News: EU to make BTC traceable, Circle’s stab at transparency, DoJ probes Tether for bank fraud

If you are not signed up for my blog already, sign up! To do this, click the three little lines on the top left of my website, scroll down and enter your email. This way, you’ll be sure to get all my blog posts hot off the press. 

If you want to contribute to my work, please subscribe to my Patreon. I’ve got 86 wonderful patrons at the moment for a total of $866 a month. It’s not a living (yet), but it pays for the extras. I’d love to get that over $1,000 soon!

Regulation

It’s time for Bitcoin to put on its big-boy pants. If you want to be real money, it turns out, you have to follow real money rules.

In light of that, the European Commission, the EU’s executive body, wants to apply FATF’s travel rule to crypto to make transactions more traceable. The rule, which already applies to real money transfers, will require all transfers of crypto assets to be accompanied by full details of both the sender and the receiver. 

“Crypto assets are increasingly used for money laundering and other criminal purposes,” the European Commission VP said in a press conference. “We’ll now bring crypto assets fully in scope of EU AML rules. (Press release; BBC)

In my last newsletter, I touched on a new stablecoin academic paper — “Taming Wildcat Stablecoins.” I’m bringing it up again because of the paper’s political importance, which is getting overlooked right now.  

The paper describes Tether as an equity instrument akin to a money-market fund and all other stablecoins as debt instruments. This appears to be an intentful regulatory distinction. I’m guessing it will come up again when the hammer falls on stablecoins — particularly Tether. Read the paper!

A bipartisan infrastructure bill agreed on by Senators and President Biden proposes to raise $28 billion from crypto investors by applying stricter IRS reporting requirements to exchanges and other parties. (Bloomberg)

CFTC Commissioner Dan Berkowitz spoke about decentralized finance at DACOM DeFI 2021. He has talked about DeFi platforms in the past. But this time, he said the contracts themselves are illegal. (Youtube)

“If you have a system where you take out the intermediary and you just have a bunch of people trading contracts, those contracts are still in violation of the Commodity and Exchange Act,” he said. “It’s not just the intermediaries that are regulated — it’s the instruments themselves and the people that are using them.”

On June 27, the Senate Banking Committee held a hearing called “Cryptocurrencies: What are they good for?” If you don’t have time to listen to the whole thing, Alexis Goldstein, senior policy analyst at nonprofit coalition Americans for Financial Reform, recaps the important bits in a Twitter thread.

Sen. Elizabeth Warren is concerned about the risk crypto poses to the financial system. In a letter to Treasury Secretary Janet Yellen, she suggested Yellen tap the Financial Stability Oversight Council — a panel of top regulators that the Treasury secretary chairs — to “act with urgency.” Warren cited stablecoins, DeFi, exposure to hedge funds, and risk to banks. (Politico)

Tether’s criminal probe

The big news: The US Justice Department is investigating Tether for bank fraud. It looks like the DoJ may have leaked a target letter to Bloomberg. (If you’re not sure what that is, here is a sample target letter.)

I wrote a blog post explaining Tether’s banking history. David Gerard and I also did a podcast on the topic for “When the Music Stops.” 

Why would the DoJ leak a target letter? Because they are giving the public a heads up on what is to come. Fifty percent of all bitcoin is still traded against tethers and this could have a potentially big impact on the market. In other words: Get your funds off Tether exchanges now. 

The Tether printer is still paused, as it has been since the end of May/early June. There are currently 62 billion USDT in circulation, with Tether having burned another 200 million USDT in the last week. 

We don’t know why Tether stopped printing. But the timing corresponds with China’s crackdown on crypto and all the stuff going on with Binance. It’s also possible Tether knew the DoJ was onto them.

Tether says that its reserves consist mostly of commercial paper, which would make it one of the largest commercial paper holders in the world. Is it Chinese commercial paper? Tether won’t say, but if it is, that could pose a problem for Tether as Chinese regulators want real estate developers — major issuers of CP — to start disclosing more details of CP issuance on a monthly basis. (CNBC)

In their infinite wisdom, Tether execs — CTO Paolo Ardoino and General Counsel Stuart Hoegner — decided it would be a good idea to go on CNBC to be interviewed by Deirdre Bosa. (Youtube)

Naturally, Bosa asked them about their commercial paper. 

“We don’t disclose our commercial partners, so that is quite important,” Ardoino said. “Given our portfolio composition in commercial paper, we believe that it is quite important to respect the privacy of the banking partners that we work with.” 

Privacy of banking partners? Just about every money-market fund out there lists all of its holdings by size and issuer and CUSIP — a unique code assigned to most financial instruments.  

