Tether and Northern Data. Part II: the partnership

By Amy Castor and David Gerard

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AI is the hottest thing in 2024. Nvidia GPU chips are in high demand and shortages are common, so many AI startups rent computation from cloud providers instead of buying their own chips.

If you’re an AI cloud provider, you could stand to make a lot of money.

CoreWeave, once a little-known bitcoin miner, is now a $19 billion purported value unicorn that provides GPU access to AI startups. Other crypto miners, Hut8, Core Scientific, Hive, and Riot, are trying to tap into the AI gold rush by converting their data centers to AI. [FT, archive]

Northern Data also wants to get in on the gold rush, so it devised a cunning plan: pivot to AI and get rich in an IPO.

But Nvidia won’t take diluted shares of company stock for its cards. So Northern Data needed a partner with lots of cash. They found one in Tether, everyone’s favorite stablecoin issuer.

And in Northern Data, Tether found … a banker of sorts.

We talked about the history of Northern Data in part I of our series. Here, we’ll discuss their partnership with Tether and plans to strike it rich in an IPO. In part III, we’ll dig into the lawsuit against Northern Data by its former directors.

A perfect backer

Northern Data had a plan: pivot to “AI” and IPO for billions.

But first, they needed Nvidia cards to grow their cloud computing business — and convince investors that their money-losing operation had profit potential if they spun it off.

If you believe their unaudited claims, Tether is sitting on piles of cash. They’ve been boasting about huge profits from interest earned on US Treasury holdings and market gains on bitcoin and gold. They claim to be so loaded up now that they’re looking for investments.

In June 2024, Tether said they planned to put $1 billion into investments over the next twelve months. In the last two years, they’ve invested $2 billion, with Northern Data as their single largest beneficiary. [Bloomberg, archive]

What is Tether getting in return? Northern Data wants to combine its cloud business and its data center business. If they can IPO the new entity, the stock could be worth multiples of the current value of the two divisions.

Tether also has the prospect of gaining access to the bank accounts of a publicly traded company with businesses in Europe and the US. (Northern Data AG is listed on the Munich Stock Exchange.)

Tether’s banking dilemma

Tether has 112 billion tethers (USDT) sloshing around in the crypto markets, allegedly backed 1:1 with US dollars and also with squirrels and confetti. But quite a bit is Treasury bills and things very close to actual cash.

US banks really, really hate Tether — they’re not happy with all the crime, money laundering, and sanctions evasion. Even if Tether has the cash they claim, they still have the problem of moving money to and from customers without banks freezing their accounts.

Tether was cut off from the US banking system in 2017. This has left Tether resorting to clown banks like Deltec and playing cat-and-mouse games to keep banking access. If Tether wants to stay afloat, they need to find ways to move large sums of money from parts of the world where they don’t need it to low money laundering risk countries, like the US, where they can more easily wire funds to other jurisdictions.

After a few years of problems (that lost them $850 million), Tether made very good friends with Sam Bankman-Fried, who founded crypto exchange FTX and its trading arm Alameda Research. Bankman-Fried and Tether formed a partnership that fueled a new bitcoin bubble. In 2021 alone, Tether printed $60 billion worth of tethers, pushing bitcoin to new all-time highs. FTX grew to become the third-largest crypto exchange in the world.

Before it collapsed like a clown car, FTX served as Tether’s main financial launderette. Alameda Research was one of Tether’s largest non-exchange customers. Between 2020 and 2022, Alameda received almost 40 billion tethers directly from Tether. [Bloomberg, archive]

“These guys were running a one-way USD to USDT bureau de change,” Jonathan Reiter (Data Finnovation) of ChainArgos told Bloomberg.

FTX and Tether used the same money launderers and they all worked together to prop each other up. Their shared bank, Deltec, is also alleged to have falsified invoices on behalf of FTX and Alameda to other banks.

FTX was functionally Tether’s banker. But in November 2022, FTX blew up. Tether needed something new.

Tether pivots to AI

Tether announced a “strategic investment” in Northern Data in September 2023 — in what turned out to be a convoluted capital raise. (Tether swears they didn’t dip into the alleged reserves for Tether, which would have been abusing customer money.) [Tether, archive]

In June 2023, Tether set up a subsidiary in Ireland, Damoon Designated Activity Company, and funded it with “the equivalent of 10,000 Nvidia H100 GPUs,” worth 400 million euros. The key word here is “equivalent,” so potentially neither GPUs nor actual money.

A few weeks later, Tether and Northern Data announced they had entered a formal agreement. Northern Data would buy Damoon and Tether would get Northern Data stock — valued at 400 million euros. Before the sale closed, Damoon would acquire the “equivalent” in Nvidia chips: [Press release]

The valuation of EUR 400 million for 100% of Damoon is equivalent to the purchase value of the associated hardware without any up-writing. In essence, on completion of the transaction, Northern Data will have acquired latest-generation GPU hardware for a value of EUR 400 million.

In November, Northern Data also secured a 575 million euros ($610 million) debt-financing facility from Tether — a line of credit — “to drive further investments across its three business lines.” The debt facility is unsecured and has a term until January 1, 2030, meaning Northern Data had six years to draw on the funds. [Press release]

We know little else about the terms of the loan. Does Northern Data even have to pay interest on this?

Northern Data completed its stock-for-stock acquisition of Damoon in January 2024, bringing Tether’s total exposure to Northern Data to 1.1 billion euros — or the “equivalent” of that. [Press release, archive, Bloomberg, archive]

In an interview with Benzinga, Northern Data CEO Aroosh Thillainathan explained the transaction: [Benzinga, 2023]

Through our acquisition of a company called Damoon, a special-purpose investment vehicle owned by crypto giant Tether, we have acquired 20 NVIDIA Pods, each with 512 H100 GPUs. The transaction has been done as a contribution in kind, in return for issuing new shares, at exactly the valuation that these pods would have cost us if we had bought them directly from NVIDIA.

That is: yet again, Northern Data spun up the stock printer to buy a company.

Tether now owns 51% of Northern Data’s stock. So they now have majority control of a German-listed public company.

How the money, if any, flows

We can’t find third-party evidence that Northern Data has acquired or installed the 10,240 GPUs that it says Damoon purchased. Press releases state that Northern Data now have the GPUs — but it’s utterly unclear how Tether, of all the companies, could have even paid for them.

We wondered how Tether got banking in Ireland when most banks hate Tether, and realized: well, maybe they didn’t.

Let’s run a pure hypothetical on how you might buy GPUs without moving money.

Tether could have placed an order for Nvidia chips — without paying for them. Companies do this all of the time.

They would have just needed to show that Damoon was creditworthy. Tether would then negotiate the purchase, issue a purchase order to get in the queue for delivery, and then, before Nvidia delivered the chips, sell Damoon for diluted Northern Data stock. This would release Tether from needing to underwrite the purchase or take delivery.

In this scheme, no money has flowed from Tether or Northern Data to any account in Ireland or to Nvidia, but now Tether has $400 million in clean receivables in Ireland.

That is: Northern Data bought a company with no assets or operations other than an incoming Nvidia delivery.

This is a scenario that could have happened. Certainly, third-party evidence could exist to the contrary.

Northern Data said in January that they now “own” 18,000 Nvidia H100 GPUs and had started deploying them in December. The move “strengthens Taiga Cloud’s position as Europe’s first and largest dedicated Generative AI Cloud Service Provider.” [Press release, archive]

It’s possible Northern Data actually do own 18,000 Nvidia GPUs! From somewhere. It would be a big deal for a public company to flat-out lie in a press release, especially a company that’s already had run-ins with BaFin.

But there’s good reason to doubt the GPUs were paid for using dollars from Tether.

Get rich quick

Now that Northern Data has acquired its AI chips — or at least the “equivalent” as part of a Tether subsidiary — they can move to the next phase of their plan.

Northern Data wants to combine two of its divisions — its Taiga cloud computing division and its Ardent data center division — and list the resulting company on the Nasdaq in the first half of 2025. (A third business division, Peak, still focuses on bitcoin mining.) [Bloomberg, archive]

The hope is that an IPO in the current AI bubble will lure in enough suckers to pull in a massive pile of cash. The new company wants to IPO for $10 billion to $16 billion — even though Northern Data’s entire market cap is only $1.4 billion.

The immediate beneficiaries will be Northern Data CEO Aroosh Thillainathan, the largest employee shareholder, and Tether, who now owns 51% of Northern Data.

Reuters columnist Yawen Chen says the IPO “sounds more like valuation voodoo than financial reality.” [Breaking Views, paywalled, archive]

I’m totally good for it, bro

It also could be that Tether really do need the cash — if there were some sort of issues with the heaps of money they claim to have.

If Tether have $112 billion backing their USDT, they could make literally billions in the current high interest rate environment just from Treasury notes and similar. They don’t need to make risky investments.

So why is Tether even making these investments?

In “Lying for Money,” Dan Davies describes how financial frauds tend to grow exponentially over time as the gap between real dollars and fake dollars in the system widens. That’s because compound interest is the enemy of fraud.

In a legitimate business, money increases, gets invested back into the business, and grows over time. In a fraudulent business, that process works in reverse:

The reason for this is that unlike a genuine business, a fraud does not generate enough real returns to support itself, particularly as money is extracted by the criminal. Because of this, at every date when repayment is expected, the fraudster has to make the choice whether to shut the fraud down and try to make an escape, or to increase its size; more and more money has to be defrauded in order to keep the scheme going as time progresses.

Riding a spiral of fraud is a tempting explanation for Tether’s rapid growth, especially since 2020 when Tether put the tether printer into overdrive.

Fraudsters also often turn to get-rich-quick schemes in the hope that they can miraculously dig themselves out of their ever-deepening money pit.

So we suspect Tether is short on actual cash dollars. They think they can turn $1 billion into $10 billion by entering a deal with cash-strapped Northern Data.

And when Tether needs to move dollars around, despite their limited access to proper banking, they’ll have their very good friends at Northern Data to help them.

We see an interesting future for Northern Data and its CEO Aroosh Thillainathan. We’re just not sure what that will look like.

Image: “A rendering provided Wednesday, March 9, 2022, by technology company Northern Data, MidAmerica Industrial Park, Grand River Dam Authority and the Oklahoma Commerce Department shows plans for Northern Data’s planned data center and North American operations headquarters at the industrial park in Pryor, Okla.” [KTUL]

Posted on July 22, 2024August 1, 2024 by Amy Castor 0

Silvergate settles with SEC, DFPI, and Federal Reserve over FTX money laundering

By Amy Castor and David Gerard

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Life as a crypto firm can be divided up into before Silvergate and after Silvergate — it’s hard to overstate how much it revolutionized banking for blockchain companies. — Sam Bankman-Fried

Silvergate Bank, of La Jolla, California, was the main US dollar bank for crypto exchanges from 2017 to 2022. The Silvergate Exchange Network (SEN) operated 24/7 — not just during normal banking hours — and was essential to US dollar crypto and inter-exchange liquidity. By 2021, 58% of Silvergate deposits were from crypto firms.

After crypto crashed in May 2022, Silvergate got broker and broker. FTX crashed in November 2022, and panicked Silvergate customers withdrew $8.1 billion. The bank had to unload assets, realizing ghastly losses. In March 2023, Silvergate finally announced it would be unwinding.

The assorted regulators promptly dived in to work out what on earth had happened here. They’re finally applying penalties. Also, they’re all still extremely annoyed about FTX.

The SEC rap sheet

The SEC is suing Silvergate for making false or misleading claims to investors — the bank’s holding company, Silvergate Capital Corporation, was publicly traded (NYSE:SI) — about Silvergate’s anti-money-laundering compliance on the SEN. [Press release; Complaint, PDF; Docket]

The complaint also names former CEO Alan Lane, former COO Kathleen Fraher, and former CFO Antonio Martino as defendants.

Silvergate has agreed to pay the SEC $50 million in civil penalties for misleading investors post-FTX.

Lane and Fraher also agreed to settlements — $1 million and $250,000 respectively — and a five-year ban on serving as officers or directors of a public company.

Martino was accused of lying to investors about the bank’s solvency. He maintains his innocence. He has not agreed to settlements and plans to challenge the SEC in court. [Bloomberg, archive]

The Fed and DFPI rap sheet

The Federal Reserve and California’s Department of Financial Protection and Innovation (DFPI) have also brought state and federal charges against Silvergate. [DFPI; Consent order, PDF]

The only detail in the consent order of the Fed and DFPI’s concern is regarding Silvergate’s SEN:

An investigation by the Department identified deficiencies with respect to Silvergate’s monitoring of internal transactions.

Silvergate has agreed to pay $63 million to settle — $20 million to the DFPI and $43 million to the Federal Reserve Board. The $50 million SEC fine will be offset by this settlement — if Silvergate pays these penalties, it won’t have to pay the SEC as well.

What happens in the SEN stays in the SEN

Crypto firms flocked to Silvergate for its Silvergate Exchange Network. Unlike bank wires, SEN let crypto exchanges move dollars between exchanges at all hours of the day, including nights and weekends.

From 2017 to 2021, deposits from crypto customers grew from $770 million to $14.1 billion. Between April 2021 and September 2022, SEN processed more than $1 trillion of transactions.

Silvergate claimed in its original 2019 S-1 filing that it had “proprietary compliance capabilities,” which constituted “policies, procedures and controls designed to specifically address the digital currency industry.”

Before April 2021, Silvergate had an automated monitoring system (ATMS-A) that was part manual. The system would trigger an alert for suspicious activity, and the bank’s compliance staff would review and track transactions on a spreadsheet.

But in April 2021, the bank switched to a new system, ATMS-B, that was fully automated. ATMS-B just … didn’t bother checking transactions on the SEN!

The coverage assessment concluded that ATMS-B had not been monitoring SEN transactions “as expected because [ATMS-B] does not consider internal transfers as risky activity within any financial crime typologies.”

SEN was a speakeasy, a money laundromat. Just what FTX and the wider crypto bubble needed!

Silvergate’s previous BSA compliance officer warned Fraher repeatedly that the Federal Reserve Board would likely be unsatisfied with the bank’s AML monitoring system, or lack thereof. The Fed and the DFPI told Lane and Fraher that Silvergate’s AML monitoring was indeed inadequate.

In its 2021 SEC 10-K filing, the bank touted “the enhanced procedures” of its compliance program. The same statements were repeated in its 2022 10-Q — even though Silvergate’s SEN hadn’t had automated monitoring in 15 months.

Silvergate and FTX

FTX declared bankruptcy on November 11, 2022. Rumor had it that FTX had been laundering customer money via Silvergate — which it indeed had — and a bank run ensued.

Just after FTX collapsed, a Silvergate compliance staff analysis found 300 suspicious transactions by FTX-related entities from January 2022 until November 2022:

Most troubling to the BSA staff was the trend of funds that flowed from FTX’s custodial accounts — which held FTX customer funds — to a series of non-custodial FTX-related entities’ accounts, followed by transfers of these funds to other third parties — either through the SEN or to accounts external to the Bank.

Despite knowing that FTX alone had run up $9 billion in suspicious transfers, Lane continued to assure the public that everything was just fine and Silvergate had a robust AML system. On November 30, 2022, he told CNBC Squawk on the Street:

Again, we built this business compliance first. We satisfy all the regulatory requirements. And we have also, in the past, we have offboarded customers if we see activity that is inconsistent and if they can’t correct it or can’t explain it, then we offboard those customers.

On December 5, 2022, Lane posted a letter, which Fraher approved, on Twitter and LinkedIn, stating:

Silvergate conducted significant due diligence on FTX and its related entities including Alameda Research, both during the onboarding process and through ongoing monitoring, in accordance with our risk management policies and procedures and the requirements outlined above.

All of these claims were false. What’s more, the SEC says Lane and Fraher knew the claims were false.

Senators Elizabeth Warren, John Kennedy, and Roger Marshall issued a public letter demanding a better explanation of Silvergate’s role in FTX.

Silvergate’s CEO Alan Lane replied that the bank monitored transactions for every account and had “conducted significant due diligence on FTX and its related entities, including Alameda Research, both during the on-boarding process and through ongoing monitoring, in accordance with our risk management policies and procedures.”

All of these claims were false too.

Whoops, liquidity!

On September 30, 2022, Silvergate had approximately $12 billion in deposits. By December 31, 2022, deposits had dropped to $3.9 billion.

By the end of 2022, the regulators told Silvergate it needed sufficient cash to cover its crypto asset customers’ deposits. Silvergate borrowed $4.3 billion from the Federal Home Loan Bank of San Francisco (FHLB).

Silvergate also issued brokered certificates of deposit (BCDs). By December 31, 2022, Silvergate reported $2.4 billion in BCD liabilities.

But interest rates were going up. This pushed many of Silvergate’s securities into an unrealized loss position. From September 30 to December 31, Silvergate’s securities holdings plummeted from $11.4 billion to just $5.7 billion.

