Tag: FDIC

Crypto is going: Coinbase sues FDIC and SEC under FOIA, Epoch Times crypto money laundering, Consumers’ Research vs Tether, FTX/Salame, Terra settles with SEC

  • By Amy Castor and David Gerard

A ‘use case’ is a fix for a problem you wish people had — Stephen Farrugia

Amy and David have a new project: Pivot to AI. The elevator pitch is “Web 3 Is Going Great, but it’s AI.” (“oh good, maybe now people will stop asking me to do it lol” — Molly White.) Sign up to subscribe via email on the site!

Coinbase gets out the conspiracy board

Coinbase strikes a blow against “Operation Chokepoint 2.0.” They will crack this conspiracy by … suing the Federal Deposit Insurance Corporation under the Freedom of Information Act. [Complaint, PDF, archive]

The FDIC sent letters to various banks asking them to stop dealing in crypto. History Associates, representing Coinbase, filed FOIA requests for the letters. The FDIC rejected the requests. History Associates is now appealing the rejection.

The FDIC rejected History Associates’ FOIA claim based on Exemption 4 — trade secrets and confidential commercial information — and Exemption 8 — “contained in or related to examination, operating, or condition reports prepared by, on behalf of, or for the use of an agency responsible for the regulation or supervision of financial institutions.”

Exemption 8 is very broad but has consistently been upheld. Courts have ruled that Congress wrote a broad exemption because they meant it as a broad exemption. [Justice Department]

The complaint contains some facts and a lot of conspiracy theorizing and table pounding: “The Pause Letters are part of a deliberate and concerted effort by the FDIC and other financial regulators to pressure financial institutions into cutting off digital-asset firms from the banking system.”

Given that all four US bank failures in 2023 were crypto-involved, we think: well done, FDIC.

Coinbase and History Associates are also suing the SEC under the FOIA for details of its internal deliberations on whether ETH is a security, which the SEC rejected under Exemption 8. They also want more information on the SEC’s 2018 settlement with the EtherDelta decentralized exchange. [Bloomberg Law, archive]

Bill’s beautiful launderette

Bill Guan, the CFO of the Epoch Times, ran a crypto money laundering operation through the paper’s companies. This apparently supplied over three-quarters of the paper’s revenue in 2020. If you ever wondered how they could afford all those billboards … [Press release; indictment, PDF]

Guan ran the paper’s “Make Money Online” team. The MMO team would buy dirty money from crimes on prepaid debit cards from an unnamed crypto platform for 70 to 80 cents on the dollar. The MMO team would move the money through layered transactions and fraudulent bank accounts into Epoch Times accounts.

Guan lied to banks and crypto exchanges that the money was from subscriptions or even donations from Epoch Times supporters.

The Justice Department has gone out of its way to not name the Epoch Times and stresses that this action has nothing to do with the paper’s “news-gathering” operations — they’re nailing this all on Guan. The indictment notes that other parts of the company even asked Guan what was going on with all the debit card purchases.

Paolo’s beautiful launderette

Consumers’ Research is running a very loud and well-funded advertising and lobbying campaign against our good friends at Tether, saying they’re money launderers and sanctions busters and their backing is questionable. There’s billboards and seven-figure TV ad spend. The ad voiceover speaks of “preece manipulation.” [Tethered To Corruption; press release; YouTube]

It’s not clear who is behind this campaign. Consumers’ Research is a conservative propaganda nonprofit whose funding is laundered through a donor-advised fund — a way for rich people to make controversial donations without having their names attached.

We’ve asked other public critics of Tether and Consumers’ Research doesn’t seem to have contacted any of us at all. The consensus is that it looks like a single guy who is extremely personally pissed off at Tether for unclear reasons. A deal gone very bad, maybe? Bennett Tomlin summarizes what’s known. [Mailchimp]

Consumers’ Research is not wrong about Tether, though. The use case for tethers is still crime and sanctions evasion — in the latest case, Russian commodities firms settling with their Chinese counterparts. Russia’s invasion of Ukraine seems to depend on Tether supplying liquidity. OFAC should probably get onto that. [Bloomberg, archive]

FTX: Salame sliced

When FTX went down, it was incredibly obvious that this was a crime scene. All the FTX executive suite — except Sam Bankman-Fried — pleaded guilty and offered to cooperate with prosecutors in the hope of a lighter sentence.

