Tag: EY

News: BTC moons, Reggie Fowler stiffs lawyers, OKEx withdrawals still frozen, Binance gets piles of USDT

Bitcoin broke $16,000 on Thursday. That’s up from $10,000 in early September. And yet, with all the media outlets rabidly covering the latest “Bitcoin bull run,” the only one mentioning the billions and billions of dollars worth of tether (USDT) entering the market was Cointelegraph. 

In particular, none of the mainstream press has bothered to mention tether in their writings about BTC’s recent price rise. This is worrisome because retail folks — the ones most vulnerable to risky investments — have little understanding of tether and the risk it imposes on Bitcoin’s price. 

Instead, most media pointed to the election, PayPal’s recent embrace of crypto and huge BTC investments by MicroStrategy and Square as the reasons for BTC’s moon. Mainstream adoption! Institutional money! The truth is, crypto markets are easy to manipulate. And when BTC goes up in value like this, the main benefit is so early investors can cash out. 

In other words, BTC gets passed on to the next bright-eyed, bushy-tailed dupe who hopes the price will continue skyward. History has shown, however, these bubbles are generally followed by a crash, and a lot of people getting hurt, which is exactly what happened in 2018.

Trolly McTrollface (not his real name, obvs) points out in a tweet thread that Tether went into hyperdrive in March to stop BTC from crashing. BTC had dropped to $5,000, losing half its value from two months prior. In fact, March is when BTC entered its current bull run phase.

Remember, if the price of BTC falls too low, the network’s miners — who are responsible for Bitcoin’s security — can’t make a profit, and that puts the entire network in danger.

Trolly believes the current price pump is a coordinated effort between Tether — which has now issued a jaw-dropping $18 billion worth of dollar-pegged tethers — and the exchanges.

Let’s talk about some of those exchanges.

OKEx withdrawals still frozen

Withdrawals from OKEx, one of the biggest crypto exchanges, have been frozen ever since the news came out that founder “Star” Xu was hauled away for questioning by Shanghai authorities more than a month ago.

Xu’s interrogation appears to be part of a broader crackdown on money laundering in China, though OKEx denies any AML violations. 

OKEx is registered in Malta, but retains offices in Shanghai and Beijing, where it facilitates peer-to-peer—or “over-the-counter”—trades. The exchange acts as an escrow to reduce counter-party risk in fiat-to-crypto trades, so you don’t have to worry about someone disappearing with your cash before they hand over the BTC you just bought from them.

As Wolfie Zhao explains for the Block, these OTC trades are the only fiat on/off ramp for Chinese crypto traders—and have been ever since September 2017 when the country banned crypto trading on exchanges.

Effectively, the government made it so the exchanges could no longer get access to banking in the country.

P2P allows two people to transact directly, thus bypassing the Chinese ban, as long as the trades are small in scale. All Chinese crypto-to-fiat is OTC, while crypto-to-crypto trades are still done via a matching order book. (A Chinese citizen simply needs to use a VPN to access Binance, for instance.)

Currently, the OTC desk is the only trading desk that remains open at OKEx All of its exchange trading activity has been ground to a halt. The exchange claims Xu has access to the private keys needed to access its funds, and until he is free, all that crypto sits locked in a virtual vault.

As a result, according to blockchain analytics firm Glassnode, there are currently 200,000 bitcoin stuck on OKEx. The exchange insists all funds are safe, and says, essentially, that everything will be fine as soon as Xu returns. But its customers remain anxious. Did I mention OKEx is a tether exchange?

Huobi, another exchange in peril?

Like OKEx, Huobi is another exchange that moved its main offices out of China following the country’s 2017 crackdown on crypto exchanges.

Huobi, now based in Singapore, continues to facilitate fiat-to-bitcoin and fiat-to-tether trades in China behind an OTC front. (Dovey Wan does a nice job explaining how this works in her August 2019 story for Coindesk.)

Since earlier this month, rumors have circulated that Robin Zhu, Huobi’s chief operating officer, was also dragged in for questioning by Chinese authorities. Huobi denies the rumors.

Meanwhile, since Nov. 2—the day Zhu was said to have gone missing —$300 million worth of BTC has flowed from Huobi to Binance, according to a report in Coindesk. (I still don’t have a good explanation as to why Huobi is doing this. If anyone can fill in the gaps, please DM me on Twitter.)

What’s up with Binance?

If you follow Whale Alert on Twitter, like I do, it’s hard to ignore the enormous influx of tether going into Binance multiple times a day.

Here’s an example: On Friday, in four separate transactions, Tether sent Binance a total of $101 million worth of tethers. The day prior to that, Tether sent Binance $118 million in tethers, and the exchange also received $90 million worth of tethers from an unknown wallet. And on Wednesday, Tether sent Binance $104 million in tethers.