Borrowing to cover debts

We wrote before about how Silvergate was unable to file its 2022 10-K on time and that its auditor had refused to sign off on the Q4 2022 accounts. This complaint fills in some of the gaps.

The SEC says that Martino understated Silvergate’s losses and misrepresented that the bank remained well-capitalized at the end of 2022. According to the complaint, he “engaged in a fraudulent scheme to mislead investors about the bank’s dire financial condition.”

Martino knew that the bank had borrowed billions of dollars in 2022 via BCDs, which were due in January and February 2023.

Martino approved a January 17, 2023, earnings release stating that Silvergate expected to sell $1.7 billion of securities in Q1 2023 — of which it had already sold $1.5 billion. This would leave just $200 million more to sell by March 31. But Silvergate sold another $1 billion in that quarter — because there was no other viable source of funding to cover the previous quarter’s BCDs.

The SEC alleges that the earnings release “falsely reported” how the $1.7 billion was calculated, understated losses on the sales, and overstated a leverage metric. It also alleges that Martino made “false or misleading” statements on Silvergate’s Q4 2022 earnings call, falsified financial statements, and failed to maintain accounting controls.

What does this mean?

The SEC suit is about lying to investors. The Federal Reserve and the California DFPI action is about money laundering. But it’s all really about FTX.

The message for other banks is: don’t pull any more SEN-like arrangements without close monitoring. Don’t set up a money laundromat for your high rollers. Don’t let in customers like FTX. Beware of crypto.

You might have thought Silvergate was already scorched earth — but with a sufficiently awful public disaster, there’s always room for more scorching.

Also, don’t lie to your investors. Remember: everything is securities fraud.

Posted on July 3, 2024July 3, 2024 by Amy Castor 1

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

If you like this post, please tell at least one other person. It really helps!
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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 June 27, 2024June 27, 2024 by Amy Castor 3

Tether, FTX, and Deltec Bank: MONEY TIME

By Amy Castor and David Gerard

There’s a lot of class action lawsuits in crypto. We mostly don’t note these — they so rarely go anywhere — but a consolidated class action against FTX’s various enablers has turned up some interesting allegations concerning everyone’s favorite stablecoin, Tether, and its remaining US dollar banker, Deltec Bank of the Bahamas.

Tether has banked with Deltec since 2018. Deltec was one of the few banks in the world that would have anything to do with Tether after their deal with Crypto Capital led to $850 million of the Tether reserve being frozen.

We already knew that FTX/Alameda, also based in the Bahamas, was in it up to their necks with Tether. Alameda was Tether’s largest customer between 2020 and 2022 that wasn’t a crypto exchange.

The new allegations, filed in a Florida federal court, are that Deltec was an active and enthusiastic part of the FTX and Alameda business schemes that lost billions of customer dollars and for which Sam Bankman-Fried is now in jail.

The amended complaint

The new amendment to the complaint, filed on February 16, is based on 7,000 pages of direct text messages that were offered up in discovery. The full amended complaint is 158 pages. The Deltec shenanigans are paragraphs 133 to 260. [Motion, PDF; Complaint, PDF; Case docket]

The complaint hammers on Deltec’s relationship with Tether, FTX, and Alameda. It states that Jean Chalopin, the head of Deltec, and Gregory Pepin, Deltec’s deputy CEO, played a key role in FTX’s money laundering.

FTX/Alameda: MONEY PARTY THE BEST PARTY

Bankman-Fried’s empire came crashing down in November 2022, when it was revealed the company had an $8 billion hole in its customer accounts. The complaint lists the various defendants in the case — Gary Wang, Nishad Singh, Caroline Ellison, Ryan Salame, and others.

Deltec provided banking for FTX Trading, FTX US, and Alameda. Pepin manually allocated incoming customer funds to FTX accounts and moved the funds to Alameda. Deltec also extended a “secret line of credit” to Alameda of $1.8 billion.

Deltec was a money launderette for FTX. They would happily let all those annoying compliance requirements slide for their very good friends at FTX.

Deltec would pass compliance questions from intermediary banks to FTX or just make up fake invoices to account for otherwise unexplained transactions. Here’s Pepin:

[Ibanera] are asking info about [the foregoing FTX customer] do you have the agreement linked to this deposit? so i can get [the wire] release asap?

Idea 🙂 Send me a PDF of the term and condition + Invoice and I’ll send

… Now if you send me a XLS sample or whatever of invoice I can populate invoice myself later can do?

Pepin would send ecstatic messages in the group chat when a batch of wires came in. The complaint has a whole page of Pepin posting like this:

MOOONNNEEEYYY TTTIIIIMMMMEEEE

I HEAR A MONEY TIME IS HAPPENING HERE I THINK I NEED TO BE A PART OF IT

doing my best to hold the wall but such money tsunami is hard to handle dude

MONEY PARTY THE BEST PARTY

it is MONEY TIME INDEEDE

Deltec Bank also moved FTX customer deposits directly to Alameda on request, in the billions. Deltec would even run out of cash to pay FTX customer withdrawals and have to ask Alameda to cover for them. Pepin: “Lena you send today the 300m? or later? As we won’t have liquidity”.

Moonstone Bank

Chalopin bought Farmington Bank in Washington in 2020 in a deal with FTX, turning a tiny local bank into a crypto service company — mostly for FTX and Alameda. The bank was then renamed Moonstone.

Moonstone joined the Federal Reserve without notifying the Fed of its change of business plan from a local farmers’ bank to a crypto money launderette. The Fed shut Moonstone down in August 2023.

North Dimension: Ipad 11 “ich Cell Phone

North Dimension was a fake electronics company that FTX/Alameda created so they could set up accounts at Silvergate Bank and Signature Bank in its name. FTX had customers wire money to North Dimension’s Silvergate and Signature accounts so that it would go directly to Alameda. This was part of the money laundering charge that Bankman-Fried was convicted on.

Pepin made sure that deposits from North Dimension came through to Deltec and were sent to FTX or Alameda as needed.

FTX put actual effort into the North Dimension bit of the fraud, if only the barest minimum. North Dimension even had a website!

The site didn’t actually work — all the product links went to the contact page. It was “rife with misspellings and bizarre product prices,” including “sale prices that were hundreds of dollars above a regular price” — such as the fabulously desirable “Ipad 11 “ich Cell Phone,” normally $410, but available at a sale price of just $899.

The North Dimension website is in the Internet Archive. The “About” page is a trip. The company logo comes from DesignEvo Free Logo Maker — it’s their “3D Orange Letter N” logo. You can see every penny of the twenty-five cents they spent on this. [North Dimension home page, archive; product page, archive; about page, archive; DesignEvo]

Tether and Deltec

When Tether became a Deltec customer in November 2018, it deposited about $1.8 billion — making up nearly half of Deltec’s total deposits at the time.

Alameda was the second-largest creator of tethers (USDT) — “about one-third of USDT minted at any time went to Alameda.”

The USDT was funded with FTX customer deposits which Deltec routed to Alameda. Remember that Alameda and FTX were claiming at this time to be completely separate operationally.

Alameda created and redeemed tethers directly via Alameda and Tether’s Deltec accounts. Alameda would first send a message to the Alameda/Tether/Deltec group chat. Transfers would often have to wait for Pepin to be awake.

Alameda pumping out new tethers seems to have been the engine for the billions of tethers printed in 2020, 100 million at a time: “In total, Alameda minted more than $40 billion USDT through this scheme, encompassing nearly half of USDT in circulation at the time.”

How solidly backed was USDT by the account at Deltec? About as solidly as it was in 2017 when Tether didn’t have a bank account at all for months at a time:

… in November 2018, Deltec Bank provided an assurance letter stating that USDTs were fully back by cash, one U.S. dollar for every USDT. However, the next day, Tether began to transfer hundreds of millions in funds out of its Deltec Bank account, such that within 24 hours, Deltec Bank’s assurance letter was no longer true.

FTX’s alleged Tether scam

The complaint postulates that Alameda was furiously printing tethers so that Alameda could make less than a tenth of a percent from arbitraging the price of USDT:

Upon information and belief, Alameda and Tether profited from the scheme as follows. Alameda would create USDT in amounts and at times that would inflate the market price of the stablecoin. Alameda would promptly sell the USDT in the market, at several basis points above the purchase price. Tether, in turn, would receive U.S. dollars for stablecoins it minted from nothing.

This sounds unlikely to us — there just isn’t the volume on any existing USD-USDT trading pair. To turn USDT into dollars in any quantity, you need to buy crypto then sell that at an actual-dollar exchange.

Deltec allowed Alameda a three-day grace period to pay for its freshly created USDT — that $1.8 billion line of credit. We think Alameda’s scam would have been to do some market-moving trades to make enough dollars to pay for the tethers they’d just bought.

Attachments to the complaint

Also attached to the complaint is a declaration from Caroline Ellison, former head of Alameda. Ellison apparently settled with this class action’s plaintiffs in January 2024 and offered to assist them. This declaration asserts the accuracy of the claims in the complaint as far as Ellison directly knows.

FTX former counsel Dan Friedberg adds a declaration. Friedberg has also settled with the plaintiffs of this class action. He only confirms the plaintiffs’ claim that Avinash Dabir managed FTX’s celebrity sponsorships out of FTX’s Miami office.

The last attachment on the amended complaint is a transcript of a podcast with Dabir talking to Joe Pompliano on the Joe Pomp Show about FTX’s celebrity sponsorships.

Harborne corrects the record by lawsuit

Christopher Harborne, shareholder of 12% of the Tether empire under his Thai name, Chakrit Sakunkrit, is suing the Wall Street Journal for an article it wrote in March 2023. The story was about Tether’s efforts to get banking after they were cut off by correspondent bank Wells Fargo in 2017. [Complaint, PDF, archive]

The WSJ story said that Harborne aided Tether’s efforts to skirt the traditional banking system by using his company AML Global to set up an account at Signature Bank: “The Sakunkrit name had earlier been added to a list of names the bank felt were trying to evade anti-money-laundering controls when the companies’ earlier accounts were closed, but Mr. Harborne’s hadn’t.”

Harborne states that “AML’s Signature Bank account was never used for Tether or Bitfinex whatsoever.” WSJ told him that the story didn’t imply that he had committed crimes, but he is suing over a claimed inference that he had.

WSJ edited the story on February 21 to remove the bits about Harborne. [WSJ; archive of March 3, 2023]

Harborne’s lawyers also reached out to Mike Burgersburg, a.k.a. Dirty Bubble Media, asking him to take down his article on Harborne. Mike kept the story up but made edits. [Dirty Bubble, archive of November 30, 2023]

Originally Mike had noted that the account Harborne set up at Signature was a back door for Bitfinex to access the US banking system. His source was the WSJ. “This was edited because WSJ removed those comments from their story. I am not making this claim, and there is no evidence at present for this assertion,” Mike said.

Tether is run by a handful of people, some known and many unknown. Former CTO Paolo Ardoino is the named CEO and he acts like a social media intern. This reeks of Ardoino being the fall guy for whoever actually is running Tether.

Harborne doesn’t want to be thought to be that person. He says he “is not now and never has been in any management or executive role at Bitfinex or Tether; he is merely a minority shareholder.” A large chunk of his net worth is apparently in ether. His son, Will Harborne, has worked for various iFinex entities over the years.

Squeal!

Pig butchering scams, a.k.a. romance scams, have taken $75 billion from victims, according to a study by University of Texas finance professor John Griffin and his student Kevin Mei.

Once scammers collect the funds, they most often convert them to tethers: “Funds exit the crypto network in large quantities, mostly in Tether, through less transparent but large exchanges—Binance, Huobi, and OKX.” [SSRN]

Zeke Faux researched Tether’s pig butchering use case in depth for his book Number Go Up. That chapter of the book was put up by Bloomberg as a teaser. [Bloomberg, 2023, archive]

Griffin has been following Tether for some years. He was behind another paper on Tether money flows, 2018’s “Is Bitcoin Really Un-Tethered.” That study showed how Tether was used to prop up the price of bitcoin for most of the 2017 crypto bubble.

Tether shills on Twitter have been frantically congratulating Tether on its “deal” with the Department of Justice to combat romance scams. No such deal has been announced. [Twitter, archive]

Just in case

USDT tokens are currently available on 15 different blockchains. Most of the issuance is on Ethereum and Tron.

Tether has proudly announced a recovery tool in case any of these blockchains have problems and your USDT becomes inaccessible. [Tether, archive]

We doubt Tether would make an announcement like this without a gun to their heads. So this reads to us like Tether reassuring the crypto whales that their tethers will be protected if Tron goes down.

Heading for the trillion

Tether crossed 100 billion USDT in circulation on March 5. This is completely in line with Dan Davies’ theory from Lying for Money that frauds snowball over time:

The reason for this is that unlike a genuine business, a fraud does not generate enough real returns to support itself, particularly as money is extracted by the criminal. Because of this, at every date when repayment is expected, the fraudster has to make the choice between whether to shut the fraud down and try to make an escape, or to increase its size; more and more money has to be defrauded in order to keep the scheme going as time progresses.

The news about crossing 100 billion made it into Reuters, which noted Tether’s remarkably non-transparent reserves and the risks Tether poses to crypto and the broader financial system. [Reuters; Reuters]

Tether needs to be shut down. We’ve been saying this since 2017. It’s a risk to anyone who holds crypto. It’s also helped to accelerate other scams, so they’ve grown to a whole new level.

As we write this, Tether has just printed 2 billion USDT — its biggest issuance yet. Tether has printed 5 billion new USDT in just the past week. Gotta keep number going up. MOOONNNEEEYYY TTTIIIIMMMMEEEE!

Image: Gregory Pepin photographed on the ipad 11 “ich sell phone.

(Updated March 12 at 5PM ET to add a quote from Mike Burgersburg and clarify why he edited his story on Tether.)

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Posted on March 9, 2024March 12, 2024 by Amy Castor 3

Amy and David answer your questions — bitcoin mining, ETH staking, FTX, Tether, and more!

By Amy Castor and David Gerard

We asked readers what they were curious about in crypto. We posted part one of our answers earlier this month. Now here’s part two! [Twitter; Bluesky]

Sending us money will definitely help — here’s Amy’s Patreon, and here’s David’s.

Q: An update on the carbon footprint of the crypto industry for 2023, if this hasn’t been done by someone else already? Thanks [Thomas Endgame on Twitter]

The news is still dismal. The bitcoin network’s annual carbon footprint is a shocking 76.79 million tons of carbon dioxide, comparable to the entire country of Oman, according to Digiconomist. [Digiconomist, archive]

In terms of energy, bitcoin uses as much electricity as the country of Ukraine — 137.68 terawatt-hours annually. Energy consumption was highest in the first half of 2022 — 204 terawatt-hours per year — but started to go down in July, after the crypto collapse.

The network currently produces 23.75 kilotons of e-waste per year, comparable to the entire Netherlands, and every bitcoin transaction uses enough water to fill a swimming pool.

This is why some of the good citizens of Texas are fighting back against the crypto mines there.

Q: Who’ll be left holding bags when Tether collapses? [Julius Cobbett on Twitter]

Tethers (USDT) function as substitute dollars on offshore crypto exchanges that have no access to US dollar banking.

The biggest holders of tethers are arbitrageurs, such as Cumberland, who pass tethers along to secondary users in exchange for bitcoins and other crypto. [CoinTelegraph, 2020; Protos]

If all tethers were suddenly switched off tomorrow, that would be nearly 100 billion “dollars” in liquidity instantly sucked out of the market.

Any secondary users stuck holding tether would find their virtual dollars suddenly worthless. Arbitrageurs would have nothing to buy and sell bitcoin with on offshore exchanges — they would have to switch over to a different stablecoin — and the price of bitcoin would likely take a serious hit.

We would expect to see a large number of bitcoin holders trying to dump their holdings on actual-dollar exchanges like Coinbase in a mad rush to get out of the market. It might look like a bunch of mice trying to squeeze out of a tiny hole.

Q. We all know crypto is garbage, why does YAHOO finance continue to have the BTC ticker and other crypto related garbage up? I’d have thought by now it would be gone. [Barsoapguy on Twitter]

Sadly, with bitcoin ETFs and so on still all over the finance press, it’s a relevant number to put up. Even if they just pull the number from whatever CoinMarketCap says.

Q. In the bankruptcy of FTX, about 7B of the $8.7B said to be “lost” has been found, and with Crypto making a comeback all creditors may become whole or better. But SBF rots in prison for decades? And BK firms make over a billion in fees? [Bill Hochberg on Twitter]

There are two misconceptions here — one is that John Jay Ray and his team have found all the money and everything will be fine. The other is that Ray and his lawyers are gouging the creditors and nobody can stop them.

FTX got itself into trouble because it had stolen the customer assets, then inflated its balance sheets with worthless FTT tokens — its own illiquid supermarket loyalty card points. The FTT made up a third of its balance sheet. When FTX filed for bankruptcy in November 2022, it had a shortfall of $8.7 billion.