Ryan Salame was too cool for that. He confessed to a smaller selection of crimes but didn’t agree to cooperate. Salame has now been sentenced to 90 months (seven and a half years) behind bars. After the sentence, Salame gets three years of supervised release. Judge Lewis Kaplan has ordered him to pay $6 million in forfeiture and $5 million in restitution. [Justice Department; Sentencing memorandum, PDF]

Prosecutors had recommended five to seven years. The Probation Office had recommended the maximum sentence of 120 months imprisonment, and evidently, Judge Kaplan was convinced.

The defense asked for no more than 18 months. LOL. [Sentencing memorandum, PDF]

FTX’s ripped-off customers are outraged at getting back only 100% of their stolen assets plus interest. So they’re suing for even more than that. They claim that because they had crypto supposedly on the exchange before the collapse — though in fact they did not, because Sam Bankman-Fried had stolen it — any cryptos recovered by John Jay Ray’s team must surely belong to them personally. [CoinDesk]

LessWrong and Effective Altruism web hosting company Lightcone hosted a “prediction markets” convention that just happened to be filled to the brim with race scientists from the Rationalist sphere and also failed to return donations from FTX to the bankruptcy. Whoops. The effective altruists are now falling over themselves to argue that it’s all okay, race-and-IQ theorists aren’t really racists, and kicking the racists out is bad. Also that Lightcone should probably have answered FTX’s letters about the money. [Guardian, archive; SFGate; Effective Altruism forum; Effective Altruism forum; Twitter, thread, archive]

The war on Terra

Do Kwon and Terraform have agreed on a settlement with the SEC for $4.5 billion and Judge Jed Rakoff has approved it. [Doc 271, PDF; letter, PDF; press release]

Total remedies — disgorgement, interest, and penalties — come to $4,473,828,306, which will become just another claim in Terraform’s Chapter 11 bankruptcy. Do Kwon must pay $204,320,196 out of his own pocket, which will go to investors.

Do Kwon is still in jail in Montenegro awaiting extradition. We already know that Milojko Spajic, the libertarian-leaning prime minister of Montenegro, was a crypto fan — photo opportunity with Vitalik Buterin and all — but It turns out that he personally bought $75,000 of LUNA in April 2018 and may well be the person keeping Kwon out of the clutches of the US or South Korea. [Bloomberg, archive]

Kwon said in 2023 how crypto “friends” of his had financially supported Spajic’s Europe Now Party. Kwon called it “a very successful investment relationship.”

Regulatory clarity

NYDFS guidance: virtual currency firms licensed in New York (that’s you, Coinbase) need to keep the Department of Financial Services updated on their responsiveness to customer complaints (that’s you, Coinbase). [DFS]

The US Treasury reports on the use of NFTs for “illicit finance.” The uses are not so much sanctions evasion, but more mundane criminal money laundering for frauds and scams. [Press release; Report, PDF]

Kanav Kariya has stepped down as President of Jump Crypto — “the end of an incredible personal journey.” By pure coincidence, this came four days after the CFTC was reported to be probing Jump Crypto’s trading. Jump was one of the heaviest US-based VIP users of Binance, served as a market maker for Terra and FTX, filled crypto orders for Robinhood, and seems to be a part-owner of TrueUSD. [Twitter, archive; Fortune, archive]

85 years old and still running Ponzis? Now that’s a work ethic. [Justice Department]

Still good news for bitcoin

The Gemini crypto exchange has been told by New York to pay back $50 million to Gemini Earn customers. Gemini is also now barred from lending crypto in the state. New York previously got $2 billion back from Genesis, who lost Earn customers’ money in the first place. The two settlements should leave Earn customers made whole! [Press release]

Robinhood is buying the European crypto exchange Bitstamp. [Bloomberg, archive]

Congressman Tom Emmer doesn’t think he can get US crypto legislation through this year. Oh well. [CoinDesk]

Bitcoin ETFs and ETPs have existed outside the US for many years, so the coiner insistence there was massive pent-up demand for a US-based ETF wasn’t such a plausible claim. And so ETPs in Europe have had net outflows every month this year. [FT, archive]

