News: Former Wex CEO arrested, CFTC probes BitMEX, Facebook’s Libra grilled in Washington

Since I’m now the editor of an ATM website, let’s start with bitcoin ATM news. LibertyX is adding 90 machines to its bitcoin ATM network. It now has over 1,000 machines.

Actually, these are not new machines. They are traditional cash ATMs that are bitcoin enabled. A software upgrade on the machines allows users to buy bitcoin with a debit card. The ATMs continue to dispense cash as well. 

According to CoinATM Radar, there are now 5,200 bitcoin ATM machines on this earth. Who the heck is using them? At least one operator, frustrated by a lack of business, has moved his Bitcoin ATM into his mother’s garage. 

In the exchange world —

Criminal in handcuffsDmitri Vasilev, the ex CEO of defunct crypto trading platform Wex, was arrested in Italy. Wex was a rebrand of BTC-e, an exchange that was shut down in 2017 for being a hub of criminal activity. BTC-e was also linked to the stolen bitcoin from Mt. Gox.  

Economist Nouriel Roubini — aka “Dr. Doom” — has stepped up his attack on crypto derivatives exchange BitMEX. In a scathing column in Project Syndicate, Roubini claims sources told him the exchange is being used daily for “money laundering on a massive scale by terrorists and other criminals from Russia, Iran, and elsewhere.” 

Days after Roubini’s column came out, Bloomberg reported that the CFTC was investigating whether BitMEX allowed Americans to trade on the platform. In fact, we know that crypto analyst Tone Vays, a New York resident, was trading on the platform until November 2018 when his account was terminated.

Regulators are cracking down on crypto exchanges. As The Block’s Larry Cermak points out, the situation is getting “quite serious.”

Elsewhere, Bitpoint, the Tokyo-based crypto exchange that was recently hacked, says it will fully refund victims in crypto, not cash. Roughly 50,000 users were impacted when $28 million worth of crypto vanished off the exchange. Two-thirds of the stolen funds belonged to customers of the exchange. 

U.S. crypto exchange Coinbase has killed off its loss-making crypto investment packages. After shutting down its crypto index fund due to a lack of interest, it closed its much ridiculed “Coinbase Bundle.” The product launched eight months ago with the aim of making it easy to purchase a market-weighted basket of cryptocurrencies. 

Malta-based Binance found itself $775,000 richer when it stumbled across nearly 10 million Stellar lumens (XLM). Turns out, the exchange had been accidentally staking (receiving dividends) on its customers lumens for almost a year. It’s planning to give the tokens away in an airdrop and will also add staking support for customers.  

Tether, the stablecoin issued by Bitfinex/Tether, is now running on Algorand, a new blockchain protocol. It’s also running on Omni, Ethereum, Tron and EOS. Presumably, running on a plethora of networks makes tether that much harder to shut down. It’s sort of like whack-a-mole. Try to take it off one network, and tether reappears on another. 

There are now officially more than $4 billion worth of tether sloshing around in the crypto markets. That number almost doubled when Tether inadvertently issued $5 billion unbacked tethers when it was helping Boston-based crypto exchange Poloniex transfer tethers from Omni to Tron. Oops.

Also interesting —

David Gerard is working on a book about the world’s worst initial coin offerings. He recently uncovered another cringe-worthy project. “Synthestech was an ICO to fund research into transmutation of elements, using cold fusion — turning copper into platinum. Literally, an ICO for alchemy. Turning your gold into their gold.” 

Facebook’s Libra had a busy week.

U.S. Secretary of Treasury Steven Mnuchin gave a press briefing on crypto at the White House. (Here’s the transcript.) He is concerned about the speculative nature of bitcoin. He’s also seriously worried Libra will be used for money laundering. He said the project has a long, long way to go, before he feels comfortable with it. 

Unlike bitcoin, which goes wildly up and down in price, Libra would have a stable value, because it would be pegged to a basket of major currencies, like the dollar, euro, and yen. Although, nobody is quite sure how that will work and what currencies it will be pegged to. Tether has a stable value, too, of course.

After his talk, Mnuchin flew off to Paris, where he met with finance ministers from six other powerful countries at the G7 summit. Everyone there agreed they need to push for the highest standards of regulation on Libra. 

Meanwhile, David Marcus, the head of the Libra project, got a grilling in Congress over privacy and trust issues. (You can watch the Senate hearing here and the House Financial Services Committee hearing here.) Nobody believes Facebook will keep its word on anything.

All of this is happening, of course, just after the social media giant got a $5 billion slap on the wrist for privacy violations following the Cambridge Analytica scandal.