As we wrote at the time, FTX’s debts were real, but its assets were fake. The FTT was unsaleable garbage, not something that Ray and his team could turn into cash.

In August 2023, Ray estimated his team had recovered $7 billion — but that included spurious dollar values for trash crypto assets. A lot of it will be FTT and other worthless tokens that aren’t realistically convertible to cash in those quantities.

In October 2023, FTX said it would refund up to 90% of “distributable assets” to creditors. That’s 90% of the amount of funds that FTX was able to recover — not 90% of the amount owed to creditors. [FTX]

Bitcoin has gone up in price since FTX fell over. The price of bitcoin was $17,000 when FTX filed for bankruptcy. Now it’s over $40,000. If FTX held onto its crypto holdings, instead of converting them into cash as soon as possible, they might have made some money. But bankruptcy lawyers typically don’t gamble on volatile markets.

Bankruptcy professionals are super expensive. Ray’s team has so far cost about $200 million. That’s a lot of money, and many people questioned this — but even the independent fee examiner said, yep, that looked about right for the ridiculous mess Ray had to sort out here.

An appeals court has ordered the appointment of an independent examiner reporting to the US Trustee, paid for out of the bankruptcy estate, which will likely cost another $100 million or so.

Q: Eth staking and destaking? It was not possible to unstake at launch, does it work now? Are stakers happy? How scammy is the whole thing? There was some stuff about OFAC compliance for stakers too? I don’t know? I might use an explainer? [Laventeot on Twitter]

Ethereum proof of stake uses validators rather than miners like bitcoin does. Every validator has a chance at winning this moment’s ETH. If your block is the winner, you get the block reward, transaction fees, and all the MEV you can steal.

You can set up a validator at the cost of staking 32 ETH. When Ethereum moved to proof of stake in September 2022, this 32 ETH couldn’t be unstaked. But since Ethereum’s Shanghai upgrade in April 2023, it is now possible to unstake your staked ETH.

Unstaking has a queueing mechanism to avoid there being too much churn. So when there’s a big dump — such as when Celsius Network destaked 30,000 ETH recently to hand back to their bankruptcy creditors — it can take days or even weeks to process. [Nansen]

The staking process seems to work as advertised and the stakers are pleased with it.

The process closely resembles an unregistered security in the US — the Ethereum Foundation (incorporated in Switzerland) promotes that you put in your ETH and you get a return on it from the efforts of others.

Some exchanges offer staking as a service — this is probably okay if the customers are accredited or institutional, and an excellent way to accumulate cease and desist letters from the SEC and state securities regulators if the customers are retail.

Anyone moving money — or, in FinCEN’s terms, “value that substitutes for currency,” including “convertible virtual currencies” — as a business in the US is required to comply with sanctions law. This is usually assumed to mean not validating transactions for sanctioned blockchain addresses listed by OFAC. US-based validators would be very foolish to flout this.

OFAC compliance in transaction processing doesn’t directly relate to the economics of staking in itself — US bitcoin miners would similarly be liable under law for processing transactions for sanctioned entities, even if OFAC hasn’t called them up yet.

Q: maybe a check-in on the enterprise blockchain pitch decks? is the same dead horse still being beaten? [Stephen Farrugia on Twitter]

Enterprise blockchain has gone back into hibernation. Corporate interest in non-cryptocurrency blockchain goes up and down with the price of bitcoin — lots of interest in 2017 and 2018, almost none in 2019 and 2020, and a sudden burst of interest in 2021 as the number went up.

The problem with enterprise blockchain is that it’s a completely useless idea. A blockchain doesn’t actually work any better than using a conventional database in any situation where you have a trusted entity who’s responsible for the system. If you’re a business, that’ll be yourself. Just use Postgres.

The main remaining interest in enterprise blockchain is inside banks. We’ve had many reports of bank fintech research units infested with coiners trying to do something — anything — that they can say is “blockchain.” Société Générale’s completely useless euro stablecoin is one recent example.

Q. Something on the way that Bitcoin Magazine and BitMEX bought commercial places on the Peregrine Mission One so they could say they’d “gone to the moon” … and the spacecraft is going to miss the moon. [BiFuriosa on Bluesky]

Private companies have of late been offering to send personal items — cremated remains, time capsules, and even crypto — to the moon. Astrobotic, which owns Peregrin-1, is one of them.

In May, BitMEX and Bitcoin Magazine announced they were going to send a physical bitcoin to the moon via Astrobotic — that is, a metal medallion with a bitcoin private key engraved onto it. They declared that this would mark a “defining moment for bitcoin as we explore the possibilities of Bitcoin beyond planet Earth.” [BitMEX, archive]

Peregrin-1 made it into space earlier this month — but it never managed to land on the moon. So when it burned up on re-entry to Earth’s atmosphere, everything onboard burned up with it, including the time capsules, the ashes of more than 200 people, and the bitcoin. [Gizmodo]

Dogecoin fans had earlier funded a similar effort to send a physical dogecoin to the moon in 2015, also via Astrobotic. As of 2023, they were still trying to get it sent up. If the physical dogecoin had been onboard, it would have met the same fate. [Twitter, archive]

Sadly, even the moon hates crypto.

Q. Why are people still falling for this nonsense? [Peter Nimmo on Mastodon]

Dude, they can get rich for free! Maybe.

Thankfully, fewer people are falling for the nonsense. Retail trade is one-eighth of what it was in the 2021 bubble. Most of the dollars boosting the price of bitcoin since 2017 have been fake.

By the end of 2017, a billion USDT was sloshing around in the crypto markets; today in 2024, we’re coming up to 100 billion USDT. Bitcoin’s price is largely manipulated.

Crypto media — CoinDesk, The Block, Decrypt, and others — play a major role in promoting the nonsense. These outlets, owned and/or financed by crypto companies, are the public relations machines for the crypto industry. The finance press treats these sites as specialist trade press rather than fundamentally a promotional mechanism.

Crypto has also put big money into lobbying efforts, so we see senators like Cynthia Lummis, Kirsten Gillibrand, and Rand Paul shamefully repeating the propaganda.

Crypto skeptics are a smaller group who try to warn people of the dangers of investing in crypto. So it’s important to send money to us. Instead of bitcoins, we spend it on useful things like wine to get through all this guff.

Q. Once Crypto blows over what will we salt our popcorn with? [EamonnMR on Mastodon]

We don’t expect crypto to ever disappear completely. We do expect the number to eventually go down to the point where fewer people pay attention.

Meme stocks blew out even harder than crypto did. The remaining devotees are like QAnon for finance, posting to Reddit with their theories of how much they’ll surely get for their deactivated BBBY shares when the Mother Of All Short Squeezes finally descends.

Now that the well of dumb crypto money has dried up, venture capitalists are pivoting to AI as the next big thing. The tech is running out of steam, though. But the power consumption is likely to be even worse than bitcoin mining by 2027, and the AI grifters are using the same excuses for it as the bitcoin grifters. [Digiconomist]

Suckers are eternal. As long as money exists, fraud and get-rich schemes will be with us. And we’ll have something to write about.

Image: Hans at Pixabay, CC-0

Posted on January 27, 2024January 27, 2024 by Amy Castor 4

Crypto collapse: Mt Gox payouts, Tether hooks up the feds, SEC says no to Coinbase, crypto media mergers

By Amy Castor and David Gerard

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It’s not over until withdrawals are temporarily paused due to unusual market activity.
— Jacob Silverman

Tightening Tether’s tethers

Tether’s been under some regulatory heat after the reports of how useful USDT is for financing terrorists and other sanctioned entities. Even Cynthia Lummis, the crypto-pumping senator from Wyoming, loudly declared that Tether had to be dealt with.

The US government isn’t entirely happy with Tether’s financial shenanigans. But they’re really unhappy about sanctions violations, especially with what’s going on now in the Middle East.

So Tether has announced that it will now be freezing OFAC-sanctioned blockchain addresses — and it’s onboarded the US Secret Service and FBI onto Tether! [Tether, archive; letter, PDF, archive]

Tether doesn’t do anything voluntarily. We expect they were told that they would allow this or an extremely large hammer would come down upon them.

There’s more to Tether’s criminal use case than sanctions violation. The most jaw-dropping chapter in Zeke Faux’s excellent book Number Go Up (US, UK) is when he traced a direct message scammer to a human trafficking operation in Cambodia that favored tethers as its currency. South China Morning Post follows up on this with an in-depth report on how Cambodian organized crime uses tethers. [SCMP]

Credit rating firm S&P Global rated eight stablecoins for risk. Tether and Dai got the lowest marks. S&P notes in particular the lack of information on Tether’s reserves. [press release; S&P; Tether report, PDF]

At least some of the claimed Tether backing in treasuries is held in the US with Cantor Fitzgerald — exposing Tether to US touchability. This has been known since February 2023, and was proudly confirmed in December 2023 by Cantor CEO Howard Lutnick: “I hold their Treasuries, and they have a lot of Treasuries. I’m a big fan of Tethers.” [Ledger Insights; Forbes]

Cointelegraph had a fascinating story on a company called Exved using tethers for cross-border payments from Russia! Then they deleted it, for some reason. Exved was founded by Sergey Mendeleev, who also founded the OFAC-sanctioned crypto exchange Garantex, which was kicked out of Estonia. Exved is working with InDeFi Bank, another Mendeleev venture. We’re not so sure the new OFAC-compliant Tether will be 100% on board with this. [Cointelegraph, archive; Telegram, in Russian; Protos]

SEC answers Coinbase’s prayers: “No.”

In July 2022 — just after crypto crashed — Coinbase wrote to the SEC proposing new regulatory carveouts for crypto.

The SEC took its sweet time responding. Eventually, Coinbase sued in April 2023 with a writ of mandamus, demanding a bureaucratic response. The court told the SEC to get on with it, or at least supply a date by which it would answer.

Finally, the SEC has responded: “the Commission concludes that the requested rulemaking is currently unwarranted and denies the Petition.” The SEC thinks existing securities regulations cover crypto securities just fine, and there’s no reason for special rules for Coinbase. [SEC rejection, PDF; Coinbase letter to court, PDF; Gensler statement]

Coinbase general counsel Paul Grewal welcomed the opportunity to challenge Coinbase’s dumb and bad proposal being turned down. [Twitter, archive]

4 (continued)

Binance founder and former CEO Changpeng Zhao will not be returning home to Dubai anytime soon. US District Judge Richard Jones ordered CZ to remain in the US until his sentencing on February 24. He can travel within the US, but he cannot leave. [Order, PDF]

After being busted hard, Binance is still behaving weird. At the FT Crypto and Digital Assets Summit in London, the exchange’s new CEO Richard Teng refused to answer even basic questions, like where Binance is headquartered and whether it’s had an audit. “Why do you feel so entitled to those answers?” Teng said when pushed. “Is there a need for us to share all of this information publicly? No.” [FT]

CZ and Binance have been trying to dismiss the SEC charges against them. This is mostly loud table pounding, wherein Binance claims that what the SEC argued were securities are not really securities. [Doc 190, PDF, Doc 191, PDF]

France was the first country in Europe to grant Binance regulatory approval. State-endorsed blockchain courses for the unemployed and NFT diplomas helped push the country’s most vulnerable into crypto. Since the collapse of FTX and Binance’s $4.3 billion fine for money laundering, French President Emmanuel Macron’s relationship with CZ has fallen under scrutiny. [FT, archive]

London law firm Slateford helped to cover up Binance’s crimes and attempted to intimidate media outlet Disruption Banking from writing about Binance’s sloppy compliance hiring practices. (Disruption Banking told Slateford to get knotted and didn’t hear from them again.) [Disruption Banking]

Binance is finally removing all trading pairs against Great British pounds. [Binance, archive]

FTX: The IRS wants its money

FTX filed a reorganization plan in mid-December. The plan is 80 pages and the disclosure statement is 138 pages, but there’s a notable lack of detail on what happens next. None of the talk of starting a new exchange has made it into the current plan — this appears to just be a liquidation.

The plan treats crypto claims as their value in cash at the time of the bankruptcy filing on November 11, 2022, back when bitcoin was at $17,000 — less than half of what it is now.

Creditors will vote on the plan in 2024. The court must approve the plan before it is implemented. [Bloomberg, archive; Plan, PDF; Disclosure statement, PDF]

The IRS is demanding $24 billion in unpaid taxes from the corpse of FTX. John Jay Ray wants to know how the IRS came up with that ludicrous number — the exchange never earned anything near those amounts. The IRS originally wanted $44 billion, but brought the number down. Judge John Dorsey has told the IRS to show its working. [Doc 4588, PDF; Bloomberg, paywalled]

Three Arrows Capital

Three Arrows Capital was the overleveraged crypto hedge fund that blew up in 2022 and took out everyone else in crypto who hadn’t already been wrecked by Terra-Luna. After months of dodging culpability, co-founder Zhu Su was finally arrested in Singapore in September as he was trying to skip the country.

Zhu was released from jail and appeared before the Singapore High Court on December 13, where he had to explain to lawyers for the liquidator Teneo what happened when 3AC went broke. The information will be shared with creditors. [Bloomberg, archive]

A British Virgin Islands court froze $1.1 billion in assets of Zhu and his co-founder Kyle Davies and Davies’ wife Kelly Chen. [The Block]

Teneo expects a 46% recovery rate for 3AC creditors on $2.7 billion in claims. [The Block]

Crypto media in the new Ice Age

Crypto news outlet Decrypt has merged with “decentralized media firm” Rug Radio. No, we’d never heard of them either. The two firms will form a new holding company chaired by Josh Quittner. Decrypt had spun out from Consensys in May 2022, just before everything crashed. It’s reportedly been profitable since then — though crypto sites always say that. [Axios; Axios, 2022]

Forkast News in Hong Kong has merged with NFT data provider CryptoSlam and fired most of its staff. Forkast was founded in 2018 by former Bloomberg News anchor Angie Lau; it shut down editorial operations on November 30. [The Block]

Crypto news outlets ran seriously low on cash in 2019 and 2020, just before the crypto bubble, and they’re struggling again. We expect more merges and buyouts of top-tier (such as that is in crypto) and mid-tier crypto outlets. We predict news quality will decline further.

Amy recalls the old-style crypto media gravy train and eating in five-star restaurants every night in Scotland and London while embedded with Cardano in 2017. Thanks, Charles! Nocoining doesn’t pay nearly as well, but these days crypto media doesn’t either. There’s probably a book in those Cardano stories that nobody would ever read.

Regulatory clarity

The Financial Stability Oversight Council, which monitors domestic and international regulatory proposals, wants more US legislation to control crypto. FSOC’s 2023 annual report warns of dangers from:

crypto-asset price volatility, the market’s high use of leverage, the level of interconnectedness within the industry, operational risks, and the risk of runs on crypto-asset platforms and stablecoins. Vulnerabilities may also arise from token ownership concentration, cybersecurity risks, and the proliferation of platforms acting outside of or out of compliance with applicable laws and regulations.

Yeah, that about covers it. FSOC recommends (again) that “Congress pass legislation to provide for the regulation of stablecoins and of the spot market for crypto-assets that are not securities.” [Press release; annual report, PDF]

IOSCO, the body of international securities regulators, released its final report on how to regulate DeFi, to go with its November recommendations on crypto markets in general. IOSCO’s nine recommendations for DeFi haven’t changed from the draft version — treat these like the instruments they appear to be, and pay attention to the man behind the curtain. These are recommendations for national regulators, not rules, but look at the DeFi task force — this was led by the US SEC. [IOSCO press release, PDF; IOSCO report, PDF]

London-based neobank Revolut is suspending UK crypto services — you can no longer buy crypto with the app — citing a new raft of FCA regulations, which go into force on January 8. [CityAM; CoinDesk]

Crypto exchange KuCoin has settled with New York. The NY Attorney General charged KuCoin in March for violating securities laws by offering security tokens — including tether — while not registering with NYAG. KuCoin has agreed to pay a $22 million fine — $5.3 million going to the NYAG and $16.77 million to refund New York customers. KuCoin will also leave the state. [Stipulation and consent order, PDF; Twitter, archive]

Montenegro plans to extradite Terraform Labs cofounder Do Kwon to either the US or South Korea, where he is wanted on charges related to the collapse of Terra’s stablecoin. Kwon was arrested in Montenegro in March. Originally it looked like Montenegro was going to pass him off to the US, but the case has been handed back to the High Court for review. [Bloomberg, archive; Sudovi, in Montenegrin]

Anatoly Legkodymov of the Bitzlato crypto exchange, a favorite of the darknet markets, has pleaded guilty in the US to unlicensed money transmission. Legkodymov was arrested in Miami back in January. He has agreed to shut down the exchange. [Press release]

The SEC posted a new investor alert on crypto securities with a very lengthy section on claims of proof of reserves and how misleading these can be. [Investor.gov; Twitter, archive]

Santa Tibanne

It’s been nearly ten years, but Mt. Gox creditors are reportedly starting to receive repayments — small amounts in Japanese yen via PayPal. [Cointelegraph; Twitter, archive]

Some payouts are apparently bitcoin payouts — with the creditors not receiving a proportionate share of the remaining bitcoins, but instead the yen value of the bitcoins when Mt. Gox collapsed in February 2014. This means a 100% recovery for creditors! — but much less actual money.