“Everything in this interview melted my brain,” says Bloomberg’s Matt Levine. 

Circle releases a new attestation

Circle released its May attestation with additional transparency around its USDC stablecoin. The Boston firm is trying to go public via a SPAC. 

In the past, Circle’s attestations pointed vaguely to “approved investments.” Now it has released a full breakdown of its investments, sort of. (Doomberg)

Sure, it’s a step toward greater transparency, but why doesn’t Circle just go ahead and release its Q1 financials? If everything is on the up and up, that would seem like the simplest way to remove any doubt about USDC’s backing. 

Frances Coppola, who worked in banking for over a dozen years, thinks Circle is commingling funds. (Twitter thread)

Binance loses another wheel

The wheels keep falling off the Binance bus. UK bank NatWest has joined Santander and Barclays in cutting off payments to the crypto exchange. (Coindesk)

The bad news follows the UK’s Financial Conduct Authority issuing a consumer warning about Binance on June 26, which Binance played down as no big deal.  

In the UK, crypto businesses are required to register with the FCA. Binance Markets Ltd., the company’s UK arm, applied but withdrew its application on May 17 after intensive engagements with the FCA who had concerns with the exchange’s AML safeguards and lack of a headquarters. 

Hedge funds are also backing away from the ticking time bomb that is Binance. Tyr Capital has significantly reduced its exposure, along with ARK36. (FT)

Binance changed its withdrawal limit from 2 BTC to just 0.06 BTC for all users without KYC. The change goes into effect for new users right away and existing users on Aug. 4. (Binance website; archive)

Either Binance is making a greater effort to comply with AML rules — or they are insolvent. I’m going to go with #2. 

Meanwhile, CZ is pretending everything is fine, so people don’t move all their funds off the exchange in a panic, causing the entire house of cards to collapse, like Mt Gox in 2014. 

CZ talks a big game about making Binance compliant, but that is all it is and all that it’s ever been — talk. Along those lines, he is now discussing taking Binance US public via an IPO. (Cointelegraph)

He also says he wants to hire a new CEO as the exchange tries to comply with regulations.(Coindesk)

If you still have money on Binance, get it off now. Otherwise, #SFYL.

A world of hell for BlockFi

New Jersey-based crypto lending firm BlockFi is getting into all sorts of trouble over its high-yield BlockFi Interest Accounts, or BIAs, which look a lot like unregistered securities.

You send crypto to BlockFi and they issue you BIAs, which earn 7.5% interest. You get paid monthly, and the incentive is to just keep rolling the funds back into BIAs, because look how rich you are — on paper!

The New Jersey Bureau of Securities issued a summary cease and desist order to BlockFi ordering the company to stop offering BIAs to customers in NJ. Originally, the order was set to hit on July 22, but it has been delayed to Sept. 2, according to BlockFi. 

In a press release on July 21, the Alabama Securities Commission said it has issued a show of cause to the firm. The order gives BlockFi 28 days to explain why they should not be directed to cease and desist from selling unregistered securities in Alabama. 

Following that, the Texas State Securities Board said in a notice of hearing on July 22 that the BIA is a security under state law. A hearing is set for Oct. 13. Texas also claims BlockFi violated the state laws by selling securities without being registered as a dealer or agent. 

Vermont also issued a show of cause order on July 22.

Meanwhile, BlockFi CEO Zac Prince has spun this like a bunch of good news. “We’ve said time and again that the key to our industry’s success is appropriate regulation. Ultimately, we see this as an opportunity for BlockFi to help define the regulatory environment for our ecosystem,” he said in a blog post.

Virgil Griffith taken into custody

Virgil Griffith, the former Ethereum developer who got himself into hot water by going to DPRK and giving a talk on crypto, has got himself into more hot water. 

Griffith, who has been living with his parents since his indictment, violated his bail conditions by trying to access his crypto on Coinbase. The judge thinks he is a flight risk, so he’s put Griffith behind bars to await trial in September. 

Since his arrest in November 2019, Griffith’s $100,000 in ETH has grown to $1 million in ETH. He had his mother reach out to Coinbase on his behalf. Griffith is a smart guy, who apparently does dumb things. 