That’s over $400 million worth of dubiously backed tethers—in three days.

Like Huobi and OKEx, Binance also has roots in China. And it has an OTC desk to facilitate fiat-to-crypto trades. Is it a coincidence that the top tether exchanges originate from China? And that China controls two-thirds of Bitcoin’s hash rate?

Reggie Fowler’s lawyers wanna quit

Reggie Fowler, the Arizona businessman in the midst of the Crypto Capital scandal, is running low on cash. His lawyers have decided they don’t do pro bono work, so now they want to drop him as a client.

Last month, Fowler’s legal team asked the court to change his bond conditions to free up credit. But apparently, that isn’t working. Unfortunately, all this is happening just when there was a possibility of negotiating another plea deal. (Read my blog posts here and here.) 

Quadriga Trustee releases report #7

EY, the trustee handling the bankruptcy for failed Canadian crypto exchange QuadrigaCX, released its 7th Report of the Monitor on Nov. 5.

According to the report, EY has received 17,053 claims totaling somewhere between CA$224 million and CA$290 million—depending on what exchange rate EY ends up using to convert the USD and crypto claims to Canadian dollars for disbursement.

EY has CA$39 million ready to distribute to affected Quadriga users, who submitted claims. But none of that money is going anywhere until the Canadian Revenue Agency finishes its audit of the exchange. (Ready my blog post for more details.)

Gensler goes to Washington

Gary Gensler has been picked to lead President-elect Joe Biden’s financial reform transition team. As Foreign Policy notes, Gensler, who was the head of the CFTC during the Obama years, is an aggressive regulator.

He is also well familiar with the world of crypto. He taught a course on blockchain at MIT Sloan. He suspects Ripple is a noncompliant security, and he told me in an interview for Decrypt that the SAFT construct—a once-popular idea for launching an initial coin offering—will not spare a token from securities laws. (He also thinks 99% of all ICOs are securities.)

Libra Shrugged author David Gerard said in a tweet that Gensler was excellent in the Libra hearing last July. Gensler also “helped clean up the 2008 financial crisis, he knows literally all the possible nonsense,” said Gerard.

Clearly, this is good news for bitcoin.

Nov. 15 — Before I said that OKEx offered the only fiat-to-crypto on/off ramp in China. That is inaccurate. P2P OTC exchanges *in general* are the only fiat on/off ramps for crypto traders in China and have been since Sept. 2017.

Nov. 16 — Previously, this story stated that Quadriga’s trustee has CA$30 million available to distribute to claimants. It’s been updated to correctly reflect that EY has CA$39 million (US$30 million) to distribute.

Posted on by Amy Castor 0

Quadriga’s 7th report of the trustee—choosing a currency conversion date

EY, the court-appointed trustee in the bankruptcy case of failed Canadian crypto exchange QuadrigaCX filed its 7th report of the trustee with the Ontario Superior Court today.

Most of this is administrative and accounting stuff with regard to how EY plans to settle claims, but I’ll summarize for you.

Claims for lost QuadrigaCX money were due on Aug. 31, 2019. Most of the claims came in before that date, but there’s been a small trickle afterward. EY has thus far received 17,053 claims for missing Quadriga funds.

(Recall that earlier, EY said Quadriga had roughly 76,000 active users when the exchange shuttered in early 2019. Presumably, some folks were shy about filing claims and revealing their true identities—or else they had such small amounts on the exchange that it wasn’t worth the fuss.)

All the claims rank pari-passu, meaning they will all get treated the same. None will receive priority over any others, although 25 percent who filed claimed a “right of priority” under the Bankruptcy and Insolvency Act.

Here’s EY’s breakdown of the claims by asset:

Image: EY’s 7th report of the trustee

Picking a currency conversion date

Affected Quadriga users have submitted claims for missing crypto, Canadian dollars, and U.S. dollars. EY now needs to convert all of the U.S. dollar and crypto claims into Canadian dollars, so it can distribute available funds in the same base currency.*

The question is — what exchange rates do they use, based on what day?

The trustee has the choice of using one of two dates. It could use Feb. 5, 2019, the date Quadriga froze all withdrawals and deposits, which is the same day the exchange filed for creditor protection. (Yes, as unbelievable as it sounds, Quadriga was accepting funds up until that very day, even though its CEO Gerald Cotten died in December.)

Or it could use April 15, 2019, the day that Quadriga officially transitioned into bankruptcy. The price of crypto went up substantially in those two months, so EY is asking the court to establish the exchange rates.

Total claims will be either CA$224 million (US$171 million) or CA$291 (US$223 million), depending on the conversion date used.