There are still 140,000 bitcoins from Mt. Gox waiting to be released. If payouts are made in bitcoins and not just yen, we expect that claimants will want to cash out as soon as possible. This could have adverse effects on the bitcoin price.

Trouble down t’ pit

In the Celsius Network bankruptcy, Judge Martin Glenn has approved the plan to start a “MiningCo” bitcoin miner with some of the bankruptcy estate. He says that “the MiningCo Transaction falls squarely within the terms of the confirmed Plan and does not constitute a modification.” [Doc 4171, PDF]

Bitcoin miners are racing to buy up more mining equipment before bitcoin issuance halves in April or May 2024. Here’s to the miners sending each other broke as fast as possible [FT, archive]

Riot Platforms subsidiary Whinstone sent its private security to Rhodium Enterprise’s plant in Rockdale, Texas, to remove Rhodium employees and shut down their 125MW bitcoin mining facility. The two mining companies have been brawling over an energy agreement they had made before prices went up. [Bitcoin Magazine]

More good news for bitcoin

The UK is setting up a crypto hub! ’Cos that’s definitely what the UK needs, and not a working economy or something. [CoinDesk]

Liquid is a bitcoin sidechain set up by Blockstream at the end of 2018. It was intended for crypto exchange settlement, to work around the blockchain being unusably slow. It sees very little use — “On a typical day, there are more tweets about Liquid than there are transactions on its network.” [Protos]

A16z, Coinbase, and the Winklevoss twins say they’ve raised $78 million as part of a new push to influence the 2024 elections. [Politico]

Little-known fact: coiners can donate to the PAC in tethers. All they have to do is send them via an opaque Nevada trust structure to hide the origins of the funds. And this is perfectly legal! [FPPC, PDF, p. 85, “nonmonetary items”]

Ahead of the SEC’s deadline to rule on a bitcoin ETF, Barry Silbert, CEO of Digital Currency, has quietly stepped down from the board of DCG subsidiary and ETF applicant Grayscale and is no longer chairman, according to a recent SEC filing. Silbert will be replaced by Mark Shifke, the current DCG senior vice president of operations. US regulators are suing DCG over the Gemini Earn program co-run by its subsidiary Genesis. [Form 8-K]

Ordinals are an exciting new way to create NFTs on bitcoin! ’Cos who doesn’t want that? The bitcoin blockchain immediately clogged when it was actually used for stuff. Now TON, the blockchain that is totally not Telegram’s, no, no no, has ordinals — and it’s getting clogged too. [The Block]

Image: Mark Karpeles with aggrieved bitcoin trader outside Mt. Gox in Tokyo in 2014.

Posted on December 28, 2023December 28, 2023 by Amy Castor 1

Crypto collapse: SEC brings regulatory clarity to Kraken and Celsius, stablecoins for the UK, crypto money laundering

By Amy Castor and David Gerard

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Most of the deliberation time was spent saying “Wow, that was a lot of crime” “Just so much crime” “Maybe too much crime”
— Allistair Hutton

Regulatory clarity for Kraken

The crypto industry demands regulatory clarity! So the SEC keeps stating the regulations as clearly as it possibly can. Isn’t that nice of them? On November 20, the SEC sued the Kraken crypto exchange.

The causes of action are very similar to those against Coinbase and Bittrex. Kraken deals in crypto securities and acts as an exchange, a broker, a dealer, and a clearing agency, all in the same company and without the proper registrations for each. The particular crypto securities in this case are ADA, ALGO, ATOM, FIL, FLOW, ICP, MANA, MATIC, NEAR, OMG, and SOL.

The SEC also alleges Kraken commingled customer assets with its operating accounts. Kraken’s own auditors said this created “a significant risk of loss” to customers and led to “material errors to Kraken’s financial statements for 2020 and 2021.”

The message the SEC is sending in this series of cases is that it just isn’t going to put up with crypto exchanges doing all the securities jobs in one company anymore, and they need to stop. [SEC press release; complaint, PDF]

The Financial Stability Board, which monitors the global financial system, thinks what the SEC is doing is very good and cool. Its new report “The Financial Stability Implications of Multifunction Crypto-asset Intermediaries” sets out precisely how and why crypto exchanges combining all these functions (an exchange, a broker, a dealer, and a clearing agency) “can exacerbate structural vulnerabilities in those markets.” It uses precisely what happened in the crypto collapse as its example. Risk to the actual economy is limited, says the FSB — though the biggest issue is how the exchanges wrecked the few banks willing to talk to them. [Press release; cover sheet; report, PDF]

It’s not just the SEC cracking down on crypto. The US government is generally sick of crypto nonsense and looking to shut it down. This is what we’ve spent the past year and a half advocating for as loudly as we possibly could.

IOSCO, the International Organization of Securities Commissions, released its final policy recommendations to securities regulators on crypto. In short: regulate the heck out of this stuff for what it clearly is — and don’t accept handwaving about technology. IOSCO will release a second part on DeFi before the end of 2023. [Press release; recommendations, PDF]

SEC trashes Celsius bankruptcy plan

Judge Martin Glenn approved the Celsius NewCo plan on November 9, giving creditors fresh hope that all the nonsense they’d been trudging through since July 2022, when Celsius initially filed for Chapter 11, was finally coming to an end. But it was not to be.

The original plan was that NewCo would be managed by Fahrenheit LLC, which won the bidding for Celsius’ assets in May. This business would focus on bitcoin mining and ether staking. [Doc 3972, PDF]

Creditors would get shares in NewCo, which would trade on NASDAQ. NewCo could issue shares without registration — under an exemption in the bankruptcy code that would allow it to do the initial issuance without filing an S-1 form with the SEC. Creditors would also get back $2 billion in crypto in January 2024.

But within hours of the court approving the deal, it fell afoul of the SEC — who would not approve the staking and lending portion of the business. [CoinDesk]

The SEC also wanted more details on the company’s assets and accounts for the “predecessor entity,” i.e., Celsius Networks. Unfortunately, Celsius’ pre-bankruptcy accounts are comical trash, somewhat documented in QuickBooks and some Google spreadsheets. This wasn’t quite good enough. [Doc 4050, PDF]

Celsius is now pivoting to “MiningCo,” a mining-only company with US Bitcoin as the manager and a board of directors. Fahrenheit members will not be part of the new entity.

Celsius’ lawyers argue that the “toggle” to mining-only is just fine, and they had this in their back pocket the entire time. Judge Glenn is not convinced: “This is not the deal that creditors voted on,” he said in a November 30 hearing. Celsius may have to seek a new creditor vote to get approval on the revised plan, putting them right back in the mud again. [Reuters, archive]

Blockchain Recovery Consortium (BRIC), who had been selected as a backup bidder in May if the Fahrenheit plan fell through, argued that Celsius should have gone with its backup bid, rather than pushing forward with this stripped-down “MiningCo” plan.

A hearing on this mess will take place on December 21.

If the MiningCo plan is not approved, Celsius may be forced to liquidate in Chapter 7.

If this new plan does go through, creditors should count the cash and liquid cryptos they get in the settlement as their actual return — and treat their MiningCo shares as lottery tickets.

My beautiful launderette

Spain has arrested Alejandro Cao de Benós, a long-time Western agent of North Korea and founder of the Korean Friendship Association, on behalf of the US, for working with Virgil Griffith. [Reuters]

Cao de Benós was indicted in April 2022, along with Christopher Emms, a UK citizen, for signing up Griffith to travel to North Korea in April 2019 to give a talk on crypto at the Pyongyang Blockchain and Cryptocurrency Conference, which the pair organized. Emms, a crypto entrepreneur, is still at large. [DOJ; FBI; FBI]

We’re guessing the US wants a long discussion with Cao de Benós concerning all of North Korea’s other money laundering as well.

The US is currently working to extradite Cao de Benós from Spain, a process that can take months.

In the US, FinCEN wants to declare crypto mixing to be primarily about money laundering, for no better reason than money laundering is precisely what crypto mixing is primarily about. [FinCEN; Federal Register]

Court to Coin Center over their spirited defense of Tornado Cash: LOL, go away. [Doc 74, PDF]

Following “requests from its wealthy customers,” Ferrari is looking to sell cars to ~~sanctioned Russians~~ (ahem) unspecified entities in a currency-substitute that they have to hand. [Reuters, archive]

Now that’s effective altruism

Sam Bankman-Fried is in a cell, where he belongs. [DOJ statement]

But there was much more to FTX than one crook — or five crooks if you count the guilty pleas of Sam’s former fellow executives. The use case for crypto is crime, and FTX was a money laundering machine. Jacob Silverman and Molly White discuss Sam’s many, many as-yet-unindicted co-conspirators. [The Nation; Molly White]

If you ever need a moment of cheer in your life, imagine how Alex Mashinsky, the criminally charged founder and former CEO of Celsius Network, feels seeing Sam be sent to jail in less than five hours. (The amount of time jurors deliberated.) Mashinsy’s trial is scheduled for September 2024.

Over in the FTX bankruptcy, John Jay Ray is suing the Bybit exchange to recover $953 million. Bybit had a private line into FTX and successfully withdrew $327 million in the run on the exchange just before FTX declared bankruptcy in November 2022. [Complaint, PDF]

Stablecoins for the UK

The more foolishly ambitious parts of the UK government are still talking up crypto. So the Financial Conduct Authority has a new discussion paper on fiat-backed stablecoins for “consumers who wish to pay for their everyday shopping with stablecoins” — a category that does not presently exist. [Discussion paper, PDF]

So far, the plan is to allow UK-issued asset-backed “regulated stablecoins” supervised by the FCA. Overseas-issued “approved stablecoins,” with a UK “payment arranger” taking local responsibility, will come later.

The FCA will be requiring consumer protections, consumer right of redemption, protections in case an issuer fails, coin value stability despite market conditions, and ways to “mitigate the risks and harms that we have observed in the market, and those that arise from existing business practices” — i.e., all the crime.

Anti-money-laundering requirements will apply only on redemption — not on every transaction.

This initiative is not about our friends at Tether or USDC — though the FCA uses them as cautionary tales, particularly with USDC breaking its peg when Silicon Valley Bank went down.

Instead, the FCA seems to be setting a path for non-banks to issue their own asset-backed pounds — a regulated form of wildcat banking, with crypto as the excuse to even contemplate doing this weird thing. Or a privatized CBDC, if you want to be generous. The listed examples don’t even really need a blockchain.

There is nothing a regulated GBP stablecoin would do for ordinary UK consumers that they can’t already do with debit cards. But the FCA says that prospective issuers are already in the wings. Our psychic powers suggest these may be Conservative Party donors, given the present government’s recent track record of blatant kleptocracy.

CoinDesk spoke to Matthew Long, the FCA’s director of payments and digital assets, who confirmed that their intent is not to let rubbish through: “We’ve seen lots of things that we’re really concerned about and at the end of the day, the person this actually affects is the customer.” [CoinDesk]

Submit comments by January 22, 2024.

Bitfinex suffers hardly any data leakage to speak of

The Bitfinex crypto exchange apparently suffered a completely trivial wafer-thin leak of almost no customer information at all sometime in October. They announced this complete non-news at 21:30 UTC on Saturday November 4. [Bitfinex, archive]

How bad do you think Bitfinex’s customer data spill was? Clearly so very insignificant — a mere trifle! — that they couldn’t get away with just saying nothing at all to the very large and important customers with short tempers.

We’re sure it’s fine. “Bitfinex has a very close relationship with law enforcement,” and maybe it’ll get much closer.

More good news for bitcoin

CoinDesk has been sold in an all-cash deal to Bullish, the crypto exchange backed by Peter Thiel via Block.One — and not to the Vessenes consortium that was sniffing around the site in August. Terms were not disclosed. CoinDesk will operate as a totally independent entity, for sure! Bullish says it will inject lots of capital. [Press release; WSJ, archive]

Binance is finally killing its BUSD stablecoin as of December 15, 2023. The remaining BUSD balances will be converted to the totally trustworthy stablecoin FDUSD on December 31. You can redeem BUSD directly at Paxos up to February 2024 — if you can pass their anti-money laundering. [Binance, archive]

Binance had previously been trying to switch to Justin Sun’s TrueUSD. But TrueUSD was having problems in July 2023 — such as billions of pseudo-dollars being minted out of thin air. It turns out TrueUSD was hacked. The company waited a month to announce the hack, giving themselves plenty of time to furiously mint more TUSD tokens and send them to Huobi. [Twitter, archive; Twitter, archive; Protos]

Bankrupt crypto lender BlockFi is winding down at last. Payouts will be between 39.4% and 100%! … so, 39.4%. [Reuters, archive]

Circle, the company behind the USDC stablecoin, reportedly wants to try going public again in 2024. Circle tried in 2021 to go public through a SPAC offering. But they failed to get SEC approval for the proposed merger with Concord Acquisition, and by early 2023 they had given up. [Bloomberg, archive; WSJ, paywalled]

OpenSea is laying off 50% of its staff, as all the air has been let out of the NFT balloon. When it laid off 20% of its employees last year, around 230 people remained. So now they’re down to about 100 employees. [Twitter, Nitter]

The trial of crypto trader and alleged exploiter of Mango Markets Avi Eisenberg has been delayed until April 8, 2024. Eisenberg’s lawyers say they need additional time to prepare for the case. He is currently residing at MDC Brooklyn, also the temporary home of Sam Bankman-Fried. [CoinDesk]

Alex de Vries (Digiconomist) has a new report out on bitcoin’s water usage. Each transaction on the bitcoin blockchain uses 16,000 liters of water on average, about 6.2 million times more than a credit card swipe — and enough to fill a backyard swimming pool. [Cell]

We also suggested that someone should become the Digiconomist of AI power usage. It turns out that guy is Digiconomist! De Vries’ article “The growing energy footprint of artificial intelligence” was published in Joule in October. [Joule]

When you buy a nice house, make sure the previous owner wasn’t a crypto Ponzi scammer. Basketball player Shai Gilgeous-Alexander bought a house in Toronto previously owned by Aiden Pleterski, the guy who was kidnapped and tortured over three days by an extremely upset investor inquiring as to where his funds had gotten to. Further aggrieved investors are still showing up at the house — and so Gilgeous-Alexander wants to reverse the sale. [NYT, archive]

Image: Kraken founder Jesse Powell in a random tie he found out on a road somewhere.

Posted on December 3, 2023December 3, 2023 by Amy Castor 2

Crypto collapse: Bankman-Fried trial draws to a close, SafeMoon arrested, fourth US bank failure was crypto

A new crypto collapse update is out! This one is on David’s blog. [David Gerard]

Sam’s trial is wrapping up. He took the stand, a terrible move, and predictably, prosecutors ate him alive. Now the jurors will decide on his guilt or innocence.

Elsewhere in crypto, Tether is making loans again, Celsius creditors still getting soaked, the proper regulator for crypto is the DOJ, and Twitter is going down the toilet.

Posted on November 2, 2023 by Amy Castor 0

New York vs DCG/Genesis and Gemini: Kids, kids, you’re both ugly

By Amy Castor and David Gerard
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If you like this article, please forward it to just one other person. Thank you!

The New York Attorney General is suing crypto investment fund Genesis, its parent company Digital Currency Group (DCG), and the Gemini crypto exchange for defrauding customers of Gemini’s Earn investment product. [Press release; complaint, PDF]

Earn put investors’ money into Genesis — where it evaporated.

The lawsuit also charges former Genesis CEO Soichiro (a.k.a. Michael) Moro and DCG founder and CEO Barry Silbert for trying to conceal $1.1 billion in crypto losses with an incredibly dubious promissory note.

New York is asking the court to stop all three companies’ business in “securities or commodities” in the state. That’s all but a death sentence — bitcoin is a commodity in the US.

The SEC was already suing both Gemini and Genesis over the Gemini Earn product because it looked an awful lot like a securities offering. Separately, Gemini sued DCG in July 2023 — and just last week, Gemini also sued Genesis to reclaim missing funds. [Adversary complaint, PDF]

What happened?

Three Arrows Capital (3AC) crashed on June 13, 2022, and blew a gaping hole in Genesis’ loan book. DCG scribbled an IOU to shuffle an imaginary $1.1 billion of value into Genesis reserves.

This financial styrofoam filler didn’t save Genesis, which ultimately halted all withdrawals on November 16, 2022, just days after FTX/Alameda declared bankruptcy. Genesis filed for chapter 11 bankruptcy on January 19, 2023.

The NYAG says that Genesis and Gemini defrauded more than 230,000 Earn investors of more than $1 billion total, including at least 29,000 New Yorkers. New York says that thousands more lost money because of DCG’s actions.