“Though the defendant is a bright well-educated man, his method of circumvention of the Order was neither clever nor effective,” the judge said. (Court filing)

Other newsworthy bits

MicroStrategy just posted a $299 million loss for Q2 after betting the house on Bitcoin. But like any crazed degenerate gambler, Michael Saylor plans to keep buying more bitcoin. (Press release; Forbes)

El Salvador’s President Nayib Bukele is pioneering hustle bro populism. Bukele distracted from his self-coup when he announced bitcoin soon after. (FP)

El Faro got a copy of the presentation Cardano gave to the El Salvador government. This is somewhere between hilarious and tragic. Bukele and his regime want to implement their colón-dollar stablecoin by Sept. 7, yet they literally have no plan for how to make it happen, so they are fishing for anything. (Leaked presentation)

Coinbase is the target of a class-action. The lead plaintiff, Brandon Leidel, claims he lost money investing in COIN when the price of the shares fell right after all the VCs cashed out. (Complaint; Law360, paywalled)

Dfinity has been hit with a class-action claiming the company sold its Internet Computer Project (ICP) tokens as an unregistered security. The suit targets Olaf Carlson-Wee’s crypto hedge fund Polychain Capital, venture capital firm Andreessen Horowitz, and Dfinity’s founder Dominic Williams as the “controlling defendants.” (Complaint; Decrypt)

DeFi exchange Uniswap is blocking 100 tokens from its website — including tokenized stocks and some derivatives. The move came right after the CFTC commissioner said contracts were illegal on DeFi. (Alexis Goldstein)

Paxos’ General Counsel takes aim at Tether and USDC, claiming that the two stablecoins it issues — Paxos Standard and BUSD — are both regulated, while Tether and USDC are not. It also claims Paxos Standard and BUSD are are backed by 96% cash or cash equivalents. (Paxos blog post; The Block)

Multilevel-marketing schemes are a predatory wealth transfer from low-information people recruited into the scheme directly to the company upper ranks’ pockets. Stephen Dhiel writes about unintentional scams. (Blog post) 

Bitcoin’s gold rush was always an illusion. Millions of people have bought into the idea that crypto could make them rich, fast. But these booms are fake. Really good story in the New Statesmen.

The DOJ’s criminal probe into Tether — What we know

Early this morning, Bloomberg reported that Tether executives are under a criminal investigation by the US Department of Justice.  

The DOJ doesn’t normally discuss ongoing investigations with the media. However, three unnamed sources leaked the info to Bloomberg. The investigation is focused on Tether misleading banks about the true nature of its business, the sources said.

The DoJ has been circling Tether and Bitfinex for years now. In November 2018, “three sources” — maybe even the same three sources — told Bloomberg the DOJ was looking into the companies for bitcoin price manipulation. 

Tether responded to the latest bit of news in typical fashion — with a blog post accusing Bloomberg of spreading FUD and trying to “generate clicks.” 

“This article follows a pattern of repackaging stale claims as ‘news,” Tether said. “The continued efforts to discredit Tether will not change our determination to remain leaders in the community.”

But nowhere in its post did Tether deny the claims. 

Last night, before the news broke, bitcoin was pumping like crazy. The price climbed nearly 17%, topping $40,000. On Coinbase, the price of BTC/USD went up $4,000 in three minutes, a bit after 01:00 UTC. 

After a user placed a large number of buy orders for bitcoin perpetual futures denominated in tethers (USDT) on Binance — an unregulated exchange struggling with its own banking issues — The BTC/USDT perpetual contract hit a high of $48,168 at around 01:00 UTC on the exchange.

Bitcoin pumps are a good way to get everyone to ignore the impact of bad news and focus on number go up. “Hey, this isn’t so bad. Bitcoin is going up in price. I’m rich!”

So what is this DoJ investigation about? It is likely a follow-up to the New York attorney general’s probe into Tether — and its sister company crypto exchange Bitfinex — which started in 2018. 

Tether and Bitfinex, which operate under the same parent company iFinex, settled fraud charges with the NY AG for $18.5 million in February. They were also banned from doing any further business in New York.

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

The companies’ woes started with a loss of banking more than a year before the NY AG initiated its probe. 

Banking history

Tether and Bitfinex, both registered in the British Virgin Islands, were banking with four Taiwanese banks in 2017. Those banks used Wells Fargo as a correspondent bank to process US dollar wire transfers. 

In other words, the companies would deposit money in their Taiwanese banks, and those banks would send money through Wells Fargo out to the rest of the world. 

However, in March 2017, Wells Fargo abruptly cut off the Taiwanese banks, refusing to process any more transfers from Tether and Bitfinex. 

About a month later — I would guess, after Wells Fargo told them they were on thin ice — the Taiwanese banks gave Tether and Bitfinex the boot.  

Since then, Tether and Bitfinex have had to rely increasingly on shadow banks — such as Crypto Capital, a payment processor in Panama — to shuffle funds around the globe for them. 