Image: EY’s 7th report of the trustee

Accepting claims with errors

Of the 17,053 claim forms it received, EY found that 5,500 contained errors. Most of these were minor errors, such as missing signatures, missing pages, etc. Rather than calling and tracking down the claimants individually to fix the errors — which costs money — EY is requesting a court order that will allow them to accept the claims as is.

EY said it believes this is the “most cost effective way to address the issue” and will maximize the amount the affected users will ultimately recover.

What’s left in the till?

Another big question is, how much money will go to the claimants?

From the period April 15, 2019, to Oct. 30, 2020, EY has rounded up nearly CA$45 million (US$34 million) in missing Quadriga funds — that includes money from liquidating properties held by Cotten’s widow, Jennifer Robertson.

In the same period, EY has paid out CA$5.7 million (US$4.4 million) — that includes a whopping CA$1.9 million for trustee fees and CA$1.4 million in legal fees. That leaves a total of roughly CA$39 million (US$30 million) available for distribution.

Miller Thomson, the legal firm representing Quadriga’s former users, said in September, that two things need to happen before any claims can be filled. First, EY has to review each claim individually. Second, the Canada Revenue Agency needs to complete its audit of Quadriga’s tax liabilities.

*Updated to clarify that the conversion rates for USD and crypto will be applied to the claim amounts, not the amount that EY has recovered.

Posted on by Amy Castor 0

Bankruptcy trustee EY to hand over QuadrigaCX user data to Canada’s tax collector

CRAOne of the biggest fears of cryptocurrency traders is losing control of their personal information. And that fear has become a reality for QuadrigaCX former users.

Ernst & Young, the trustee overseeing the bankruptcy case for the failed Canadian crypto exchange, will be turning over all of Quadriga’s user info and data to the country’s tax collector.

In its sixth report of the trustee posted Tuesday, EY said the Canadian Revenue Authority, or CRA, asked it to hand over information about the failed crypto exchange. In response, the accounting firm wants to send over a mountain of data, which has a lot of Quadriga user data mixed in. And it is seeking an order from the court authorizing it to do so. (The exchange estimated it had 115,000 affected users at the time of its collapse in January 2019.*) 

We’ve known this was coming. In August 2019, the CRA sent a letter to EY saying it wanted Quadriga’s records from Oct. 1, 2015, to Sept. 30, 2018. The CRA’s request for documents and information is “significant,” the trustee said at the time. (See the third report of the trustee.)

The long list of requests

Following that, on Feb. 26, the CRA sent EY a seven-page production demand letter. The list of requests includes financial records and documents for tax years ended in 2016 to 2018, corporate legal records, and things like the platform’s raw database, files of AWS accounts, wallet addresses, fiat transaction records from payment processors, and so on

As this is coming from the taxman, EY is obligated to comply. But since it doesn’t have most of the info that the CRA is asking for (Quadriga kept no books), it simply plans to forward a copy of the full EDiscovery Database, redacted only for privilege. The database contains 750,000 individual documents.

In a letter, posted on its website Thursday, Miller Thomson, the law firm representing Quadriga’s creditors, said that it would not oppose the move. At this point, it wants to minimize costs and make sure funds get distributed to the exchange’s users as soon as possible.**

Personal information

The problem for Quadriga’s users though is that a lot of their personal information is mixed in with those documents in the database. What can they do about it? Not a lot.

On Sept. 17, 2019, when EY was granted an order from the Ontario Superior Court of Justice that would make it easier for them to comply with requests for information from law enforcement, regulators and tax authorities, it also got authorization to produce:

“…material, documents or data that contain any personal information including information related to Affective Users notwithstanding any previous orders of the Nova Scotia Court with respect to confidentiality of Affected User information, as defined in the Representative Counsel Appointment Order dated February 28, 2019…” [Link to order added.]

That order allowed EY to heap all of its Quadriga documents into a single giant database called the EDiscovery Database, and share that entire database with authorities every time they put in a request. This was a lot easier than tailoring each response individually. But it came at the price of giving out personal data about the exchange’s users. 

Now what?

According to Miller Thomson, the cost of trying to fight the CRA’s request would be between CA$50,000 and CA$100,000, notwithstanding the cost of EY and its lawyers.  

Alternatively, the law firm could redact or pull anything considered private. But that could potentially come at an even bigger cost because it would require manually going through every single document in the massive database. (And as we know, EY has already spent roughly CA$637,000 compiling that database and responding to legal requests in the second half of 2019.) 

Still, Quadriga users aren’t happy. Magdalena Gronowska, one member of the official committee that represents Quadriga creditors, wrote in a Twitter thread on Thursday that the CRA’s request is “an unprecedented affront” to individual privacy. She thinks they are just going on a fishing expedition.

Why is the CRA doing this?