The NYAG claims that:

Genesis and Gemini lied to investors about Earn and Genesis’ credit-worthiness;
Genesis lied to Gemini that it was solvent;
DCG and Gemini lied to the public, including investors, about the promissory note;
Earn is an unregistered security under New York’s Martin Act.

This is a complaint we recommend you read. We all knew some of what went on between Genesis, DCG, and Gemini, but this suit goes into great detail about what happened behind the scenes.

This is a civil complaint, not a criminal indictment — but the NYAG describes several crimes being committed, particularly by DCG, Genesis, Moro, and Silbert.

How Earn worked

Gemini, owned by Tyler and Cameron Winklevoss, and Genesis Capital, a subsidiary of DCG, partnered to launch the Gemini Earn program in February 2021 — just as bitcoin’s number was going up really fast. Crypto was a hot product!

Gemini and Genesis marketed Earn to the public as a “high-yield investment program” — which is just coincidentally a common marketing term used by Ponzi schemes.

Earn promised to pay up to 8% yield. Ordinary investors could deposit their crypto via the Gemini exchange. You could get your money back anytime!

Earn was a pass-through fund to Genesis. Retailers put their crypto in Earn. Gemini then handed the funds off to Genesis, who then lent the money to institutional investors, notably crypto hedge fund 3AC in Singapore. Genesis was substantially a 3AC feeder fund — of which there were many.

When Earn investors wanted to withdraw their funds, Genesis had five days to return the principal and the interest, minus Gemini’s agent fee.

Gemini earned more than $22 million in agent fees for running Earn, plus more than $10 million in commissions when investors bought crypto on Gemini to put into Earn.

Paper thin

3AC was Genesis’ second largest borrower. 3AC had borrowed $1 billion of crypto at 8% to 15% interest, secured by $500 million of illiquid crypto tokens.

Genesis hadn’t received audited financial statements from 3AC since July 2020. But with interest rates like that, why worry — it’ll be fine, right?

It wasn’t fine. 3AC fell over on June 13, 2022, losing Genesis $1 billion. Babel Finance, another Genesis borrower, fell over on June 17, losing Genesis another $100 million — because in June 2022, everyone was falling over.

Genesis was $1.1 billion in the red — it didn’t have the funds to pay back Earn investors. Between mid-June and July 2022, Silbert and other DCG officers met with Genesis management to work out how to fill the hole in Genesis’ balance sheets — and what to tell counterparties such as Gemini.

One problem was that some of the collateral for 3AC’s loan was GBTC shares, issued by another DCG subsidiary, Grayscale — which Genesis couldn’t sell, due to restrictions on sales of stock by “affiliates” of the issuing company.

Silbert told the board of DCG that Genesis was anticipating a run on the bank if word got out. So DCG began casting about for financing. Silbert also suggested to the DCG board on June 14, 2022, that they “jettison” Genesis.

But DCG and Genesis decided instead to act like everything was fine. On June 15, Genesis told everyone its “business is operating normally.” Two days later, Genesis CEO Michael Moro posted in a tweet reviewed and edited by DCG: “We have shed the risk and moved on.” [Twitter, archive; Twitter, archive]

Everything was not fine. The 3AC hole meant that Genesis’ loss exceeded its total equity, and Genesis couldn’t pay out Earn investors. Genesis hadn’t “shed the risk and moved on” — it still had the gaping hole in its balance sheet. It was not “operating normally” — it was floundering in a panic.

Genesis was unable to find anyone to lend them the money they needed, so they had to find a way to paper the hole before the end of the quarter.

The solution: DCG would make a loan from its right pocket to its left pocket and count the loan as an asset.

(When Tether and Bitfinex tried to pull the exact same trick a few years earlier, the NYAG fined them $18.5 million and kicked them out of the state.)

So on June 30 — the last day of Q2 2022 — DCG gave its wholly-owned subsidiary Genesis a promissory note for $1.1 billion. DCG would pay it back in ten years at 1% interest.

Both Silbert and Moro signed off on the IOU. The note was, of course, not secured by anything.

DCG never sent Genesis a penny — the note was only ever meant to be a $1.1 billion accounting entry so that Genesis and DCG could tell the world that Genesis was “well-capitalized” and that DCG had “absorbed the losses” and “assumed certain liabilities of Genesis.”

None of this was true. DCG wasn’t obligated to pay anything on the note for 10 years. And Genesis was still out $1.1 billion of actual funds.

Michael Patchen, Genesis’ newly appointed chief risk officer, said in internal documents that the promissory note “wreaks havoc on our balance sheet impacting everything we do.”

Genesis directed staff not to disclose the promissory note to Genesis’ creditors, such as Gemini. Many Genesis staff didn’t even know about the promissory note until months later.

DCG’s piggy bank

DCG made Genesis’ problems even worse by treating Genesis like its own personal piggy bank.

In early 2022, DCG “borrowed” more than $800 million from Genesis in four separate loans. When $100 million of this came due in July, DCG forced Genesis to extend the maturity date — and DCG still hasn’t paid a penny of it to date.

A DCG executive told a Genesis managing director on July 25, 2022, that DCG “literally [did not] have the money right now” to repay the loan. Genesis had no choice — the managing director replied: “it sounds like we don’t have much room to push back, so we will do what DCG needs us to do.” DCG also dictated the interest rate for this loan.

Around June 18, 2022, DCG borrowed 18,697 BTC (worth $355 million at the time) from Genesis. It partially paid this back on November 10, 2022 — with $250 million worth of GBTC! — but this still left Genesis with no cash to pay back its own creditors. And it still couldn’t liquidate the GBTC.

It’s hard to consider the deals between Genesis, DCG, and Grayscale as anything like arm’s length — it was a single conglomerate’s internal paper-shuffling.

On November 2, CoinDesk reported that FTX, one of the largest crypto exchanges, was inflating its balance sheet with worthless FTT tokens. The report brought FTX tumbling down, and FTX filed for bankruptcy on November 11, 2022.

Around November 12, 2022, Genesis sought an emergency loan of $750 million to $1 billion from a third party due to a “liquidity crunch.” Its efforts were unsuccessful. On November 16, Genesis halted redemptions.

If you owe Gemini a billion dollars, then Gemini has a problem

Gemini Earn investors were supposed to be able to get their funds back at any time. This meant that those funds had to be highly liquid. Gemini told investors it was monitoring the financial situation at Genesis.

Gemini absolutely failed to do this. They lied to investors, and they hid material information.

Gemini got regular financial reports from Genesis. Gemini’s internal risk analyses showed that Genesis’ loan book was undercollateralized for Earn’s entire operating existence. But Gemini told Earn customers that Genesis had more than enough money to cover their loans.

Starting in 2021, Genesis’ financial situation went from bad to worse. In February 2022, after analyzing Genesis’ Q3 2021 financials, Gemini internally rated Genesis capital as CCC-grade — speculative junk — with a high chance of default.

Gemini also found out that Genesis had a massive loan to Alameda — secured by FTT tokens! The same illiquid FTX internal supermarket loyalty card points that were discovered by Ian Allison at CoinDesk to make up about one-third of Alameda’s alleged reserves.

Even after Genesis recalled $2 billion in loans from Alameda, the crypto lender was still full of loans to affiliates, including its own parent company DCG.

In June 2022, the crypto markets crashed and burned. But Gemini continued to reassure investors that it was safe to feed money to Genesis via Earn.

This was apparently fine when it came to someone else’s money, but according to the complaint:

During this same period, Gemini risk management personnel withdrew their own investments from Earn. A Gemini Senior Risk Associate working on Earn withdrew his entire remaining Earn investment — totaling over $4,000 — between June 26, 2022, and September 5, 2022.

Likewise, Gemini’s Chief Operations Officer [Noah Perlman], who also sat on Gemini’s Enterprise Risk Management Committee, withdrew his entire remaining Earn investment — totaling more than $100,000 — on June 16 and June 17, 2022.

This was when DCG tried to paper over the hole in Genesis’ balance sheet with a $1.1 billion IOU.

Gemini realized things weren’t good at Genesis, but it’s not clear that they realized how bad they were — not helped by Genesis lying to Gemini about their true condition.

From June to November 2022, Genesis would send Gemini false statements on their financial condition — for instance, saying that the DCG promissory note could be converted to actual cash within a year, when in fact, it was a 10-year note.

Gemini didn’t tell investors that Genesis was in trouble. Instead, they thought they’d “educate clients on the potential losses” and “properly set clients’ expectations.”

When the Gemini board was advised of Genesis’ financial state in July 2022, one board member compared Genesis debt-to-equity ratio to Lehman Brothers before it collapsed.

Gemini tried and failed to extricate itself from Genesis. They just could not get the funds back. But they knew that Genesis operated as a closely controlled sockpuppet of DCG, and they wanted Silbert to make good on Genesis’ debt.

As things at Genesis got worse, Gemini worked out how to break the news to Earn creditors.

On September 2, 2022, Gemini finally decided to terminate Earn. On October 13, Genesis formally terminated the Earn agreements and demanded the return of all investor funds.

On October 20, 2022, Silbert met with Cameron Winklevoss of Gemini. Silbert said that Gemini was Genesis’ largest and most important source of capital — meaning that Genesis could not redeem Earn investors’ funds without Genesis declaring bankruptcy.

Gemini quietly granted Genesis multiple extensions to return investor funds.

On October 28, 2022, Silbert finally let Genesis tell Gemini the true terms of the promissory note — just two weeks before Gemini cut off withdrawals.

For some reason neither we nor the NYAG can fathom, Gemini cointinued to take investors’ money and put it into Earn right up to the end!

Customer service

Gemini didn’t do anything so upsetting for Earn investors as to tell them about Genesis’ unfortunate condition — even as Gemini’s own staff closed out their positions in Earn.

One customer wrote to Gemini on June 16, 2022, three days after 3AC collapsed, asking if any of their funds were with 3AC. Gemini didn’t answer the question, but replied with vague reassurances about Genesis’ trustworthiness.

Another wrote on June 27, 2022: “with other exchanges like Celsius and Blockfi I am concerned about Gemini. Does Gemini have any similar vulnerabilities? … liquidity vulnerabilities? … risky investments/loans that would risk my assets or cause Gemini to halt withdrawals?”

Gemini responded: “Gemini is partnering with accredited third party borrowers including Genesis, who are vetted through a risk management framework which reviews our partners’ collateralization management process.”

This investor was sufficiently reassured to send in another $1,000.

A third customer wrote on July 24, 2022, asking specifically if Gemini was involved in any of the “drama” around 3AC and if it impacted Earn. Gemini said they weren’t involved in anything regarding 3AC — even as the 3AC crash had in fact blown out Earn.

The consequences

The NYAG is asking the court that all three companies be permanently banned from dealing in “securities or commodities” in New York — e.g., bitcoin.

Some of the press coverage noted this provision — but didn’t notice that it would be a near death sentence for a crypto business. DCG’s profitable Grayscale business would have to leave New York or be sold off. Gemini would be kicked out of the state.

New York is also seeking restitution for the victims and disgorgement of ill-gotten gains.

Also, they all get fined $2,000 each. It’s possible that bit of the General Business Law could do with an update.

Posted on October 30, 2023October 30, 2023 by Amy Castor 0

The beautiful mind of Sam Bankman-Fried

Here’s our latest, just before Sam gets up to destroy his life even further. He is testifying in his own defense in his criminal trial today, something his lawyers have likely strongly advised against. But Sam just can’t shut up. What makes him so reckless? Join us, as we take a deep look inside the mind of Sam and uncover what makes him tick. This one is on David’s blog. [David Gerard]

Posted on October 26, 2023 by Amy Castor 0

Crypto collapse: The Fed takes on crypto banks, Coinbase earnings call is bad, FTX 2: Ex Harder

Our latest news!

In this week’s edition:

* New Federal Reserve regulations on banks dealing in crypto

* The TassatPay networks — Signet returned

* Coinbase earnings call — crypto trading is dead

* Sam Bankman-Fried’s bail is in danger

* FTX may restart as a new crypto exchange

Posted on August 14, 2023 by Amy Castor 0

John Jay Ray sues FTX inner circle for $1 billion, prosecutors want Sam Bankman-Fried’s bail revoked

We just posted an update on the latest happenings with FTX. This one is on David’s blog. [David Gerard]

In recent months, John Jay Ray III and his team have filed a pile of more actions to claw back funds for FTX creditors.

Ray is suing the FTX inner circle for $1 billion in fraudulent transfers. Among their bizarre plans, SBF and the gang wanted to turn the Island of Nauru into a doomsday bunker for effective altruists.

In other news, FTX and Genesis are settling, several media outlets are still battling to keep the court from permanently sealing FTX’s creditor list, and it’s looking like Sam is about to have his bail revoked. The prosecution is fed up with his efforts to “taint the jury pool.” Leaking Caroline’s diary to NYT reporters was the last straw for them.

Image: Caroline Ellison, Sam Bankman–Fried, Nishad Singh, and Gary Wang

Posted on July 30, 2023July 30, 2023 by Amy Castor 0

Crypto collapse: Venture capital goes home, Coinbase, Tether backing, FTX sues Hollywood VCs, 3AC on the beach

By Amy Castor and David Gerard

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“My survey of three card monte tables suggests they’ve always got at least one patron but you won’t see anyone playing at the big casinos which just shows the system is rigged.”
— crossestman

Crypto’s not dead! Look, it’s still twitching

Crypto venture capital investments have gone full crypto collapse, from $21.6 billion in 2022 to just $0.5 billion so far in 2023. This Fortune article includes the funniest graph of the week: [Fortune, archive]

Investors are leaving the crypto sector without any plans to return. [Bloomberg]

Crypto trading is at its lowest level since October 2020. The Block puts the volume for May 2023 at $424 billion. For comparison, May 2021 was $4.25 trillion and May 2022 was $1.4 trillion. [The Block]

Volume numbers are considerably less if you take into account that unregulated crypto exchanges are known for faking their volumes. Crypto trading is all but dead. We know this because exchanges run by normal finance guys don’t see any trading. [Bloomberg]

Traditional finance groups want to start their own crypto exchanges run in a non-clown-shoes manner. A nice ambition — but that was Gemini’s pitch and even they still had to resort to risky garbage. [FT]

The Winklevoss twins marketed Gemini as an exchange that played by the rules — one that serious money people could trust. But after the failure of FTX and the Genesis bankruptcy — in which Gemini is the largest creditor — they lost that trust. Maybe they could pivot to AI? [Bloomberg]

Crypto.com halted services for institutional traders in the US on June 21. The exchange cited “limited demand” as the reason. [news.bitcoin.com]

The rest of crypto is also desperate. Reddit founder Alexis Ohanian is still pushing play-to-earn games and touts Axie Infinity as a huge success. Gamers hate play-to-earn and think it’s vacuous horse hockey. [Twitter, archive]

Universe.xyz is the latest NFT market to shut down, taking all the images on the site with it. As more NFT markets shut down, your apes are in danger of going blank forever. [Twitter, archive]

TechMonitor asks: “Is crypto finally dead?” We should be so lucky. With quotes from David. [TechMonitor]

Coinbase: We didn’t do it, nobody saw us, and it wasn’t even a thing

Coinbase has responded to the SEC’s complaint with 177 pages of chaff. [Doc 22, PDF]

Paragraph 2 makes the claim that in approving Coinbase’s original S-1, the SEC approved Coinbase’s business. Let’s quote again this line from the S-1, signed off by Brian Armstrong: [SEC]

Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

Coinbase argues that Congress is looking into cryptos, therefore existing laws don’t matter. Paul Grewal, Coinbase’s general counsel, has told Bloomberg how Coinbase’s big hope is that new laws will save their backsides. This is correct — Rep McHenry’s new crypto markets bill is indeed Coinbase’s only hope. [Bloomberg]

Coinbase claims that with this complaint, the SEC is working well outside its remit and that its ideas about whether crypto tokens are securities are entirely novel. Never mind the SEC’s repeated wins in court whenever a crypto issuer is dumb enough to take the matter that far. [Doc 23, PDF; CoinDesk]

Earlier, Coinbase filed a writ of mandamus demanding that the SEC consider its proposal for new crypto regulations. The SEC says it’ll have something to report within 120 days. Judge Cheryl Ann Krause expects a decision on Coinbase’s proposal from the regulator by October 11. [Doc 30, PDF; Doc 32, PDF]

Tether: Yes! We have no Chinese commercial paper

CoinDesk finally got access to documents from the New York Attorney General related to Tether’s reserves from March 31, 2021. [CoinDesk; CoinDesk, PDF; CoinDesk, PDF; CoinDesk, PDF; CoinDesk, PDF; Bloomberg]

The NYAG claimed that Tether had been lying about its reserves — which it had been. Tether and Bitfinex settled with New York for $18.5 million in February 2021.

The settlement required Tether to publish a breakdown of its reserves quarterly for two years. But what the public got to see in May 2021 were two skimpy pie charts, showing where Tether had parked its alleged $41 billion in backing reserves at the time. [Tether, archive]

CoinDesk then filed a Freedom of Information request for the fully detailed version of Tether’s report to the NYAG on its reserves.