David Rosenthal writes on the bitcoin halving and how it actually worked out. [DSHR]

Watch Jackie Sawicky’s new Proof-Of-Waste Podcast! The first one features Peter Howson, author of Let Them Eat Crypto. [YouTube]

Daniel Kuhn, CoinDesk: well, the world has rejected crypto. But maybe we don’t want the world using crypto! Have you considered that, huh? Anyway, “adoption means following the law (which is often at odds with crypto’s values).” Well, yes. This opinion piece also looks to the philosophical wisdom of Roko Mijic, the creator of the mind-numbingly stupid Roko’s Basilisk thought experiment. [CoinDesk]

Posted on by Amy Castor 3

Crypto collapse: New Sam Bankman-Fried charge, Binance fallout, SEC sues exchange over crypto securities, how Signature died

  • By Amy Castor and David Gerard

“who needs an examiner when you can just hand sam an empty sheet of paper and wait”

— haveblue

Sam is a growing boy, he needs his crimes

A new superseding indictment against FTX founder Sam Bankman-Fried alleges that he paid Chinese officials $40 million in crypto in a bribe to unfreeze $1 billion in crypto on Alameda — which would violate the Foreign Corrupt Practices Act. Sam now faces 13 criminal counts. [Superseding indictment, PDF]

On Thursday, March 30, Sam took a trip to New York and pleaded not guilty to his latest five charges. He had to battle his way through a gaggle of reporters just to get in the door. At least it got him out of the house. [Twitter; YouTube; NYT]

In early 2021, China froze $1 billion of cryptos in various Alameda accounts on two of the country’s biggest crypto exchanges (which aren’t named in the indictment). Bankman-Fried “understood that the Accounts had been frozen as part of an ongoing investigation of a particular Alameda trading counterparty.” A bribe was sent from Alameda to a private blockchain address in November 2021. The accounts were unfrozen shortly after, and Alameda got its cryptos back.

Somehow, Daniel Friedberg, FTX’s chief counsel at the time knew nothing of this. Friedberg said in an affidavit dated March 19, 2021, when the FTX Arena naming rights deal was going through, that FTX and its affiliated companies “do not have any ownership or contracts or any other obligations with respect to any governmental agency of the People’s Republic of China, or any governmental agents or political persons.” [Miami-Dade Legislative Item, PDF, p. 54]

Sam will be kept on a very short leash while he’s out on bail. Sam gets a non-smartphone that only does voice and SMS — no internet access — and a locked-down laptop configured to access only certain websites. He can work with his lawyers, order food from DoorDash, and keep up with the sportsball. YouTube is also on the list, so we’re looking forward to the 10-hour video blogs detailing crimes hitherto unknown to humanity. [Order, PDF]

Sam’s father, Joseph Bankman, is paying his son’s lawyer fees with over $10 million that Sam borrowed from Alameda and gave to his father as a present in 2021. We wonder if John Jay Ray is going to come calling to claw this back for the bankruptcy estate. [Forbes]

In the FTX bankruptcy, a group of ad-hoc FTX creditors with $2 billion in claims want to participate in the bankruptcy without revealing their identities. They include “large institutional market makers and asset managers.” This is the precise sort of creditor that the Bankruptcy Act is not intended to protect from public scrutiny. [Doc 1137, PDF]

FTX appears to have been hiding money under the names of employees. The OKX exchange, formerly OKex, has agreed to turn over $157 million in FTX funds. $150 million of that was in an account of a former FTX employee. The ex-employee says the account was opened on behalf of Alameda. He has agreed to forfeit the assets. [Doc 1189, PDF; Doc 1190, PDF]

Binance: This is fine

The CFTC lawsuit against Binance, which we covered in detail on Tuesday, has rattled customers. Within days, the exchange saw outflows of $2 billion, out of a claimed reserve of $63.2 billion, according to Nansen. Currently, 28% of Binance reserves are in Tether and 10% are in BUSD. [WSJ, paywalled; Nansen]

The three large US hedge funds trading on Binance weren’t named in the CFTC complaint — though Radix Trading later came forward and said that they were “Trading Firm A.” Radix insists they did nothing wrong — they ran their apparent conspiracy to violate commodities laws past their in-house legal team, after all. [WSJ, paywalled]