After allowing Quadriga to operate for years with no oversight, the CRA has suddenly decided that it wants to audit the exchange. That’s a problem given that Quadriga maintained no traditional books or accounting records since 2016, and it did not file returns. Most years, Gerald Cotten, the exchange’s now-deceased founder, neglected to even file a personal tax return. When he did file, he claimed no income from Quadriga. 

I don’t know what the CRA plans to do with all of this information. Are they planning to find out how much Quadriga should have paid them? Most of that money is long gone, thanks to the massive fraud that took place on the exchange after 2016. And if the CRA wants to make sure that Quadriga’s users pay taxes on any money they get back, there are certainly easier ways to get that information. 

Read my full Quadriga timeline here. 

* An early affidavit estimated that the exchange had 115,000 affected users when it collapsed. But, in its trustee’s preliminary report, published in May 2019, EY said it anticipated receiving omnibus claims from 76,319 affected users. 

**Roughly CA$215 million of user funds (crypto and fiat) was on the exchange at the time it shuttered. EY has so far only recovered about CA$45 million—if you count the CA$12 million that should come from selling properties that Cotten and his wife accumulated after 2016. (See my earlier story in Decrypt and the fourth report of the trustee.)

Posted on by Amy Castor 0

The high cost of fulfilling law enforcement requests: Quadriga’s 5th trustee report

Stack of Canadian Dollar

Ernst & Young, the bankruptcy trustee for failed Canadian crypto exchange Quadriga, filed its fifth report of the trustee with the Ontario Superior Court of Justice on Jan. 22.

The purpose of the 79-page document was to submit the accounts of the trustee and its counsel with regard to activities involving various law enforcement officials, regulatory agencies and tax authorities. In its report, EY collectively refers these activities as “law enforcement.” 

In August 2019, EY told the court that it was getting overwhelmed with requests for material from law enforcement agencies and regulators. Collecting and producing the information is hard work and lawyers don’t come cheap. A court order on Sept. 17, 2019, solved that, giving EY the green light to continue cooperating with investigators.

EY worked with its general bankruptcy lawyer Stikeman Elliott to facilitate its cooperation with law enforcement. It also brought onboard Toronto law firm Lenczner Slaght Royce Smith Griffin for extra help in producing documents.

The volume of documents was huge, so EY put everything into a central “EDiscovery” database. At present, the database contains about 750,000 individual documents, it said.

The grand total for six months of responding to investigator inquiries came to CAD $637,156 ($484,000 USD). The costs were broken down as follows:

  • EY’s fees in connection with law enforcement activities for the period June 24, 2019, to Dec. 31, 2019, came to CAD $188,939.
  • Stikeman Elliott’s fees in connection with law enforcement activities for the period June 16, 2019, to Dec. 31, 2019, came to $133,618.
  • Lenczner Slaght’s fees in connection with law enforcement activities for the period June 25, 2019, to Dec. 31, 2019, totaled CAD $314,599.

EY said that it made “various efforts” to minimize costs and streamline the accumulation, review, and production of documents. However, it said, given the volume of documents and the time and effort required, the cost was still significant. The rest of the lengthy report spells out how the expenses were accrued.

(To learn more about the Quadriga scandal, read my full updated timeline.) 

Photo: iStock

 

 

Posted on by Amy Castor 0

My story in Decrypt: “QuadrigaCX CEO traded millions in fake funds to fund luxury lifestyle, alleges trustee”

Ernst & Young released its fifth report of the monitor last night, and it was a doozy. I covered the report for Decrypt. If you have not read my story yet, check it out here.

The monitor’s report is 70-pages long, and I recommend finding a nice comfortable spot and reading all of it. It is page after page, paragraph after paragraph, of “What the hell?”

According to the report, from 2016 onwards, QuadrigaCX went completely off the rails. Gerald Cotten, the exchange’s now-deceased CEO, clearly had no interest in running a legitimate business. He treated customer funds like his own personal bank account—a bit like Bernie Madoff, only a lot more recklessly.

Cotten gambled with his customers’ money, went on lavish vacations, flew on private jets, and bought properties, an airplane, a yacht, whatever toys he wanted. Now most of the funds on the exchange are gone, and EY still has no clue as to where the cash proceeds went. The big question is, did Cotten really act alone?

QuadrigaCX co-founder Michael Patryn is not mentioned in the report. According to what we’ve been told, he completely stepped away from the business in early 2016. After that, Cotten allegedly became a recluse and ran the business into the ground single handedly.

EY has also released a three-part (1, 2, 3) sixth monitor’s report detailing the costs of professional services related to Quadriga’s Companies’ Creditor Arrangement Act. Moving forward, EY is now the trustee in Quadriga’s bankruptcy proceedings.

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Posted on by Amy Castor 0