US. She stepped down in May when Brian Brooks, the former Acting Comptroller of the Currency, took over. Nobody has heard from her since. Where did she disappear off to?
Coley’s last tweet was on April 19. And both her LinkedIn Profile and Twitter account indicate she is still the CEO of Binance.US.
She hasn’t been in any interviews or podcasts. She doesn’t respond to DMs, and there are no reports of anyone being able to contact her.
A Forbes article from last year says that Binance.US may have been set up as a smokescreen — the “Tai Chi entity” — to divert US regulators from looking too closely at Binance, the parent company.
Binance.US maintains that it is a separate entity. However, Forbes 40 under 40 reported that Coley was “chosen” by CZ, the CEO of Binance, which suggests that Binance is more involved with Binance.US than it claims.
Has CZ told her to stop talking? What does she know? Catherine, if you are reading this, send us a message!
(Updated July 13 to clarify that Barclays still allows customers to withdraw funds via credit card and to note that Binance.US is the Tai Chi entity.)
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Binance, the world’s largest dark crypto slush fund, is struggling to find corners of the world that will tolerate its lax anti-money laundering policies and flagrant disregard for securities laws.
On Thursday, the Cayman Islands Monetary Authority issued a statement that Binance, the Binance Group and Binance Holdings Limited are not registered, licensed, regulated, or otherwise authorized to operate a crypto exchange in the Cayman Islands.
“Following recent press reports that have referred to Binance, the Binance Group and Binance Holdings Limited as being a crypto-currency company operating an exchange based in the Cayman Islands, the Authority reiterates that Binance, the Binance Group or Binance Holdings Limited are not subject to any regulatory oversight by the Authority,” the statement said.
This is clearly CIMA reacting to everyone else blaming Binance on the Caymans, where it’s been incorporated since 2018.
On Friday, Thailand’s Security and Exchange Commission filed a criminal complaint against the crypto exchange for operating a digital asset business without a license within its borders.
Last week, Binance opted to close up shop In Ontario rather than meet the fate of other cryptocurrency exchanges that have had actions filed against them for allegedly failing to comply with Ontario securities laws.
Singapore’s central bank, the Monetary Authority of Singapore, said Thursday that it would look into Binance Asia Services Pte., the local unit of Binance Holdings, Bloomberg reported.
The Binance subsidiary applied for a license to operate in Singapore. While it awaits a review of its license application, Binance Asia Services has a grace period that allows it to continue to operate in the city-state.
“We are aware of the actions taken by other regulatory authorities against Binance and will follow up as appropriate,” the MAS said in a statement.
On June 26, the UK’s Financial Conduct Authority issued a consumer warning that Binance’s UK entity, Binance Markets Limited, was prohibited from doing business in the country.
“Due to the imposition of requirements by the FCA, Binance Markets Limited is not currently permitted to undertake any regulated activities without the prior written consent of the FCA,” the regulator said.
It continued: “No other entity in the Binance Group holds any form of UK authorisation, registration or licence to conduct regulated activity in the UK.”
Following the UK’s financial watchdog crackdown, Binance customers were temporarily frozen out of Faster Payments, a major UK interbank payments platform. Withdrawals were reinstated a few days later.
Only a few days before, Japan’s Financial Services Agency issued a warning that Binance was operating in the country without a license. (As I explain below, this is the second time the FSA has issued such a warning.)
Last summer, Malaysia’s Securities Commission also added Binance to its list of unauthorised entities, indicating Binance was operating without a license in the Malaysian market.
Binance offers a wide range of services, from crypto spot and derivatives trading to tokenized versions of corporate stocks. It also runs a major crypto exchange and has its own cryptocurrency, Binance Coin (BNB), currently the fifth largest crypto by market cap, according to Coinmarketcap.
The company was founded in Hong Kong in the summer of 2017 by Changpeng Zhao, more commonly known as “CZ.”
China banned bitcoin exchanges a few months later, and ever since, Binance has been bouncing about in search of a more tolerant jurisdiction to host its offices and servers.