But the CFTC complaint has “already sent chills” across the commodity trading industry — particularly firms who make their money from real commodity trading and only dabble in the toxic waste barrel of crypto. Market makers are wondering if they’re risking their own broker-dealer licenses. [Bloomberg]

Cash withdrawals from Binance US are no longer working via ACH through Signature. Binance says: “ACH deposits and withdrawals for a small subset of our users were disrupted last week and, out of an abundance of caution, remain paused. Our teams are working through this transition and expect to restore functionality within the next 24 hours.” It’s probably fine. Your funds are safe. [Reddit]

You’ll be shocked to hear that Binance kept substantial business links to China for years after its claimed 2017 exit, despite Binance executives repeatedly saying otherwise. [FT]

The Block reported in 2019 that Binance had offices in Shanghai. CZ hit the roof and threatened to sue them, with the explicit aim of outspending them on lawyers … and The Block stood by its story. (Ben Munster, then of Decrypt, helped with the response story, though The Block took out Ben’s harsher additions.) [The Block, 2019; Twitter, archive; Twitter, archive; The Block, 2019]

The sale of Voyager Digital to Binance US is on hold. The Department of Justice and the US Trustee appealed the sale on the basis that the order granted inappropriate immunity from prosecution, and asked for a stay. The appeals court has granted the request for a stay while the appeal proceeds. [Doc 1222, PDF; Doc 1223, PDF; Bloomberg]

Be your own Signature Bank

In his statement on the recent bank failures and the federal regulatory response, FDIC Chairman Martin Greunberg explained why Signature failed: the bank was insolvent, contrary to Barney Frank’s claims. [FDIC, PDF]

On March 10, Signature Bank lost 20 percent of its total deposits in a matter of hours, depleting its cash position and leaving it with a negative balance with the Federal Reserve as of close of business. Bank management could not provide accurate data regarding the amount of the deficit, and resolution of the negative balance required a prolonged joint effort among Signature Bank, regulators, and the Federal Home Loan Bank of New York to pledge collateral and obtain the necessary funding from the Federal Reserve’s Discount Window to cover the negative outflows. This was accomplished with minutes to spare before the Federal Reserve’s wire room closed. 

Over the weekend, liquidity risk at the bank rose to a critical level as withdrawal requests mounted, along with uncertainties about meeting those requests, and potentially others in light of the high level of uninsured deposits, raised doubts about the bank’s continued viability. 

Ultimately, on Sunday, March 12, the NYSDFS closed Signature Bank and appointed the FDIC as receiver within 48 hours of SVB’s failure.

The FDIC has told crypto clients with deposits at Signature Bank that they have until April 5 to close their accounts and move their money. The FDIC is looking to sell off Signature’s Signet inter-crypto-exchange dark liquidity pool. [Bloomberg]

Frances Coppola explains precisely what happened at Signature. [Coppola Comment]

We noted previously how larger US banks don’t want to go within a mile of crypto. But some smaller banks are still feeling lucky. [WSJ, paywall]

The SEC shuts down Beaxy

The Beaxy crypto exchange shuttered after the SEC filed charges against it for failing to register as a national securities exchange, broker, and clearing agency, and over its 2018 ICO. The SEC also charged a market maker operating on Beaxy as an unregistered dealer. [SEC press release; complaint, PDF; CoinDesk]

Beaxy ran a “private sale” ICO for its internal exchange token BXY from May 2018 to June 2019. The SEC is charging Beaxy and its founder Artak Hamazaspyan over the ICO as an unregistered offering of securities to US retail.

That’s the sort of complaint we’re used to seeing from the SEC — but they’re also charging Windy Inc., who ran the Beaxy platform, and Windy’s founders, Nicholas Murphy and Randolph Abbott, over unregistered securities trading on the exchange.

If cryptos being traded are securities — and it’s likely that most are — that leaves even the normal activities of an exchange subject to a vast array of additional regulations.