The dumb tweet of the week award goes to Anthony Pompliano, co-founder of a digital asset fund Morgan Creek Digital, who says dollars aren’t moved digitally, they are moved electronically. For some reason, he has 250,000 followers on Twitter. The historic tweet even made it in FT Alphaville.

Apple co-founder Steve Wozniak has joined an energy-focused blockchain startup in Malta. The Mediterranean island nation is gung-ho about blockchain. It is also a haven for money laundering and the place where a female journalist who tried to expose government corruption was blown up in 2017. 

U.S authorities have charged former Silk Road narcotics vendor Hugh Brian Haney with money laundering. The darknet market was shut down in 2013. Special agents used blockchain analytics to track down Haney and seize $19 million worth of bitcoin. 

This clever young man has made a business out of helping crypto exchanges inflate their volume. 

ConsenSys founder Joseph Lubin is being sued by a former employee for $13 million. The employer is alleging fraud, breach of contract and unpaid profits.

Former bitcoin core developer Peter Todd is being sued for allegedly touching people inappropriately.

And finally, bitcoin ransomware Ryuk is steadily making its way into China.  

 

 

News: NYAG calls Bitfinex out, Bitfunder founder off to jail, Roubini pissed at Bitmex

A few people asked me where I’ve been lately. I’ve been working! I recently started a full time job. I’m the editor of a website about ATM machines. I recently wrote Spanish authorities: bitcoin ATMs expose hole in AML laws” and Bitcoin ATMs: Why Vancouver doesn’t want them.” (By the way, if you are curious how criminals use bitcoin ATMs to clean money, this moneylaunder.com article does a nice job of explaining the process.) 

I also write a newsletter on money. You should sign up for it

On to the news — 

Much ado about exchanges

Crypto exchange Bitfinex is doing a lot more business in New York than it’s led us all to believe. The NYAG’s recent court filings — a Memorandum of Law and an affirmation from assistant Attorney General Brian Whitehurst, along with 28 pieces of evidence — reveal a full picture of the company’s dealings in the state.  

Why does it matter? Because his means NYAG has jurisdiction to push ahead with its investigation into Bitfinex and Tether’s ongoing shenanigans. Decrypt’s Ben Munster also points out that Bitfinex “loaned tethers to a New York trading firm.” There’s an open question as to whether the funds were ever paid back.  

Also, Bennet Tomlin had a good thread on the NYAG’s filing.

By the way, there are now nearly $3.9 billion tether sloshing around in the markets, pushing up the price of bitcoin, which briefly crested $13,000 on July 10. 

I nearly missed this bit of news from a few weeks ago: Ireland-based cryptocurrency exchange Bitsane went poof!, leaving its 246,000 users high and dry. Users began having issues withdrawing crypto from the exchange in May. And on June 17, the exchange’s website along with its twitter and facebook accounts vanished.  

Bitmarket, the second largest Polish crypto exchange, has shut down citing a loss of liquidity. Approximately 1,300 bitcoin are stuck on the exchange, and users are rightfully pissed off. They have formed a Facebook group and are planning a class-action lawsuit. The exchange was acting goofy before the shutdown. Reddit user u/OdoBanks says users were asked to change passwords and provide additional KYC for withdrawals.

Founder of bitcoin stock exchange Bitfunder will be spending 14 months behind bars for lying to the SEC about a hack that cost clients 6,000 BTC. Instead of telling his customers the truth in 2013, operator Jon Montroll misappropriated funds to hide the losses.  

Cryptocurrency exchange hacks don’t happen too often — only once every few weeks. Japan’s Bitpoint is the latest to make headlines. The exchange’s hot wallets were hacked to the tune of $32 million worth of crypto, most of which were customer funds. On Monday, the exchange found another $2.3 million missing on exchanges “that use the trading system provided by Bitpoint Japan,” according to Japan Today

(Update, July 15, 11:30 a.m. EST — previously, I indicated Bitpoint located $2.3 of the missing funds, but actually the exchange found more money missing.)

Speaking of Japan, the country’s top regulator says 110 crypto exchanges are waiting for licenses right now. Under Japanese law, crypto exchanges need to register with the Financial Services Agency to operate in the country. As of now, there are only 19 licensed exchanges in Japan. The FSA has been slow to license after the Coincheck hack

Binance burned 808,888 of its native BNB tokens — about $24 million worth. This is the eighth burn of BNB coins, which are totally not a security. The price of the remaining BNB goes up every time there is a burn. Keep in mind, until any crypto is converted to fiat, its value is completely theoretical. 

Screen Shot 2019-07-14 at 11.26.10 PMBitMEX, the Hong Kong-based bitcoin derivatives exchange, has finally released the tapes (round 1 and 2) from its “Tangle In Taipei,” a July 3 debate between Bitmex CEO Arthur Hayes and NYU professor Nouriel Roubini. The two have been going at it online.