Tether fought the release of the documents for two years. In February, they lost in court and decided not to go ahead with an appeal. So the NYAG sent Coindesk the documents on June 15. New York also sent the same documents to Bloomberg and Decrypt.

In June and July 2022, Tether vigorously denied that it held money in Chinese commercial paper — loans to Chinese companies which most money market funds avoid. It also said in September 2021 that it had no debt or securities linked to Evergrande, a cash-strapped Chinese real estate company. [Tether, 2022; Tether, 2022; CoinDesk, 2021]

Bloomberg called out Tether’s wider claims of no involvement in Chinese commercial paper as nonsense. [Bloomberg, 2021]

It turns out that Tether did hold Chinese commercial paper in 2021, and quite a lot of it. It held securities issued from banks around the world — but mainly China, including debt issued by the Industrial & Commercial Bank of China, China Construction Bank, and Agricultural Bank of China. ChainArgos took a close look at the funds and put together a spreadsheet. [Google Docs]

The Tether press releases on the FOIed docs are a hoot. Lots of table pounding. [Tether, archive; Tether, archive]

We give CoinDesk a bit of stick from time to time. But we also read the site every day and follow the livewire feed. They get all the credit for doggedly pursuing this one.

FTX versus the venture capitalists to the stars

John Jay Ray’s team at FTX seems to have found some more truly fascinating documents. FTX is suing venture capital firm K5 Global, its managers, Michael Kives and Bryan Baum, and various related entities to recover the $700 million that Sam Bankman-Fried put into the firm.

Kives worked at Creative Artists Agency from 2003 to 2018 as a Hollywood talent agent. He left in 2018 to found K5.

In February 2022, SBF attended a dinner party at Kives’ house, with A-list celebrities, billionaires, and politicians. He was deeply impressed with Kives’ “infinite connections” and even contemplated that Kives could work with FTX on “electoral politics.”

Less than three weeks later, SBF signed a “term sheet” agreeing to give Kives and Baum $125 million each personally and to invest billions of dollars into K5 over three years:

The Term Sheet was little more than a cursory list of investment ideas, and repeatedly stated that the actual “mechanics” of these very substantial investments would be later worked out “in the long form documents.”

SBF wired $300 million to K5 the next day. No due diligence was done on any of the deals — including $214.5 million for a 38% stake in MBK Capital LP Series T, whose gross asset value was just $2.94 million as of March 2022.

K5 were very close advisors. Kives and Baum joined FTX’s internal Slack chat. SBF reserved a room for them in his Bahamas luxury apartment. In May, Alameda transferred another $200 million to K5.

Sam didn’t worry too much about the fine details. In an August 2022 internal document, he wrote that “Bryan is ~100% aligned with FTX,” that “FTX is aligned with Bryan too,” and that “if there are significant artificial up-downs between FTX and K5 as entities, I’m happy to just true it up with cash estimates.”

SBF wrote that he was:

… aligned with Bryan and K5, and treats $1 to it as $1 to FTX even though we only own 33%, because whatever, we can always true up cash if needed, but also, who cares … There are logistical, PR, regulatory, etc reasons to not just merge K5 100% into FTX but I and Bryan will both act how we would if they were merged.

… Is Bryan an FTX employee, or a random 3rd party? The answer, really, is neither. The answer is that it’s sorta complicated and liminal and unclear. Bryan lives in the uncanny valley.

FTX and Alameda employees flagged K5’s “pretty bizarre” expenses at the time, such as “over $777k in design expenses” that had been billed to Alameda.

FTX wants the $700 million back as having been avoidable transfers. It may want even more money, as Ray’s team suspects that more interesting details will come out in discovery. FTX also wants K5’s claims in the bankruptcy disallowed until this matter is resolved. [Adversary Case, PDF]

More news from Chapter 11

Cameron Winklevoss tweeted yet another open letter to Barry Silbert of Digital Currency Group on July 4, demanding back Gemini Earn customers’ money. Winklevoss accuses DCG of “fraudulent behavior” and wants them to do the “right thing” and hand over $1.465 billion of dollars, bitcoin, and ether. If Silbert doesn’t pay up, Winklevoss threatens to sue on Friday, July 7. CoinDesk, which is owned by DCG, couldn’t get a comment from their own proprietor on the story. [Twitter, archive; CoinDesk]

After the deal for Binance.US to buy Voyager Digital fell through, Voyager gave up trying to sell itself and is liquidating. Here’s the liquidation notice. [Doc 1459, PDF]

Celsius is finally converting its altcoins to BTC and ETH as it pursues its plan to relaunch with the auction-winning consortium Fahrenheit. [CoinDesk]

If you have vastly too much time on your hands, here’s the full Celsius Network auction transcript — all 256 pages of it. [Doc 2748, PDF]

Customers of the bankrupt US branch of the Bittrex crypto exchange — which is being sued by the SEC — can withdraw those holdings that are clearly theirs … whatever that means. [CoinDesk]

Three Arrows Capital: What Su and Kyle did next

Crypto was taken out in 2022 by a one-two punch of Terra-Luna collapsing in May and then crypto hedge fund Three Arrows Capital collapsing in June.

Other crypto firms had invested in Terra-Luna and 3AC because they paid the highest interest rates! Now, you might think that investment firms would know that high interest means high risk.

3AC’s two founders, Su Zhu and Kyle Davies, just shut their office door in Singapore in late May 2022 and skipped the country, leaving their staff to tell investors the bad news.

What did Zhu and Davies do next? They spent the summer traveling around Asia, went surfing, and played video games. Davies is currently in Dubai and Zhu is back living in Singapore. [NYT]

Zhu and Davies insist they must have done nothing wrong because no government has filed charges yet. Uh huh.

3AC’s creditors think Zhu and Davies have done one or two things wrong. Teneo, the liquidator trying to clean up the 3AC mess, wants the pair fined $10,000 a day for contempt, saying that Davies has failed to respond to a subpoena. [CoinDesk]

The pair are suing Mike Dudas, the original founder of crypto media outlet The Block, for defamation. In the US, LOL. They allege Dudas said nasty things about their new crypto venture OPNX, though the suit doesn’t say what allegedly defamatory claims Dudas made. We expect the 3AC boys to have some trouble demonstrating they have a reputation to malign. Stephen Palley is representing Dudas. [CoinDesk]

Regulatory clarity

In the UK, the Financial Services and Markets Bill has passed. One part of this gives the Treasury greater powers to regulate crypto, likely via the Financial Conduct Authority. We should expect more detailed regulations within a year. [CoinDesk]

This comes not before time. UK losses to crypto fraud increased more than 40% to surpass £300 million (USD$373 million), according to Action Fraud, the national reporting center for fraud and cybercrime. [FT]

Europe’s MiCA is now law from the end of June 2023. It goes into application in one year for stablecoins and in 18 months for general crypto assets and virtual asset service providers. [EUR-Lex]

The European Central Bank keeps talking about doing a CBDC. This is good news for crypto! Or maybe it isn’t: [ECB]

Policymakers should be wary of supporting an industry that has so far produced no societal benefits and is increasingly trying to integrate into the traditional financial system, both to acquire legitimacy as part of that system and to piggyback on it.

The CFTC Division of Clearing and Risk sent out a staff advisory to registered derivatives clearing organizations on May 30, reminding them of the risks associated with expanding the scope of their activities. It specifically addressed crypto. [CFTC]

When the CFTC points out that market shenanigans are illegal in crypto just like they are in regular commodities, keep in mind that Avi Eisenberg is finally going to trial for allegedly committing those precise market shenanigans in DeFi. These are real go-to-jail crimes. [Bloomberg; Schedule, PDF; Case docket]

The Thailand SEC has banned crypto lending that pays returns to investors. It now also requires crypto trading firms to post the following warning: “Cryptocurrencies are high risk. Please study and understand the risks of cryptocurrencies thoroughly. because you may lose the entire amount invested.” [SEC Thailand, in Thai]

New York has settled with CoinEx after suing them in February for failing to register as a securities exchange. The company has to stop operating in the US — not just New York — return $1.1 million to investors, and pay $600,000 in penalties. [NYAG; Stipulation and consent, PDF]

The ETF trick will surely work this time

Guys, guys, the Blackrock and Fidelity bitcoin ETFs will change everything! They’re going to get surveillance of trading and market data from somewhere! This will surely answer all of the SEC’s previous objections to bitcoin ETFs! The market will be delighted!

… oh. The SEC has found these applications inadequate. [WSJ]

Blackrock and Fidelity are going to try again with Coinbase as the exchange supplying market surveillance. [CoinDesk]

But the trouble with monitoring at Coinbase is that Coinbase isn’t where the market is — the bitcoin market is at Binance. That’s where price discovery happens.

We expect these ETF applications to go no further than all the previous bitcoin ETF applications.

The good news for bitcoin continues its monotonous patter

Binance senior staff have been jumping ship. General counsel Han Ng, chief strategy officer Patrick Hillmann, and SVP for compliance Steven Christie all resigned this week. They specifically left over CZ’s response to the ongoing Department of Justice investigation. [Fortune]

Binance.US’s market share has dropped to 1%, down from a record 27% in April. Is Binance giving up on its US exchange? The market share nose-dived after the SEC sued Binance in June. [WSJ]

Fortune favors the internal trading desk: Crypto.com has been caught trading directly against its own customers. Dirty Bubble spotted the job ads for a proprietary trading desk at the firm in November 2022, of course. [FT, archive; Twitter, archive]

Russia is giving up on the idea of a unified state-run crypto exchange. Instead, it’s focusing on regulation for multiple exchanges. Russia is continuing to promote crypto as a way to evade sanctions for making international payments. When you’ve devastated your economy by embarking upon a very stupid war, that’s … a strategy? [Izvestia, Russian]

In crypto collapse news from the distant past, something’s happened in Quadriga! The government of British Columbia is seeking forfeiture of $600,000 in cash, gold bars, and Rolex watches that QuadrigaCX cofounder Michael Patryn has in a safe deposit box. The RCMP alleges the items are the proceeds of unlawful activity. [Vancouver Sun]

Posted on July 6, 2023July 7, 2023 by Amy Castor 0

FTX: John Jay Ray files second interim report, sues Daniel Friedberg

By Amy Castor and David Gerard

ONE WEIRD TRICK they don’t want you to know: Send us money! Here’s Amy’s Patreon, and here’s David’s. Sign up today!
Our patrons can also get a couple of “Bitcoin: It Can’t Be That Stupid” stickers just by messaging one of us and asking.
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Me: [turning to guy at gas station] so the polycule was mostly in the dark about the fraud. SBF had back door access
Guy: [pulling out taser from under seat] is that right
— Ed Zitron

“Attorney-1” was a bad boy

John Jay Ray III, the CEO of FTX in bankruptcy, has released a second interim report detailing how FTX skirted bank secrecy laws and commingled funds — and how an FTX lawyer, “Attorney-1,” served as Sam Bankman-Fried’s fix-it and hatchet man. [Report, PDF]

(We covered the first interim report, which came out in April, here.)

“Attorney-1” is very obviously Daniel Friedberg, who was FTX’s compliance officer and Alameda’s general counsel. A day after Ray released the interim report, FTX filed suit against Friedberg, alleging malfeasance in the course of his duties. The complaint details many of the same incidents in the report. [WSJ; redacted complaint, PDF]

In 2008, Friedberg was a colleague of Stuart Hoegner at Ultimate Bet, where the pair helped cover up a multi-million-dollar scandal in which the site cheated its players. Hoegner now works for Tether, a dubious stablecoin issuer.

SBF hiring Friedberg should have been the first clue that FTX.com was a massive fraud.

Friedberg resigned around the time the FTX Group filed for bankruptcy. Weeks later, he met with the FBI, the DOJ, and the SEC and told them he wanted to cooperate with any investigations.

There’s an interesting line in the interim report:

The Debtors have identified on Attorney-1’s hard drive a final copy of the false written testimony that Bankman-Fried provided to Congress.

FTX has access to the hard drive from Friedberg’s computer. Did Friedberg just leave the evidence behind when he quit FTX? Or did he willingly hand over his laptop to FBI agents? This hard drive seems to have had all sorts of interesting documents on it.

Friedberg hasn’t been charged with any crimes as yet — but based on Ray’s report and the ensuing lawsuit, we wouldn’t be surprised if there’s a sealed indictment out there waiting for him.

Following the money

FTX owes $8.7 billion in customer funds — over $6.4 billion of which is cash and stablecoins. According to Ray, Friedberg lent a helping hand when FTX executives “used commingled customer and corporate funds for speculative trading, venture investments, and the purchase of luxury properties, as well as for political and other donations designed to enhance their own power and influence.”

Ray details what he found about various FTX accounts and the flows of cash in and out of them. Tracking money flows was “extraordinarily challenging”:

… from the inception of the FTX.com exchange, the FTX Group commingled customer deposits and corporate funds, and misused them with abandon … Commingling and misuse occurred at their direction, and by their design.

Ray and his team have recovered $7 billion in “liquid assets” so far, which is astounding — though we’re not sure how liquid the crypto component of that will be in practice, or how much is unsaleable FTT tokens.

The report does not include FTX in Japan, Cyprus, or Singapore — areas where funds were properly segregated by law. It also does not address FTX.US, which Ray says is still under investigation.

No, no, it’s research

FTX lied to banks — a lot. Alameda Research had “research” in its name so that it could get bank accounts without immediately being flagged for enhanced due diligence as a money services business. FTX couldn’t get banking, so they used Alameda bank accounts to receive customer cash, right from the start.

But banks started asking inconvenient questions. When “Bank-1” — likely either Signature or Silvergate — asked why FTX was sending money to Alameda, an Alameda employee told them that “customers occasionally confuse FTX and Alameda” but that all wires through the account were to settle trades with Alameda.

This was false. In just 2020, one of Alameda’s accounts received more than $250 million in deposits from FTX customers and more than $4 billion from other Alameda accounts that were funded in part by customer deposits, says the report.

When banks started rejecting wires to Alameda accounts, FTX set up North Dimension so it could continue to funnel money to FTX. Friedberg and SBF told “Bank-1” that North Dimension was a crypto trading firm with substantial operations. In fact, it was an empty shell with no employees or operations.

Friedberg also engaged his old law firm to create a fake corporate register for North Dimension for the bank: “Specifically, after Bank-1 asked for a copy of the register, Attorney-1 directed a law firm to create a register.”

Time travel by document

In 2021, FTX Trading Ltd was planning to go public. As part of the paperwork for that, it needed an audited financial statement.

The problem was that from April 2019 when FTX.com first launched until the end of August 2020, FTX.com customers had been sending cash deposits to Alameda bank accounts. FTX needed to cover up the fact that they were just using Alameda to move customer and company funds around without any agreement to do so.

So in January 2021, Friedberg had his old law firm draft a “cash management agreement” to explain why Alameda held FTX cash. Friedberg created from this a fake “Payment Agent Agreement.”

FTX usually signed documents with DocuSign to provide an electronic record. In this case, to avoid a DocuSign timestamp, SBF wet-signed the document on behalf of Alameda and FTX on April 16, 2021 — backdated to 2019 “for the sole purpose of providing it to an external auditor.”

How did Ray’s team know the document was backdated? They found the original document file on Friedberg’s hard drive:

While metadata reflects that Attorney-1 created the Payment Agent Agreement on April 12, 2021, and that the executed version was last modified on April 16, 2021, the agreement purports to have an “Effective Date” of June 1, 2019 —nearly two years earlier.

The IPO never happened — but the fake document did help the FTX companies get more funding from “potential investors in connection with its $400 million Series C financing that closed in January 2022.”

Sam the philanthropist

SBF was famous for his Effective Altruism. He used FTX funds by preference:

The Debtors have been able to identify certain transactions that appear clearly to have been funded in part with commingled customer deposits. These include political and “charitable” donations, venture investments and acquisitions, and the purchase of luxury real estate for senior FTX Group employees in the Bahamas.

Sam’s charitable donations got a bit esoteric. The FTX Foundation gave one guy $300,000 to “Write a book about how to figure out what humans’ utility function is” — a question that LessWrong rationalist philosophy needs to answer so as to construct the perfect superintelligence to rule over us all. And that hopefully won’t turn out to be Roko’s basilisk. [LessWrong, PDF, 2004]

The Foundation gave someone else $400,000 to make YouTube videos to promote LessWrong rationalism and Effective Altruism.

Closer to home, the Foundation gave $20 million to the Guarding Against Pandemics PAC, which was run by Sam’s younger brother Gabe Bankman-Fried.

FTX sues Friedberg

Friedberg’s malfeasance was egregious enough that FTX is suing him for “damages caused by breaches of fiduciary duties, legal malpractice, and other wrongdoing, and to recover fraudulent transfers.”

The suit also alleges Friedberg paid off whistleblowers rather than deal with the compliance issues they raised.