The SEC is also charging Brian Peterson and Braverock Investments as unregistered dealers for market-making on Beaxy for the BXY and Dragonchain DRGN tokens. The SEC sued Dragonchain in August 2022, alleging that DRGN was an unregistered offering of securities; that case is proceeding. [SEC, 2022; case docket]

Hamazaspyan is also alleged to have misappropriated $900,000 from the ICO for his own use. Murphy and Abbott discovered this in October 2019 and convinced Hamazaspyan to pay back $420,000 to Beaxy and let Windy run Beaxy going forward.

Windy, Murphy, Abbott, Peterson, and Braverock settled, paying a total penalty between them of $228,579. The SEC case against Beaxy and Hamazaspyan over the ICO is proceeding.

Beaxy shut down on Tuesday, March 28, owing to “the uncertain regulatory environment surrounding our business.” We think it’s deadly certain. [Beaxy, archive]

This is the first SEC action over securities trading on an exchange. It’s a likely template for future SEC cases against other crypto exchanges — like, say, Coinbase.

The Coinbase employee convicted in a criminal case of wire fraud by insider trading is fighting an SEC civil case claiming that the insider-traded tokens were securities. [WSJ]

SEC chair Gary Gensler will be testifying before Congress on April 18. The very non-partisan committee announces that “Republicans will hold @GaryGensler accountable for his flagrant disregard for the law, jurisdiction, and the APA.” (The Administrative Procedure Act.) We hope the Blockchain Eight show up. [Twitter]

More good news for decentralization

Judge Larry Alan Burns of the Southern District of California has denied the motion to dismiss of members of the bZx DAO who held governance tokens (BZRX), finding the DAO is plausibly alleged to be a general partnership. [Order, PDF; CoinDesk]

One of the earliest objections to the original DAO in 2016 was that it would be a general partnership, leaving everyone involved jointly and severally liable. (This is why incorporation is a thing.) The same problem was frequently noted in the rise in DAOs in the recent crypto bubble. Nobody involved can claim they had no idea.

Regulatory clarity, European style

The European Banking Authority has a new consultation paper on anti-money laundering (AML) risk factors that national bank regulators should consider. Crypto-asset providers are listed as an area that regulators should examine closely, including if “Distributed Ledger Technology” is “essential to the sector’s business model and operation” or “where services of the subject of assessment are provided using DLT or blockchain technology.” Comments are due by June 29, 2023. [EBA, PDF]

Coming soon in European AML: no anonymous crypto payments in the EU of over 1,000 EUR. Crypto asset managers will be required to verify “their customers’ identity, what they own and who controls the company.” [EP]

Terra-Luna

After he was arrested last week, Do Kwon of Terraform Labs is serving time in a Montenegrin prison. Kwon is likely to stay in jail there for at least a year, while his appeals and extradition hearings proceed. We expect he’ll be sent to South Korea first, and only then to the US. [YNA, in Korean; Protos] 

South Korean prosecutors are making another effort to arrest Terraform Labs cofounder Daniel Shin, who left the company in March 2020. [Bloomberg]

MicroStrategy doubles down 

As part of winding the bank down, Silvergate struck a deal with MicroStrategy to accept $161 million to repay a $205 million bitcoin-backed loan — taking a $44 million loss. Silvergate had said repeatedly that its bitcoin-backed loans were safe. [WSJ, paywall]

MicroStrategy sold 1.35 million shares of MSTR in Q1 2023, diluting shareholders by over 10% to pay off its Silvergate loan — and bought $150 million more BTC between February 16 and March 23. This is a Hail Mary pass praying for number to go up, which it is quite unlikely to do. [8-K; Twitter]

More good news for bitcoin

Hindenburg Research’s latest short-seller report is on Jack Dorsey’s Block, formerly Square. Cash App’s growth is aimed at targeting the “unbanked” — which mostly means embracing noncompliance to grow its user base. A Cash App employee told Hindenburg, “every criminal has a Square Cash App account.” And this is before Block has even got into crypto in any substantial way. [Hindenburg]

Indicted crypto promoter Guo Wengui used his culture-war social network Gettr to pump cryptos. Wengui was fined a billion dollars by the SEC in 2021 over his crypto offerings. [Washington Post]

The British Virgin Islands has ordered Three Arrows Capital founders Zu Shu and Kyle Davies to attend an examination on May 22 or be in contempt of court. We’re sure they’ll be right on that. [CoinDesk]

Freeing yourself from fiat history

If you click on a lot of old links to theblockcrypto.com, it’ll tell you that The Block has “sunset our News+ product” — their previous paywalled news offering. They didn’t open up those old pages — they’ve just effectively deleted a whole swathe of their journalism from 2018 to 2020!