A man is suing Gemini — the NY exchange operated by the Winklevoss twins — after $240,000 was stolen from his money market account and wired to Gemini, where it was used to to purchase crypto on the exchange.  

Due to heightened oversight on online crypto exchanges, users are increasingly asked to fork over their IDs and addresses. The shift is giving peer-to-peer exchanges, which typically don’t impose such KYC checks, a boost, according to Bloomberg

Other interesting stuff

Founders of the Tezos crypto platform object to sharing emails between them regarding the Tezos “fundraiser” because they are married. Steven Palley has the full story

New York City’s Monroe College was hit with a ransomware attack that shutdown the college’s computer systems. The attackers want the college to fork over $2 million worth of bitcoin to free up the computers.  

President Trump blasted bitcoin on Twitter. He is no fan of Facebook’s Libra either. There’s only room in this country for one currency, and that’s the almighty dollar.

The Federal Trade Commission has fined Facebook a gobsmacking $5 billion for privacy violations. It’s the biggest fine in FTC’s history. Surprise, surprise, Facebook’s stock went up on the news. 

An angry mob burned down the home of a man behind bitcoin ponzi scheme in South Africa after he admitted all the money was gone. 

Finally, police in China cracked down on a cartel of illicit bitcoin miners who stole nearly $3 million worth of electricity. A local power company tipped off authorities after they noticed a peculiar surge in power use.  

News: Kraken sets out to raise millions, Circle is cutting staff, Bitfinex scores another tiny victory in court

Crypto exchanges are struggling. Revenue growth is not what it was during the bubble of 2017, and regulators are cracking down. You can’t just list any old coin anymore without considering, “Is the SEC going to deem this a security?” And the cost of hiring lawyers, responding to subpoenas, and staying compliant is cutting into profits. So what are exchanges doing? They are laying off staff and/or trying to raise more money, while they hold out hope for the big institutional money that will come any day now.

Kraken and Bnk to the Future

Screen Shot 2019-05-24 at 12.12.57 AM

Recently, customers of Kraken got an interesting email offering a “rare, but limited opportunity.” Some folks thought the email was spam, but it was real.

Turns out, the San Francisco-based trading platform is partnering with Bnk to the Future as a way to raise funds by selling preferred shares of its stock. You can own a piece of Kraken for as little as $1,000. (In the US, you need to be an accredited investor, though.) 

The exchange hopes to rustle up $15.45 million. (Originally, it wanted to raise $10.2 million, but lifted the goal.) As of this writing, Kraken has raised $6.2 million from 942 investors. The crowdfund runs until June 20.

In December, Kraken tried to raise money at a $4 billion valuation, and it reportedly raised $100 million early this year, which it used to buy Crypto Facilities, a regulated London-based crypto derivatives exchange.  

In 2016, Bitfinex also used Bnk to the Future when it encouraged its customers to exchange their BFX tokens to shares in iFinex, the parent company of Bitfinex and Tether. BFX was the token that Bitfinex gave to its customers in compensation for funds they lost when the exchange was hacked. The exchange sold $57.39 million worth of iFinex shares in this manner, basically converting stolen funds to shares.

Bitfinex customers didn’t have much of an option. BFX tokens were dropping in value, and they wanted to get their money back.

Bitfinex/Tether and the NYAG law suit

Bitfinex joyously declared another small legal victory on May 22, when New York Supreme Court judge Joel M. Cohen granted a motion limiting the scope of the documents Bitfinex and Tether have to hand over to the New York Attorney General’s office.

The day prior, the companies had filed a motion to dismiss the case outright with three new court docs: proposed order to show cause, a memorandum in support of the motion to dismiss, and an affidavit by their general counsel Stuart Hoegner.

Lawyers for the companies argued the Bitfinex platform does not allow New Yorkers to trade (putting it outside of the NYAG’s jurisdiction), the Martin Act doesn’t apply to them (because tether is not a security or commodity, they said), and the document requests were too onerous. The NYAG has seven days to respond, and the judge scheduled a hearing for the motion to dismiss on June 29. 

According to Hoegner’s affidavit, which I read late one evening, you can’t actually redeem tethers 1:1 unless you bought them directly from Tether, which means if you got them on an exchange somewhere, too bad. You won’t be too surprised to learn then, that I can’t find a single person who claims to have either bought or redeemed tethers via Tether Ltd.

The Block got hold of a court transcript from the Bitfinex court hearing on May 16. “Tether actually did invest in instruments beyond cash and cash equivalents, including bitcoin,” a lawyer for Bitfinex told the court.