Friedberg worked at FTX from 2017 until its collapse in 2022, the last 22 months of that as general counsel at Alameda and chief compliance officer at FTX. Joe Bankman, SBF’s father, pushed Sam to hire Friedberg and keep him “in the loop … so we have one person on top of everything.”

FTX paid Friedberg millions of dollars in salary and bonuses, and tens of millions in crypto — a $300,000 salary at FTX.US, a $1.4 million signing bonus, an 8% equity stake in FTX.US, and a $3 million payment from Alameda.

Plaintiffs want compensatory damages to be determined at trial, disgorgement of all of Friedberg’s compensation including the cryptos, punitive damages, and attorney’s fees.

Chief noncompliance officer

Friedberg’s putative job as chief compliance officer was to make sure the proper checks and balances were in place to prevent fraud, commingling of funds, and other wrongdoings. Per the complaint, he didn’t do any of that. Instead, “Friedberg actively participated in and facilitated such misconduct.”

Money was funneled to FTX insiders and booked as “personal loans” — which were never repaid, and which there was never any serious discussion of paying — “despite Friedberg’s false statement to the outside accountants that interest was paid quarterly on the loans.” Friedberg was involved in more than $2 billion in such “loans.”

Friedberg also encouraged the use of Signal for corporate messaging, preferably set to make messages disappear.

Ray is still appalled at how bad FTX’s accounting was:

Those entities that did produce financial statements used QuickBooks, Google documents, Slack communications, Excel spreadsheets, and other inadequate means for measuring the level of assets and liabilities held by the FTX Group. Entries in QuickBooks were often made months after transactions occurred, rendering real-time financial reporting and risk management impossible.

Hush money

Friedberg served as SBF’s fixer. He paid off whistleblowers and “retained” whistleblowers’ attorneys — that is, he paid them off too.

In November 2019, FTX and Alameda were hit with a class action lawsuit that accused the companies and their executives of racketeering and market manipulation. [Docket; Decrypt, 2019]

The lawsuit doesn’t name “Plaintiff’s Attorney-1” — but this is clearly Pavel Pogodin, who set up Bitcoin Manipulation Abatement for the sole purpose of filing crypto class actions.

Alameda said at the time: “The troll has no evidence of any wrongdoing, and will not further discover any — because there was no wrongdoing to discover evidence of.” [Medium, 2019]

Nevertheless, Friedberg took the suit seriously enough that he paid Pogodin off. (The details are redacted.) The suit was dismissed in December 2019.

As a California Bar member of flawless repute, Pogodin is happy to be paid not to do anything. He sent a letter in January 2022 threatening further possible action against FTX. Friedberg offered him “$1.6 million and $50,000 paid on a monthly basis.”

In sum, Friedberg arranged for the FTX Group to pay Plaintiffs’ Attorney-1 $3,320,000 through July 2022. Upon information and belief, Plaintiffs’ Attorney-1 provided no actual legal services to the FTX Group after signing the engagement letter.

An FTX.US employee on a $200,000 salary was fired after less than two months. She sent a demand letter in December 2021 claiming that “Alameda [was] nothing more than an extension of FTX, used to bolster investor confidence in FTX projects, and in turn drive up the prices of projects FTX had developed or invested in itself” and let employees insider-trade.

Friedberg gave this employee an “extraordinary settlement” (redacted in the filing) — and made a $12 million deal to retain Whistleblower-1’s attorney. Their only work for FTX was a three-page memo.

In early 2022, an attorney working at FTX for less than three months discovered that Alameda owned North Dimension. He flagged to Friedberg that North Dimension accounts were being used to fund FTX customer withdrawals and that Alameda didn’t have the proper money transmitter licenses.

Friedberg promptly fired him. The complaint details how the attorney was paid a large (redacted) severance package.

Other FTX news

John Ray’s team has so far racked up $200 million in fees — and the fee examiner thinks this is quite reasonable. Gotta pay the undertaker: [Bloomberg; summary report, PDF]

Without question, the fees incurred to date are remarkable, but so is the professionals’ performance. The Fee Examiner has been struck by the creativity, professionalism, and personal sacrifice of the Retained Professionals who sprung into action in November to begin transforming a smoldering heap of wreckage into a functioning Chapter 11 debtor-in-possession.

Over in the criminal case, SBF moved to dismiss 10 of the 13 charges against him. Judge Lewis Kaplan has told SBF to get knotted: “The Court has considered all of the arguments of the parties. To the extent not addressed herein, the arguments are either moot or without merit.” [Doc 136, PDF; Doc 148, PDF; Doc 149, PDF; NYT; Doc 167, PDF]

Sam wants to blame his troubles on Fenwick & West, the law firm used by FTX and Alameda, who apparently told him that all the hamfistedly obvious crimes he did were all totally legal. The DoJ and FTX objected, and Judge Kaplan has again told Sam to get knotted: “Neither Fenwick nor the FTX Debtors are part of the ‘prosecution team,’ and the government has no obligation to produce materials that are not within its possession, custody, or control.” [Bloomberg; Doc 150, PDF; Doc 151, PDF; Doc 151-1, PDF; Doc 156, PDF; Doc 159, PDF; Doc 166, PDF]

Over at Lightcone, who build and run LessWrong and the Effective Altruism Forum: “Funding is quite tight since the collapse of FTX.” They’re asking the users for $3 million to $6 million over the next year. [LessWrong]

Posted on June 29, 2023July 1, 2023 by Amy Castor 5

Crypto collapse: Fahrenheit buys Celsius, DCG may be broke, Hong Kong cracks down, Binance commingling, how Bitfinex was hacked

By Amy Castor and David Gerard

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Temperature drop

Fahrenheit has officially won the bid for the bankrupt Celsius Network’s assets — pending approval by the court, which is near-certain, and by regulators, which is less so. A $10 million deposit is due by Monday. [Doc 2713, PDF]

Fahrenheit is a consortium that includes VC firm Arrington Capital, miner US Bitcoin, investment firm Proof Group, former Algorand CEO Steven Kokinos, and Seasons Capital CEO Ravi Kaza.

The new deal is an adaptation of the previous NovaWulf proposal. A “NewCo” will be created to take ownership of Celsius’ remaining DeFi tokens, its loan portfolio, its venture capital investments, its bitcoin mining operation, and $500 million in “liquid cryptocurrency” (not specified, but presumably Celsius’ remaining BTC and ETH). US Bitcoin will manage Celsius’ bitcoin mining operation.

Holders of Earn claims, some holders of Convenience claims, Withhold claims, and Borrow claims will receive equity in NewCo, pro rata. NewCo will endeavor to get a public stock exchange listing for the equity. Earn claimants will also get a distribution of the liquid cryptocurrency and any proceeds from litigation.

If you’re a Celsius creditor, the plan contains lots of important details. Read it and discuss this with your fellow creditors.

As with the original NovaWulf proposal, we think this is a Hail Mary pass that can only work if number goes up. On the other hand, it’s doing something and not just liquidating what little remains. Also, Alex Mashinsky won’t be involved.

DCG: When your left pocket can’t pay your right pocket

In the Genesis bankruptcy, Genesis’ parent company Digital Currency Group missed a $630 million payment to Genesis due earlier this month. Note that that’s a payment from themselves to themselves, and they still failed to make it.

This failure to pay was noted by Gemini, which has a tremendous interest in getting that money so Gemini Earn investors can be paid back. Gemini Earn’s retail customers are the largest creditor of Genesis. [Gemini, archive of May 25, 2023]

Gemini Earn was an investment product where Gemini customers put their money into Genesis to earn unlikely interest rates. Gemini’s customers were not so happy at the prospect of their money being stuck in the Genesis bankruptcy for months or years.

So in February, the creditors worked out an “agreement in principle” — not, you’ll note, an actual deal — whereby they would get money back from DCG, as the owners of Genesis. [press release]

In April, the creditors got sick of DCG messing about and upped their demands. This led to a bizarre statement from DCG on May 9 that they were “in discussions with capital providers for growth capital and to refinance its outstanding intercompany obligations with Genesis.” They didn’t have the money to pay themselves. [CoinTelegraph]

Gemini also plans to file a reorganization plan of its own. This is likely why Genesis has filed asking for its exclusive right to make reorganization proposals to be extended to August 27. The court will hear this motion on June 5. [Doc 329, PDF]

Either DCG is trying extremely hard to screw over Genesis customers … or, despite all the millions and billions with dollar signs in front in their accounts, and “$200 million” a year in Grayscale management fees, DCG is broke — at least in actual money — and has been pretending not to be broke. And we’re pretty sure Gemini is pushing this point this hard because they can’t cover their customers either. Imaginary assets are great — until you have to pay up.

Binance is outraged at Reuters catching them out again

Reuters has caught Binance at it again. This time, Binance was commingling customer funds and company revenue on the order of billions of (actual) dollars in their Silvergate accounts in 2020 and 2021. Controls? What are controls? [Reuters]

Binance told Reuters that this was money being used to buy BUSD and this was “exactly the same thing as buying a product from Amazon,” per Brad Jaffe, Binance’s VP of communications since August 2022.

This explanation is at odds with Binance’s previous claims to customers that dollars they sent to Silvergate were “deposits” that they could “withdraw” as dollars. Jaffe said that “the term ‘deposit’ is a communication term, it’s not an indication of the technical treatment of the funds.” Oh, a communication term — you mean like when words mean things in a context?

Reuters didn’t find any misappropriation of customer funds in the documents they saw. But commingling is a massive red flag for incompetence (as it turned out to be with FTX) and fraud — such as moving money around to evade regulatory scrutiny. Reuters includes a complex diagram of the international flows of Binance’s cash in the report.

Binance PR person Patrick Hillmann dismissed the story as “1000 words of conspiracy theories” and said that Reuters was “making stuff up.” Though Hillmann never stated at any point that Binance hadn’t commingled funds at Silvergate. Hillmann also decried “the xenophobia behind consistently mentioning @cz_binance’s ethnicity without noting that he’s been Canadian since the age of 12” … which the Reuters story didn’t do at all. [Twitter, archive]

Hong Kong brings some regulatory clarity

The Hong Kong Securities And Futures Commission (SFC) has finished its consultation on virtual asset trading platforms opening to retail investors. The rules allow licensed exchanges to offer trading to the public in tokens that are highly liquid and are not securities.

The rules are strict — no securities, no lending, no earn programs, no staking, no pro trading, and no custody. Unlicensed crypto exchanges are not allowed to advertise. Hong Kong very much wants to avoid the sort of embarrassment that comes with a large exchange like FTX failing.

Exchanges will be required to assess the failure risk of all tokens they offer trading in. Tokens are required to have a 12-month track record. Exchanges will need to get smart contract audits where appropriate. 98% of client assets must be in cold wallets (offline); hot wallets must not hold more than 2%.

Margin trading is not yet allowed even for professional investors, but the SFC will issue guidance on derivatives in the future.

The guidelines take effect June 1, which is when exchanges can begin to apply for a license. [SFC; Consultation Conclusions, PDF]

Regulatory clarity around the world

Japan will be enforcing FATF rules on crypto from June. This went through with no objections because Japan learned its lesson from Mt. Gox and regulated crypto exchanges early. [Japan Today]

FATF tells CoinDesk that it didn’t actually demand that Pakistan not legalize crypto. “Countries are permitted, but not required, to prohibit virtual assets and virtual asset service providers.” [CoinDesk]

The International Organization of Securities Commissions is putting together recommendations on crypto. Service providers need to address conflicts of interest, separation of functions, and accounting client assets, and this has to work across borders. Get your comments in by July 31. [IOSCO, PDF; recommendations, PDF]

Huobi gets kicked out of Malaysia for failure to register. Not registering is a violation of Malaysia’s Capital Markets and Services Act of 2007. The Securities Commission Malaysia said Huobi has to disable its website and mobile apps on platforms including the Apple Store and Google Play. [Securities Commission Malaysia]

The CFTC is talking about all the fraud in crypto, says it’s on good working terms with the SEC on these matters, and warns the crypto industry that it’s not going to be a soft touch. [Reuters]

The SEC has changed the disclaimer that commissioners say before speeches — probably in response to William Hinman’s comments saying ether wasn’t a security being cited in the Ripple case. [blog post]

Molly White put up Rep. Sean Casten (D-IL) questions at May 18, 2023, stablecoin hearing, and it’s a lovely five minutes. This guy understands precisely how Web3 was fundamentally a venture capital-funded securities fraud. [YouTube]

Bitfinex: whoops, apocalypse

The Organized Crime and Corruption Reporting Project obtained an internal report on the August 2016 hack of the Bitfinex crypto exchange — the hack that led to the Tether printer going wild and the 2017 crypto bubble.

The report was commissioned by iFinex and prepared by Ledger Labs. It was never released, but OCCRP has obtained a draft.

Bitfinex kept transaction limits secured by three keys. It looks like someone made the mistake of putting two of the three keys on the same device. This is how the hacker was able to raise the global daily limit and drain the accounts.

One key was associated with a generic “admin” email address and another linked to “giancarlo,” which belonged to Bitfinex CFO Giancarlo Devasini. The report does not blame Devasini for the hack.

Ledger Labs thinks the hacker came in from an IP address in Poland. [OCCRP]

Tether’s issuance is up — but its usage is through the floor. The trading volume is at its lowest in four years. Most of the tether trading happens on Binance, which is where the majority of all trading volume happens, and where USDT is accepted as being worth a dollar. We mentioned last time that volume was down, but Kaiko has the numbers. [Kaiko]

More good news for bitcoin

Do Kwon’s bail has been scrapped. He’s back in jail in Montenegro, awaiting his local trial on charges of forging documents, specifically the ones he was using to try to get out of Montenegro to his next bolt-hole. [Reuters]

Glassnode tells us that hodling has never been more popular! 68.1% of BTC hasn’t moved in the past year! Now, you might think that this is because most people who bought in during the bubble are still underwater. But “baghodler” isn’t yet a word. [Glassnode]

Shaquille O’Neal was finally served in the FTX class action suit against the exchange’s celebrity promoters — at the former FTX Arena. [Washington Post]

Openfort is scraping up the very last of the Web3 gaming venture cash — they just got $3 million to do an online crypto wallet for blockchain games. You know, that gigantic current market that anyone has the slightest interest in. Openfort doesn’t appear to have a customer as yet. [VentureBeat]

Coinbase has a new TV ad! We know you lost all your money — but crypto is like the early Internet, really. [Youtube]

Solana is so thoroughly out of ideas that they’re adding a ChatGPT plugin. Presumably, it can write tweets for them. [The Block]

Crypto fans make up new justifications for the importance of their magic beans all the time. David Rosenthal takes us through a few. [DSHR Blog]

Video: The problems with Crypto Currency. Max Silverman wanted to do an animation, so asked David for 90 seconds of audio. It came out great! [YouTube]

Posted on May 26, 2023 by Amy Castor 0

Crypto collapse: Bittrex files chapter 11, Binance loses market makers, FTX gets a tax bill, bitcoin gets apes

By Amy Castor and David Gerard

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Bittrex takes a dive

Bittrex’s US entity, Desolation Holdings LLC, and Bittrex Malta filed for Chapter 11 bankruptcy in Delaware on May 8. The move came just weeks after Bittrex shut down its US operations, which was soon after they were sued by the SEC for trading securities without registering as a securities exchange. [Bloomberg; Bittrex; case docket]

The bankruptcy is apparently the fault of the SEC. The first-day declaration cites several SEC actions against other firms — and harps on about a “lack of regulatory clarity.” [Doc 9, PDF; first day declaration, PDF]

Bittrex says the bankruptcy will totally not impact its non-US operations, and funds are safe! Surely Bittrex didn’t do any commingling of company and customer funds like every other crypto exchange in trouble keeps turning out to have done.

The debts are largely fines levied against Bittrex by US government agencies — who are the only named creditors. OFAC is the largest creditor, owed $24.2 million. FinCEN is also a top 50 creditor with a $3.5 million claim. The SEC is listed with an undetermined amount of claims. [Doc 1, PDF]

Bittrex wishes to avail itself of a debtor-in-possession loan of 700 BTC so as to wind down Desolation and Bittrex Malta in an orderly manner and return customers’ funds. The loan will be from themselves — Aquila Holdings Inc, Bittrex’s parent entity, which is not in bankruptcy. [Liquidation plan, PDF]

The precedence of creditors (who gets paid back first) would be: themselves, then the customers, then the US government. That’s novel.

Michel de Cryptadamus notes several other interesting wrinkles. Bittrex’s US gross (not net) revenue for 2022 was $17 million, against the $30 million in government fines. “Several states alleged that BUS was undercapitalized and demanded that BUS immediately surrender its money transmitter licenses in those states.” Bittrex’s complicated corporate structure is reminiscent of FTX. And Bittrex may also be trying to protect the salaries of Bittrex executives from being seized by the SEC. [Twitter, archive]

Michel thinks the whole filing is a massive troll. We concur. The idea seems to be for Bittrex to set up a sacrificial entity to pay back their customers but stiff the US government. We are unconvinced that the government agencies will be inclined to let this one slide.