We discovered this when Amy went looking for one of her old Block pieces on Binance for our article on Tuesday and when David looked for various other Block articles for today’s story.

You’d think a publisher wouldn’t just trash their own search optimization — but in practice, both mainstream and specialist publications destroy their own URLs and content all the time. So it’s pretty likely this was an error. Hopefully a reversible one.

We remember when Decrypt moved their domain from decryptmedia.com to decrypt.co. They saw their Google hits go through the floor and thought they’d been shadowbanned … not realizing they’d done it to themselves. The Block changed its URL to theblock.co around the same time, with similar effects.

In the meantime: ARCHIVE EVERYTHING. Stuff that’s blocked from the Internet Archive saves just fine into archive.is, and archive.is also accepts pages from the Internet Archive, Google cache, and Bing cache and indexes them correctly under the source URL. David uses and recommends the Get Archive extension for Firefox. [Mozilla Add-Ons]

Posted on by Amy Castor 0

Silvergate, banker to the crypto world, is going down

Things have been going downhill for Silvergate ever since FTX blew up in November. The latest red flag: Sivergate missed the deadline for its annual 10-K filing.

Silvergate’s crypto customers withdrew $8.1 billion in November when FTX collapsed. The bank was technically solvent — it had loans as assets on its books, such as its bitcoin-secured loans — but it didn’t have the cash to give the customers their money back.

So Silvergate started rapidly selling assets, taking a big hit in the process. It also borrowed in the wholesale market as well, including a $4.3 billion advance from the Federal Home Loan Bank of San Francisco.

Now it has to pay that money back.

Bank failures in the US are rare. But when a bank does fail, the FDIC moves quickly to protect depositors. We would be unsurprised if a team of FDIC agents was to quietly descend on the La Jolla bank in the near future.

Our full write-up is over on David’s blog. [David Gerard]

Posted on by Amy Castor 0

Who had Voyager Digital next in the DeFi dead pool?

  • By Amy Castor and David Gerard
  • Become a patron and support our work — Amy’s Patreon is here; David’s is here.

In our last episode, Voyager Digital was looking shaky. Voyager had a massive hole in its balance sheet, courtesy of Three Arrows Capital (3AC), which had imploded. Voyager had maxed out its line of credit from Alameda for the month — it could only withdraw $75 million in credit for each 30-day rolling period. 

On Friday, July 1, Voyager announced it was “temporarily suspending trading, deposits, withdrawals and loyalty rewards.” [Voyager, archive; WSJ]

How screwed is Voyager? Three-quarters of their assets — about $600 to $700 million in BTC and USDC owed by 3AC — are missing. [Press release; Yahoo Finance]

How screwed are Voyager’s customers? “Your debit card will stop working … exploring strategic alternatives,” the crypto broker said. “We are in discussions with various parties regarding additional liquidity and the go-forward strategy for the company.” [Voyager blog, archive]

Whoever had Voyager Digital next in the DeFi dead pool: you may now claim your 100 trillion luna.

Voyager’s business

Voyager is — or was — a crypto investment firm. You deposited dollars or crypto into Voyager, and you earned up to 12% interest on your deposits via their Earn program. The company claimed 3.5 million customers. 

It also had a mobile app that allowed you to trade 100 different cryptocurrencies commission-free. [Voyager, archive]

Voyager was a “CeFi” company, or centralized DeFi — an investment firm that played the DeFi markets.

It also offered a debit card. Customers deposited dollars, which were immediately converted to the USDC stablecoin, which Voyager paid a yield of up to 9% on. “Earn like crypto, spend like cash.” [Voyager, archive]

Voyager very much wanted its customers to treat the company like their bank — and deposit their money. It encouraged customers to directly deposit their paychecks into their Voyager debit card account.

It’s not a bank, though. We’ll see in a moment why that turned out to be important.