They also started furiously printing tethers. In early 2017, there were only 10 million tethers in circulation. Today, there are 62 billion tethers in circulation with a big question as to how much actual cash is behind those tethers.  

Crypto Capital

Partnering with Crypto Capital turned out to be an epic fail for Bitfinex and Tether.

The payment processor was operated by principals Ivan Manuel Molina Lee and Oz Yosef with the help of Arizona businessman Reggie Fowler and Israeli woman Ravid Yosef — Oz’s sister, who was living in Los Angeles at the time.

In April 2019, Fowler and Ravid were indicted in the US for allegedly lying to banks to set up accounts on behalf of Crypto Capital. Fowler is currently awaiting trial, and Ravid Yosef is still at large. 

Starting in early 2018, the pair set up dozens of bank accounts as part of a shadow banking network for Crypto Capital. Some of those banks — Bank of America, Wells Fargo, HSBC, and JP Morgan Chase — were either based in the US, or in the case of HSBC, had branches in the US, and therefore, fell under the DOJ’s jurisdiction. 

In total, Fowler’s bank accounts held some $371 million and were at the center of his failed plea negotiation in January 2020. Those accounts, along with more frozen Crypto Capital accounts in Poland, meant that Tether and Bitfinex had lost access to some $850 million in funds in 2018.

Things spiraled downhill from there. Molina Lee was arrested by Polish authorities in October 2019. He was accused of being part of an international drug cartel and laundering funds through Bitfinex. And Oz Yosef was indicted by US authorities around the same time for bank fraud charges.

Tether stops printing

At the beginning of 2020, there were only 4.5 billion tethers in circulation. All through the year and into the next, Tether kept issuing tethers at greater and greater rates. Then, at the end of May 2021, it stopped — and nobody is quite sure of why. Pressure from authorities? A cease and desist order? 

Usually, cease and desist orders are made public. And it is hard to imagine that there would be an order that has been kept non-public since May.

One could argue, you don’t want to keep printing dubiously backed stablecoins when you’re under a criminal investigation by the DOJ. But as I’ve explained in prior posts, other factors could also be at play. 

For instance, since Binance, one of Tether’s biggest customers, is having its own banking problems, it may be difficult for Binance users to wire funds to the exchange. And since Binance uses USDT in place of dollars, there’s no need for it to acquire an additional stash of tethers at this time.

Also, other stablecoins, like USDC and BUSD, have been stepping in to fill in the gap.

The DOJ and Tether

You can be sure that any info pulled up by the NY AG in its investigation of Tether and Bitfinex has been passed along to the DoJ and the Commodities and Futures Trading Commission — who, by the way, subpoenaed Tether in late 2017. 

Coincidentally — or not — bitcoin saw a price pump at that time, too. It went from around $14,000 on Dec. 5, 2017, the day before the subpoena was issued, to nearly $18,000 on Dec. 6, 2017 — another attempt to show that the bad news barely had any impact on the bitcoin price. 

Tether relies on confidence in the markets. As long as people believe that Tether is fully backed, or that Tether and Bitfinex probes won’t impact the price of bitcoin, the game can continue. But if too many people start dumping bitcoin in a panic and rushing toward the fiat exits, the truth — that there isn’t enough cash left in the system to support a tsunami of withdrawals — will be revealed, and that would be especially bad news for Tether execs. 

Will Tether’s operators be charged with criminal actions any time soon? And which execs is the DoJ even investigating? The original operators of Bitfinex and Tether — aka “the triad” — are Chief Strategy Officer Phil Potter, CEO Jan Ludovicus van der Velde and CFO Giancarlo Devasini.

Phil Potter supposedly pulled away from the operation in mid-2018. And nobody has heard from van der Velde or Devasini in a long, long time. Now, the two main spokespersons for the companies are General Counsel Stuart Hoegner and CTO Paolo Ardoino, who give lots of interviews defending Tether and accusing salty nocoiners like me of FUD.  

Tracking down bad actors takes a lot of coordination. Recall that the DoJ had to work with authorities in 17 different countries to finally arrest the operators of Liberty Reserve, a Costa Rica-based centralized digital currency service that was used for money laundering. Similar to Liberty Reserve, Tether is a global operation and all of the front persons associated with Tether — except for Potter who lives in New York — currently reside outside of the US. 

It may still take a long while to completely shut down Tether and give it the Liberty Reserve treatment. But if the DoJ files criminal charges against Tether execs, that is at least a step in the right direction.

Read more: 
The curious case of Tether — a complete timeline
Nocoiner predictions: 2021 will be a year of comedy gold 

If you like my work, please subscribe to my Patreon for as little as $5 a month. Your support keeps me going.