Its first stop after Hong Kong was Japan, but Japan was quick to put up the “You’re not welcome here” sign. The country’s Financial Services Agency sent Binance its first warning in March 2018.
“The exchange has irked the FSA by failing to verify the identification of Japanese investors at the time accounts are opened. The Japanese officials suspect Binance does not have effective measures to prevent money laundering; the exchange handles a number of virtual currencies that are traded anonymously,” Nikkei wrote.
Binance responded by moving its corporate registration to the Cayman Islands and opening a branch office in Malta, the FT reported in March 2018.
In February 2020, however, Maltese authorities announced Binance was not licensed to do business in the island country.
“Following a report in a section of the media referring to Binance as a ‘Malta-based cryptocurrency’ company, the Malta Financial Services Authority (MFSA) reiterates that Binance is not authorised by the MFSA to operate in the crypto currency sphere and is therefore not subject to regulatory oversight by the MFSA.”
CZ lives in Singapore but has continually refused to say where his company is headquartered, insisting over and over again that Binance is decentralized. This is absolute nonsense, of course. The company is run by real people and its software runs on real servers. The problem is, CZ, whose net worth Forbes estimated to be $2 billion in 2018, doesn’t want to abide by real laws.
As a result, his company faces a slew of other problems.
Binance is currently under investigation by the US Department of Justice and the Internal Revenue Service, Bloomberg reported in May. It’s also being probed by the Commodity Futures Trading Commission over whether it allowed US residents to place wagers on the exchange, according to another Bloomberg report.
Also in May, Germany’s financial regulator BaFin warned that Binance risked being fined for offering its securities-tracking tokens without publishing an investor prospectus. Binance offers “stock tokens” representing MicroStrategy, Microsoft, Apple, Tesla, and Coinbase Global.
Binance has for five years done whatever it pleases, all the while using the excuse of “decentralization” to ignore laws and regulations. Regulators are finally putting their collective foot down. Enough is enough.
Image: Changpeng Zhao, YouTube
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A lot is going on in cryptoland right now—most of it involves investigations, a New York Attorney General (NYAG) lawsuit and missing funds, but I don’t want to sound negative.
The destiny of all crypto exchanges is to be hacked, apparently. Last year, thieves stole $950 million worth of cryptocurrency from exchanges. So, in many ways, it’s not surprising to hear that Binance, the largest crypto exchange by volume, got hacked a second time.
Binance, all funds SAFU
Thieves looted more than 7,000 BTC from Binance in a single transaction. The hackers, however, are not free yet! They still need to move that $41 million worth of BTC into fiat, a feat that typically requires layering funds into smaller and smaller amounts (generally using a script of some sort), moving it through coin mixers, and then funneling it through various exchanges until they can exit into cash.
Thanks to blockchain, we can watch this money laundering happen real time. The first transaction out of Binance consisted of of 44 outputs. The hackers have since consolidated the bitcoin into seven addresses of mostly amounts. Now we wait.
After the hack, Binance suspended all deposits and withdrawals for seven days. Traders on the platform can’t dump their bitcoin—or their tether. If bitcoin were to crash, they would be trapped. Fortunately, bitcoin is not crashing—it’s pumping. As I write, bitcoin is now at $6,800, having shot up $1,000 within a week.
According to one expert, the boost is partially due to “a rare alignment of celestial bodies forged in an ancient supernova”—thus, number go up. Makes total sense to me.
Binance says it has an insurance policy—its SAFU fund—to cover losses on the exchange. Nobody knows for certain what is in that fund, because there has never been an outside audit, but Binance’s CEO CZ says they have enough bitcoin to cover the losses. Phew!
In a recent blog post, CZ also said the exchange is revamping its security measures, including its 2FA, API and withdrawal validation processes. Also, withdrawals and deposits should resume “early next week.”
Bitfinex’s legal woes
If you need to get up to speed with the Bitfinex and Tether saga, I covered the NYAG lawsuit in my previous newsletter. Robert-Jan den Haan also wrote a complete timeline of Bitfinex’s history with its third-party payment processor Crypto Capital.