The company offered “even greater rewards” if you owned their VGX token! This was aimed squarely at the cryptocurrency audience: “When it comes to your crypto, every satoshi counts.” With VGX you could get up to a 12% yield! [Voyager; archive]

Voyager is listed on the Toronto Stock Exchange. However, its services were only available to Americans — not Canadians. [Voyager terms of use; archive]

At the end of March 2022, Voyager got cease-and-desist letters and orders to show cause from the states of New Jersey, Alabama, Oklahoma, Texas, Kentucky, Vermont, and Washington — who considered Voyager’s yield platform to be an unregistered offering of securities. [CoinDesk; press release]

Voyager’s liabilities

Here is Voyager’s press release for their Q3 2022 numbers, released on May 16. (Voyager’s financial year is July to June, so January to March is Q3.) The headline announced that revenue was up — $102 million! [Voyager, archive]

But the numbers show that year-over-year losses were also way up — Voyager had operating losses of $43 million. The company was burning money to pump up revenue and user numbers. Voyager promoted both these numbers to investors in June 2022 without mentioning the losses that were getting it there. [Voyager, archive]

The Q3 2022 numbers were announced when UST and luna had gone to zero, and Terraform’s Anchor protocol had collapsed. Voyager CFO Evan Psaropoulos said on the quarter’s earnings call: [Seeking Alpha]

“It is important to note with recent news related to UST and LUNA, that Voyager does not have UST listed on the platform and has not placed any access in any DeFi lending protocols such as the Anchor platform.”

But it turned out that Voyager was heavily exposed to UST, luna, and Anchor — via their largest debtor, Three Arrows Capital. The guys at 3AC knew they were in terminal trouble, but hadn’t told anyone yet — including their creditor, Voyager.

In the Q3 2022 earnings call, voyager CEO Steve Ehrlich said:

“We also spoke to all of our counterparties on lending and verified that there were no issues. In the past, we’ve had questions from investors about one counterparty. And as of today, we have no exposure to that counterparty.

… the people we lend to are some of the biggest names in the industry. As we stated, too, we had conversations and verified there was no contagion with them, had conversations with every single one of them. And since we limit who we lend to, to these parties, we’re really comfortable we did not have to call anything in and we had zero issues with any of our borrowers.”

Which counterparty could that have been?

Voyager released new financials yesterday afternoon, July 1, as part of its announcement that it was suspending withdrawals, detailing the 3AC-shaped hole in their numbers.

Is Voyager FDIC insured? No, but they’d like you to think so

If you had dollars on deposit with Voyager, you should assume they’re gone and not coming back.

Voyager tried very hard to imply in the large print that customer deposits were insured up to $250,000 by the Federal Deposit Insurance Corporation (FDIC) if something happened to Voyager — and only admitted in the small print that they weren’t. Voyager tweeted on November 12, 2020: [Twitter; archive]

“Have you heard? USD held with Voyager is FDIC insured up to $250K. Our customers’ security is our top priority. Start growing your crypto portfolio today.”

But your dollars had already been converted into USDC. Voyager then used the USDC, a liability to you, as collateral for loans it took out elsewhere. The user agreement explicitly allows this: [Voyager, archive]

“Consent to Rehypothecate. Customer grants Voyager the right, subject to applicable law, without further notice to Customer, to hold Cryptocurrency held in Customer’s Account in Voyager’s name or in another name, and to pledge, repledge, hypothecate, rehypothecate, sell, lend, stake, arrange for staking, or otherwise transfer or use any amount of such Cryptocurrency, separately or together with other property, with all attendant rights of ownership, and for any period of time and without retaining a like amount of Cryptocurrency, and to use or invest such Cryptocurrency at Customer’s sole risk.”

Your dollars were transformed into Voyager’s USDC the moment you deposited.

Voyager has an omnibus account with Metropolitan Commercial Bank, where it deposited its customers’ dollars. An omnibus account is a single holding account for money from multiple investors. Voyager acts as the money manager of the omnibus account — and maintains full control of the money.

Pass-through FDIC insurance, which would cover the customers and not just Voyager, is a bit tricky. You have to meet several requirements. Fundamentally, the funds need to be a liability of the bank, e.g., Metropolitan, not the account holder, e.g., Voyager. [FDIC; Seward & Kissel LL]  

If Metropolitan failed, the FDIC insurance would cover Voyager up to $250,000. But Voyager’s customers were not FDIC insured. And Metropolitan is doing just fine. 