News: More Bitfinex drama, Crypto Capital, a dodgy football businessman and a relationship coach

There is so much going on now with Bitfinex. My eyes are burning and my head hurts from reading piles of court docs. Here is a rundown of all the latest—and then some.

The New York Attorney General (NYAG) is suing Bitfinex and Tether, saying tethers (USDT) are not fully backed—after $850 million funneled through third-party payment processor Crypto Capital has gone missing.  

Screen Shot 2019-05-04 at 2.10.08 PMIt’s still not clear where all that money went. Bitfinex says the funds were “seized and safeguarded” by government authorities in Portugal, Poland and the U.S. The NYAG says the money was lost. It wants Bitfinex to stop dipping into Tether’s reserves and to handover a mountain of documents.

In response to the NYAG’s ex parte order, Tether general counsel Stuart Hoegner filed an affidavit accompanied by a motion to vacate from outside counsel Zoe Phillips of Morgan Lewis. Hoegner admits $2.8 billion worth of tethers are only 74% backed, but claims “Tether is not at risk.” Morgan says New York has no jurisdiction over Tether or Bitfinex. Meanwhile, the NYAG has filed an opposition. It wants Bitfinex to stop messing around.

Football businessman Reggie Fowler and “co-conspirator” Ravid Yosef were charged with running a “shadow banking” service for crypto exchanges. This all loops back to Crypto Capital, which Bitfinex and Tether were using to solve their banking woes.    

In an odd twist, the cryptocurrency saga is crossing over into the sports world. Fowler was the original main investor in the Alliance of American Football (AAF), an attempt to create a new football league. The league filed for bankruptcy last month—after Fowler was unable to deliver, because the DoJ had frozen his bank accounts last fall.  

The US government thinks Fowler is a flight risk and wants him held without bail. The FBI has also found a “Master US Workbook,” detailing the operations of a massive “cryptocurrency scheme.” They found it with email subpoenas, which sounds like it was being kept on a Google Drive?

Yosef is still at large. She appears to have split her time between Tel Aviv and Los Angeles. This is her LinkedIn profile. She works as a relationship coach and looks to be the sister of Crypto Capital’s Oz Yosef (aka “Ozzie Joseph”), who was likely the “Oz” chatting with “Merlin” documented in NYAG’s suit against Bitfinex.  

All eyes are on Tether right now. Bloomberg reveals the Commodity and Futures Trading Commission (CFTC) has been investigating whether Tether actually had a stockpile of cash to support the currency. The DoJ is also looking into issues raised by the NYAG.

Meanwhile, bitcoin is selling for a $300 to $400 premium on Bitfinex — a sign that traders are willing to pay more for bitcoin, so they can dump their tethers and get their funds off the exchange. This isn’t the first time we’ve seen this sort of thing. Bitcoin sold at a premium on Mt. Gox and QuadrigaCX before those exchanges collapsed.

Bitfinex is still in the ring, but it needs cash. The exchange is now trying to cover its Tether shortfalls by raising money via—of all things—a token sale. It plans to raise $1 billion in an initial exchange offering (IEO) by selling its LEO token. CoinDesk wrote a story on it, and even linked to my Tether timeline.

Did a sex-trafficking site sparked the Crypto Capital investigation? Also, Decrypt’s Tim Copeland takes a look at the payment processor’s dark past.

Tether wants to move tethers from Omni to the Tron blockchain. Tron planned to offer a 20% incentive to Omni USDT holders to convert to Tron USDT on Huobi and OkEx exchanges. But given the “recent news” about Bitfinex and Tether, it is delaying the rewards program.  

Kara Haas has an article on AccountingWeb and a Twitter thread on the potential accounting implications of Tether’s definition of “reserves.”

Coinbase is bidding adieu to yet another executive. Earn.com founder Balaji Srinivasan, who served as the exchange’s CTO for a year, is leaving. It looks like his departure comes after he served the minimum agreed period with Coinbase. 

Elsewhere, BreakerMag is shutting down. The crypto publication had a lot of good stories in its short life, including this unforgettable one by Laurie Penny, who survived a bitcoin cruise to tell about it. David Gerard wrote an obituary for the magazine.

The Los Angeles Ballet is suing MovieCoin, accusing the film finance startup of trying to pay a $200,000 pledge in worthless tokens—you can’t run a ballet on shit coins.

Police in Germany and Finland have shut down two dark markets, Wall Street Market and Valhalla. And a mystery Git ransomware is wiping Git repository commits and replacing them with a ransom note demanding Bitcoin, as this Redditor details.

# # #