We have podcasts, too. I discuss the Bitfinex drama with Sasha Hodder on HodlCast, and Robert talks about it with Laura Shin on her Unconfirmed podcast.
In response to the NYAG’s court order, Bitfinex submitted a motion to vacate. The NYAG filed an opposition, and Bitfinex responded. At a hearing on May 6, New York Supreme Court judge Joel M. Cohen called the preliminary injunction “amorphous and endless.” The prelim will stand, but he is giving both parties a week to sort it out.
Bitcoin was selling at a 6% premium on Bitfinex—a sign that traders are willing to pay more to get rid of their tether and get their funds off the exchange. The price of bitcoin on the exchange was so off-kilter that CoinMarketCap, a website that aggregates bitcoin pricing from top exchanges, stopped pulling from Bitfinex.
The Bitfinex premium disappeared when Binance halted withdrawals on its platform, Larry Cermak doubts it has anything to do with Binance though. He thinks it’s because Bitfinex started processing cash withdrawals again.
Twitter user “Bitfinex’ed,” disagrees. When bitcoins and tethers are stuck on Binance, that effectively reduces the supply and makes it that much easier to pump the market, he told me. He think prices will crash when Binance reopens withdrawals.
“I am lion, hear me roar”
Bitfinex has a $851 million shortfall due to issues with Crypto Capital. How is it going to fix that? Here is an idea: Why not just print more money?
The exchange’s latest plan is a token sale, or exchange traded offering (ETO), on its own platform. It will be selling a new token LEO—as in lion.
Earlier this week, iFinex, the parent company of Bitfinex, released a white paper outlining the business proposition behind the token offering. Each LEO is worth 1 USDT, which is worth $1 USD. This is not the first time Bitfinex has issued a new token to pull itself out of a financial mess. (It created a BFX token after it was hacked in 2016.)
Bitfinex shareholder Dong Zhao told CoinDesk that iFinex has received hard and soft commitments of $1 billion for the token sale. Perfect. That should definitely eleviate all of Bitfinex’s money problems.
QuadrigaCX
Ernst & Young, the trustee for failed Canadian crypto exchange QuadrigaCX, released a preliminary report describing the company’s assets and liabilities. In a nut, Quadriga has US$21 million in assets, but owes creditors US$160 million.
Elsewhere
Recently, Negocie Coins, a crypto exchange that you probably have never heard of, rose to number three on CoinMarketCap’s top exchange’s list sorted by volume. How is this even possible? Clay Collins, founder of market data company Nomics, made a video, explaining how crypto exchanges use ticker stuffing and volume spamming to game the system.
FinCEN has released a new “interpretive guidance” for money services businesses using cryptocurrency. If you are not sure if you are a money transmitter, David Gerard breaks it down for you. Sasha Hodder also covers the new guidance in Bitcoin Magazine. And there were several tweet storms—here, here, and here.
The FinCEN document has far reaching implications, such as, it appears Lightning Network (LN) operators qualify as money transmitters. Emin Gün Sirer says he is not surprised “given how similar LN is to hawala networks, and given the role hawala networks played in financing terrorism pre-9/11.”
The US banking committee is concerned about Facebook’s attempt at a cryptocurrency—Facebook coin—and how the social media giant is treating people’s’ financial information. It’s published an open letter with questions for Facebook.
Redditor u/BioBiro, who needed to acquire bitcoin for a totally legal purchase, complains about the rigamarole he had to go through. Among other things, “Now there’s two pictures of me and my driving license on their server for the rest of time, I guess.”
Consensus, CoinDesk’s big money maker conference, kicks off in New York next week. Last year it had 8,500 attendees, pulling in ~$17 million in ticket sales—and that’s before sponsorships. Arthur Hayes, CEO of bitcoin derivative exchange BitMEX, was one of several who rolled up to New York Hilton Midtown in a lambo.
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Amy Castor 