Wait, what? Bitcoin? Tether invested in bitcoin?

The entire purpose of tether is to be a stable asset that traders can use to escape market volatility. Yet, Tether is taking its reserves—money that it was supposed to keep an eye on, so that tethers always remained fully backed—and investing it in a highly volatile asset. What if bitcoin crashes? What then of the stablecoin? 

We learn something new about Tether everyday, it seems. According to CoinMarketCap, every 24 hours, the entire $3 billion supply of tethers changes hands 7.5 times, but not really, because most of that volume is fake.

The Block analyst Larry Cermak posted a graph of exchanges that trade tether, and some of the ones with the highest volume are obscure platforms nobody has heard of. “If I were to make an educated guess, at any given time, only a maximum of 15% of the total Tether volume is real,” he tweeted. In other words, it is all wash trading, i.e., trading bots simultaneously buying and selling tether to create the appearance of frenetic activity.

As far as I can tell, tether’s actual value is on par with horse manure—giving true meaning to the word “stablecoin”—just not as good for the roses. 

Circle and Poloniex

Circle, the Boston-based company that bought crypto trading platform Poloniex in February 2018, is laying off 30 people—10 percent of its workforce. The company blames the layoffs on an “increasingly restrictive regulatory climate.”

Last week, I mentioned that Poloniex geofenced nine altcoins, meaning people in the US will no longer be able to trade those coins on the exchange after May 29. Circle said  recent guidance from the SEC was a trigger for the move. I took another look and realized that one of the coins was Decred—a fork of bitcoin. Why Decred?

It’s possible the project’s premine and governance structure look a little to shareholdery, and Circle, which is backed by Goldman Sachs, is not in a position to risk listing any coins on Poloniex that might be construed as securities.

QuadrigaCX

I finally got around to writing up QuadrigaCX Trustee’s Preliminary Report. Ernst & Young basically says the money is all gone. Also, it adds that Quadriga’s financial affairs were a complete mess, and they’ll probably never sort everything out properly.

Remember the photo of 1,004 checks sitting on a stovetop? EY finally deposited those into a disbursement account on April 18. What a surprise for this trader to learn the money was freshly sucked out of his bank account two years later!

Also interesting, Black Banx (formerly WB21), the third-party payment processor allegedly holding $CA12 million in Quadriga funds is now issuing Visa cards without Visa’s consent. Antony Peyton, the finance journalist who had a thug show up on his doorstep last time he wrote about them, has been researching the company.

Cryptopia

New Zealand crypto exchange Cryptopia went belly up on May 14. Turns out, for the last nine months—since before the January hack that put it out of business—Adam Clark, the exchange’s former founder and programmer, has been building a new crypto exchange. According to his LinkedIn profile, he’s been working on Assetylene since September 2018. So, if you lost your money on Cryptopia, you can try again on Assetylene. I’m sure they’ve got their security issues sorted out by now.

Meanwhile, the funds that were stolen from Cryptopia are on the move. Whale Alert, who has been keeping on eye on the transfers, says funds from Cryptopia recently went to Huobi, where they were likely traded for other coins. Whale Alert also noted 500 ETH going to decentralized exchange EtherDelta.

Elsewhere in cryptoland

Facebook is getting ready to launch its GlobalCoin cryptocurrency payments system in 2020. They probably want to do something like PayPal combined with social media. David Gerard asks: “Why are on earth are they doing this as a cryptocurrency?” As he explains, nothing about putting this on a blockchain makes any sense whatsoever.

Bestmixer.io, one of the largest crypto mixers and tumblers, was shut down by Dutch authorities with the help of Europol and Luxembourg law enforcement. According to Europol’s press release, it was responsible for $200 million in money laundering.

Well, this is a shocker. The SEC has again delayed the VanEck bitcoin ETF proposal. Here is the order. The new deadline for the SEC to make a decision is August 19, and it can delay one more time for a final deadline of October 18, Jake Chervinsky tweeted. It’s been eight years, and the SEC has yet to approve any bitcoin ETFs in the US.  

Bitcoin is set to overtake the existing financial system—or maybe not. In a recent report, the European Central Bank says crypto poses no threat to financial stability in the euro zone. A “very low” number of merchants currently allow buying of goods and services with bitcoin, and there is no “tangible impact on the real economy.”

The IRS is planning to publish new tax guidance for crypto holders and traders. The last time it issued guidance was November 2014, back when it said crypto would be treated as property and you had to report earnings as capital gains.

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News: Money laundering in real time, Binance has you covered, maybe, and Bitfinex ready to IEO with LEO

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”

Screen Shot 2019-05-10 at 9.39.37 PMBitfinex 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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