Voyager repeatedly and consistently led customers to believe their US dollar deposits were safe if Voyager failed.

Usually, Voyager just tried to imply that customer deposits were directly FDIC-insured — and then detailed in the fine print how this wasn’t the case. Occasionally, Voyager slipped up and claimed this directly, such as in this blog post of December 18, 2019: [Medium, archive]

“Through our strategic relationships with our banking partners, all customers’ USD held with Voyager is now FDIC insured. That means that in the rare event your USD funds are compromised due to the company or our banking partner’s failure, you are guaranteed a full reimbursement (up to $250,000). We’re excited to offer our customers an extra level of security, so they can feel more comfortable holding their USD with Voyager.” [emphasis ours]

Let’s say that again: “you are guaranteed a full reimbursement”

This claim was simply not true.

Metropolitan Bank has issued a statement on Voyager and FDIC insurance — we expect they’ve been getting a lot of calls from Voyager customers: [Metropolitan, archive]

“FDIC insurance coverage is available only to protect against the failure of Metropolitan Commercial Bank. FDIC insurance does not protect against the failure of Voyager, any act or omission of Voyager or its employees, or the loss in value of cryptocurrency or other assets.”

Several Voyager customers on Reddit were very confused about all of this. Many were trying to figure out how to file an insurance claim to get their cash back. Others were learning for the first time that their dollar deposits were not, in fact, safe. [Reddit; Reddit] 

Reddit user DannyDaemonic called up the FDIC: [Reddit]

“I called the FDIC earlier and they said Voyager Digital LLC was not a bank and was not FDIC insured. They said for future reference, LLCs cannot be banks, ever. So when you see “LLC,” any claim of FDIC insurance is false. They did confirm that Metropolitan Bank is FDIC Insured but just because Voyager Digital stated “each Customer is a customer of the Bank” doesn’t mean they were funding those accounts. It just means if Metropolitan Bank failed, any holdings Voyager Digital placed under your name there would be safe. But since it’s only Metropolitan Bank that’s FDIC insured, Voyager Digital failing wouldn’t trigger the FDIC insurance.

I imagine Voyager is allowed to withdrawal from those accounts to pay debt or make investments. It’s also possible, if Voyager Digital is insolvent, that they haven’t even been depositing cash into the Metropolitan Bank for quite some time.

It doesn’t look good.”

The precise law that Voyager seems to be playing fast and loose with is 18 USC 709 — “False Advertising or Misuse of Names to Indicate Federal Agency”: [Onecle]

“… or falsely advertises or otherwise represents by any device whatsoever the extent to which or the manner in which the deposit liabilities of an insured bank or banks are insured by the Federal Deposit Insurance Corporation…”

As of March 31, Voyager claimed to have $175 million in cash. At present, it’s not clear they have any cash. They said they had $355 million in cash “held for customers” as of June 30, per their press release. However, they haven’t spelled out liabilities, including “cash owed to customers.” What really matters to customers is the balance held at Metropolitan, and we don’t know what that is.

At this point, Voyager either needs to get another loan from FTX or declare bankruptcy.

If Voyager does need cash, they’ll have to sell their bitcoins and ether — driving down the prices of those. 

The purpose of CeFi is to mis-sell investments

The CeFi lenders who are collapsing right now, such as Voyager and Celsius, are in the business of packaging up extreme risk as a shiny product — so that they can mis-sell these to the public as retail-suitable investments.

DeFi is a bunch of wires on a lab bench — not a finished product. CeFi puts a shiny box around the breadboarded system held together with clips and lumps of explosive.

The CeFi companies then lie to their customers that the remarkable interest rates on offer can exist without a jaw-dropping amount of hidden risk.

The very stupid and very crypto thing is when their fellow crypto institutions think “this is fine!” and do things like putting all their money into 3AC, which put all its money into Anchor.

It’s supposed to be retail — and not institutional traders — that sees a 5%, 10%, or 20% interest rate and stops thinking of anything but the big number. Perhaps crypto companies need to be legally restricted to retail-friendly investments? Or we could send some of these guys to jail for fraud, that works too.

Posted on by Amy Castor 18