Good news for Binance

Market makers are leaving Binance US. Jane Street Group in New York and Jump Trading in Chicago — two of the world’s top commodities market makers — are pulling back from crypto in the US as regulators crack down on the industry. Their business in normal commodities is much larger, and they could do without the regulatory heat. [Bloomberg]

The Department of Justice is investigating Binance for possible violations of US sanctions against Russia. There’s already plenty of evidence that Binance has committed sanctions violations. Binance was the final destination for millions in funds from Bitzlato, an exchange shut down for money laundering. Now Dirty Bubble writes that Binance partner Advcash may be facilitating transfers from Russian banks. [Dirty Bubble]

Binance is withdrawing from Canada, owing to a surfeit of regulatory clarity. [Twitter, archive; Reuters]

Bitcoin has been trading at a premium of up to $650 on Binance US. A premium like this is usually an indication that people can’t get their dollars out of the exchange, so they buy bitcoins and move those to another exchange to cash out. [CoinDesk]

We also saw bitcoin trading at a premium on Mt. Gox just before that exchange collapsed in 2014, and the same with QuadrigaCX, which imploded in 2019. Naïve traders who don’t understand what’s happening will often move their BTC to the dying exchange, thinking it’s an arbitrage opportunity.

Trading at a premium is not a good sign, but a worse sign is when people complain they can’t get their crypto off an exchange. Binance US has long had a reputation for demanding arbitrary new KYC documentation when users try to withdraw.

Monkey laundering comes to bitcoin

Binance paused withdrawals twice on Sunday, May 7. The first time was due to a “congestion issue.” Later in the day, Binance paused withdrawals again due to a “large volume of pending transactions.” [Twitter, archive; Twitter, archive]

For once, Binance might have been on the level. On May 7, the bitcoin mempool was clogged with 400,000 transactions waiting to be processed, and transaction fees surged.

In bitcoin, the mempool, or memory pool, is where pending transactions pile up before a miner selects the most profitable ones and puts them together as a proposed block. If your transaction stays in the mempool too long, it gets dropped.

The best way to break a blockchain is to try to use it for something. In this case, some idiot worked out how to do NFTs on bitcoin.

“Ordinals” are a new way to create NFTs on bitcoin by linking a JPEG, video, or another image type to a satoshi, the smallest denomination of a bitcoin. Ordinals came out in January, and bitcoin has been filled with monkey pictures since. Bitcoin maxis condemn ordinals as a conspiracy to destroy bitcoin by using the network for a purpose. [Decrypt]

Child genius, adult moron

Sam Bankman-Fried’s defense team is trying to strike 10 of the 13 criminal charges against their client. They argue that the Bahamas did not agree to several of the charges — including one claim that Sam hid millions of dollars in political donations — while other claims didn’t meet the legal requirements of the underlying criminal statutes. [Docket, see filings 137-147]

The facts against SBF are solid. There’s no reason to doubt that Sam did everything the US claims. So the defense seems to be going for unreasonable doubt and hoping they have a dumb enough jury member or two.

Former federal prosecutor Sean Shecter of Lewis Brisbois says SBF’s lawyers want to preserve an appeal, so they have to try everything they can think of, “even if it involves throwing spaghetti against the wall.” He thinks the defense is likely hoping that the government gives up “nuggets of information” in response to the motions. [Law360, paywall]

Prosecutors have until May 29 to respond. Judge Lewis Kaplan will hear oral arguments on June 15.

The IRS has hit the FTX companies with a $44 billion tax bill, with the largest chunk being $20.4 billion for Alameda. It looks like the IRS reclassified all FTX employees from contractors to employees and charged for unpaid employment taxes. [Docket, see filings April 27, 28; IRS Alameda claim, PDF; CoinDesk]

The IRS has not released its calculations in detail, but we’d assume the bill is inflated by fraud (fictitious profits), penalties, and interest. John Jay Ray is sure to fight this. But even if Ray gets that amount substantially reduced, this is still sure to be a huge hit for FTX creditors.

The IRS claims are treated as unsecured — but they will receive priority status as ordinary and necessary business expenses of the bankruptcy estate. So the IRS will come before ordinary unsecured creditors.

The searing light of regulatory clarity

Ishan Wahi will spend two years in prison for insider trading as a former product manager at Coinbase. He previously admitted to passing on confidential information from Coinbase to his brother and friend, who profited from the tips. [WSJ, paywall; DOJ press release]

In Estonia, nearly 400 VASPs (“virtual asset service providers,” the FATF term for companies dealing in crypto) have shut down or had their licenses revoked after the government’s recently enhanced terrorist financing prevention and anti-money laundering laws came into effect in March. [Protos; Estonia Financial Intelligence Unit]

Bakkt has delisted a bunch of tokens from the institutional crypto business they bought from Apex Crypto, including several that the SEC has indicated it considers securities. “Our review process ensures those interests are best served when we contemplate the most up-to-date regulatory guidance.” [CoinDesk]

John Reed Stark thinks an SEC action against Coinbase is imminent. He explains the regulations and how they work in detail and why Coinbase doesn’t stand a chance.

Stark notes also that Coinbase’s “regulatory estoppel” claim — that the SEC approving their S-1 public offering means the SEC must have approved the exchange dealing in securities — is directly contradicted by the mandatory “no approval clause” in the S-1: “Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.” Whoops. [LinkedIn]

Unvaxxed bitcoin is the new bitcoin

QuadrigaCX bankruptcy claimants will get 13% on the dollar. They will be paid out the dollar value of their crypto at the time Quadriga filed for bankruptcy — April 15, 2019, when bitcoin was in the toilet.

It’s amazing that creditors will even get back that much. Most of the Quadriga money was gambled away by cofounder Gerald Cotten and filched by shady payment processors. We’re surprised no criminal charges were filed — but then, most of the money was stolen by a guy who is supposedly dead. [EY notice, PDF; CoinDesk]

Arthur Hayes of BitMEX has been tweeting at Three Arrows Capital co-founders Su Zhu and Kyle Davies because 3AC owes him $6 million following its collapse in June 2022. Rather than returning Hayes’ money, 3AC cofounder Su Zhu has filed a Singapore restraining order to prohibit Hayes from using “threatening, abusive or insulting words” and “making any threatening, abusive or insulting communication, that would cause the Applicant harassment, alarm or distress.” [Twitter, archive; Twitter, archive; CoinDesk]

Awe that's sweet, is that your way of using symbolism to represent the $6 million you owe me? 1 Oyster = $1 million … https://t.co/ehWJ4wUfXB
— Arthur Hayes (@CryptoHayes) May 2, 2023

BlockFi users discover that BlockFi owned their coins. Bankruptcy Judge Michael Kaplan ruled that BlockFi users who had money in BlockFi’s interest-bearing accounts gave up ownership of their bitcoins — all they owned was a liability from BlockFi — and all of the $300 million in crypto deposits is now the property of the bankruptcy estate, as is normal. [Bloomberg]

P2P exchange Paxful has resumed operations after it shut down last month amidst a messy dispute between cofounders Ray Youssef and Artur Schaback. The entire operation has been comedy gold. Youssef and Schaback say the exchange is now owned by a custodian — who they never actually name — and the custodian, Schabeck, and Youseff all serve as directors. [Paxful, archive; CoinDesk]

In the crypto bubble, Miami crypto companies boomed with the enthusiastic support of Mayor Francis Suarez. Now there’s empty real estate and lawsuits. “Most of crypto was a pyramid scheme,” said local businessman Ryan Kirkley. Suarez is now trying to lure tech startups into Miami instead. [WSJ, paywalled]

Robert F. Kennedy Jr., who is running for US President on the gibbering insane Twitter blue check conspiracy theorist ticket, will be making the first appearance of his campaign giving the keynote at Bitcoin 2023 in Miami later this month. So, on brand then. [Twitter; NBC]

A propaganda movie is in the works for bitcoin mining — because consuming a country’s worth of electricity is actually good news for bitcoin. Based on the trailer, the film is amazing, but not in a good way. [Dirty Coin the Movie]

Media stardom

Amy spoke to Bloomberg about the growing ranks of crypto skeptics after the crypto collapse: “There were a handful of us before, screaming into the abyss. Now there’s a lot more.” We’ll just be over here, quietly being right. [Bloomberg]

Posted on May 14, 2023May 14, 2023 by Amy Castor 0

Crypto collapse: Treasury comes after DeFi, SEC comes after crypto exchanges, stablecoin bill, FTX first interim report

By Amy Castor and David Gerard

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“Please god let FTX go back into business, take a lot of money from crypto rubes, then collapse and lose everything again. Please let there be people who lost money in two separate FTX collapses.”
– Ariong

The Treasury brings good news for DeFi

The US Treasury released its “Illicit Finance Risk Assessment of Decentralized Finance.” The 42-page report examines DeFi from the perspective of anti-money laundering and sanctions laws. [Press release; Report, PDF]

This report is not about consumer protection — it’s about national security, sanctions busting, and terrorist financing. The Treasury is not happy:

“The assessment finds that illicit actors, including ransomware cybercriminals, thieves, scammers, and Democratic People’s Republic of Korea (DPRK) cyber actors, are using DeFi services in the process of transferring and laundering their illicit proceeds.

… In particular, this assessment finds that the most significant current illicit finance risk in this domain is from DeFi services that are not compliant with existing AML/CFT obligations.”

The report makes clear: blockchain analysis is not sufficient for KYC/AML. Calling something “decentralized” or a “DAO” doesn’t absolve you of responsibility. And almost everything in DeFi falls squarely in the ambit of existing regulation.

How’s regulatory clarity for crypto? Just fine, thank you:

“Through public statements, guidance, and enforcement actions, these agencies have made clear that the automation of certain functions through smart contracts or computer code does not affect the obligations of financial institutions offering covered services.”

The report recommends “strengthening U.S. AML/CFT supervision and, when relevant, enforcement of virtual asset activities, including DeFi services, to increase compliance by virtual asset firms with BSA obligations” and “enhancing the U.S. AML/CFT regulatory regime by closing any identified gaps in the BSA to the extent that they allow certain DeFi services to fall outside of the BSA’s definition of financial institution.”

Nicholas Weaver tells us the report “should be thought of as being as serious as a heart attack to the DeFi community, as this represents the US government regulation at its most serious. Indeed, the report can be summarized in a sentence: ‘If you want to continue to OFAC around, you are going to find out.’”

The SEC brings good news for Coinbase and DeFi

SEC chair Gary Gensler is fed up with Coinbase blatantly trading unregistered securities and not registering with the SEC as a proper securities exchange. So he’s going to update the rules.

The SEC has reopened the comment period for a proposal, initially issued in January 2022, that would update the definition of an “exchange” in Rule 3b-16 of the Exchange Act. [SEC press release; Fact sheet, PDF; Gensler statements]

Gensler’s comments are laser-targeted at Coinbase — and also DeFi:

“Make no mistake: many crypto trading platforms already come under the current definition of an exchange and thus have an existing duty to comply with the securities laws.”

He reiterates that “the vast majority of crypto tokens are securities” — the SEC’s position since 2017 — so “most crypto platforms today” meet the definition of a securities exchange. He adds:

“Yet these platforms are acting as if they have a choice to comply with our laws. They don’t. Congress gave the Commission a mandate to protect investors, regardless of the labels or technology used. Investors in the crypto markets must receive the same time-tested protections that the securities laws provide in all other markets.”

A regulatory framework for casino chips

On Saturday, The US House Financial Services Committee published an as-yet-untitled discussion draft bill for regulating stablecoins a few days before a hearing on the topic on Wednesday, April 19. [Discussion draft, PDF; hearing agenda]

The bill refers to stablecoins as “payment stablecoins.” This is utterly hypothetical. Nobody uses stablecoins to buy things. They’re chips for gambling on speculative assets in the crypto casinos.

This bill was a sudden surprise for a lot of people — but it appears to be a version of a draft bill that Senate Banking Committee Ranking Member Pat Toomey (R-PA) was circulating last year. [Stablecoin TRUST Act, 2022]

The bill divides stablecoin issuers into banks and nonbanks. Credit unions and banks that want to issue stablecoins would need approval from the financial regulator they fall under‚ the National Credit Union Administration, the FDIC, or the OCC. Non-bank stablecoin issuers would fall under the Federal Reserve.

For this bill, USDC or Pax Dollars, under the Fed, might pass muster. But Tether would be kicked out of anything touching the US because they wouldn’t be able to meet the transparency or liquidity requirements.

All stablecoins that circulate in the US would need to be backed by highly liquid assets — actual dollars and short-term treasuries — and redeemable within one day. That doesn’t leave much room for the issuers to turn a profit by putting the deposits in longer-term investments.

Custodia is not a bank under the Bank Holding Act, so for this bill, it would also be considered a non-bank. This bill would derail Custodia’s lawsuit against the Federal Reserve and the Federal Reserve Bank of Kansas City to try to force a Fed master account out of them.

The bill also calls for a moratorium on new algorithmic stablecoins until a study can be conducted.

Finally, the bill includes a request for federal regulators to study a central bank digital currency (CBDC) issued by the Fed. As we noted previously, FedNow would make a CBDC completely superfluous.

Hilary Allen, a professor of law at American University Washington College of Law, points out important shortcomings in the stablecoin bill. She argues that the bill is stacked in favor of stablecoins, and notes that the bill’s payment stablecoin definition could be a way of avoiding SEC jurisdiction. And while the bill calls for monthly attestations, it doesn’t say anything about full audits for stablecoin reserves. [Twitter]

FTX’s first interim report reads like Quadriga

John Jay Ray III, FTX’s CEO in bankruptcy, released his first interim report on the control failures at FTX and its businesses. Ray documents a shocking level of negligence, lack of record keeping, and complete disregard for cybersecurity at FTX. [Doc 1242, PDF]

The report confirms what we’ve been saying all along: all crypto exchanges behave as much like Quadriga as they can get away with. A few highlights:

FTX Group was managed almost exclusively by Sam Bankman-Fried, Nishad Singh, and Gary Wang. The trio had “no experience in risk management or running a business,” and SBF had final say in everything.
SBF openly joked about his company’s reckless accounting. In internal docs, he described Alameda as “hilariously beyond any threshold of any auditor being able to even get partially through an audit,” and how “we sometimes find $50m of assets lying around that we lost track of; such is life.”
FTX kept virtually all of its assets in hot wallets, live on the internet, as opposed to offline cold wallets, where they would be safe from hackers.
FTX and Alameda also kept private keys to billions of dollars in crypto-assets sitting in AWS’s cloud computing platform.
SBF stifled dissent with an iron fist. Ex-FTX US president Brett Harrison quit after a “protracted argument” with Sam over how FTX US was run. Sam cut Harrison’s bonuses, and when “senior internal counsel instructed him to apologize to Bankman-Fried for raising the concerns,” Harrison refused.

Ray and his team have so far recovered $1.4 billion in digital assets and have identified an additional $1.7 billion they are in the process of recovering. (We’re still waiting for him to ask for money back from The Block, but maybe that’s coming.)

In other FTX news, Voyager and FTX and their respective Unsecured Creditors’ Committees have reached an agreement on the money FTX paid to Voyager before FTX filed bankruptcy that FTX wants to claw back now — $445 million in cash will go into escrow while things are sorted out. [Doc 1266, PDF]

**Terraform Labs did nothing* wrong**

South Korean prosecutors have seized 414.5 billion won ($312 million) in illegal assets linked to nine Terraform Labs execs. None of the assets tied to Do Kwon have been recovered. Kwon converted everything to BTC and moved the funds — worth an estimated 91.4 billion won ($69 million) — to offshore exchanges. [KBS, Korean]

Who crashed UST in May 2022? Terraform Labs seems to have played no small part. In the three weeks leading up to the collapse, Terraform dumped over 450 million UST on the open market. [Cointelegraph]

Crypto mining: the free lunch is over

A bill limiting benefits and tax incentives for crypto miners in Texas unanimously passed a Senate committee vote and now it’s in the chamber. The bill was sponsored by three Republican state senators. Even they’re sick of the bitcoin miners. [SB 1751, PDF; CoinDesk; Fastdemocracy]

Bitcoin mining doesn’t create jobs — so Sweden has ended the 98% tax relief it gave data centers, including crypto miners. Crypto is outraged. [CoinDesk]

More good news for exchanges

The downfall of peer-to-peer bitcoin exchange Paxful is a comedy goldmine. Paxful cofounders Ray Youssef and Artur Schaback originally blamed Paxful’s closure on staff departures and regulatory challenges — but now they’re turning against each other in court.

As an example of their good judgment, in 2016, the pair drew police attention when they were spotted in Miami aiming an A15 rifle off their penthouse balcony for photo purposes. Former employees allege “favoritism, erratic dismissals, lavish spending on travel and reports of routine cannabis usage on the job by Youssef himself.”

Paxful’s business model was based on price-gouging fees on gift cards, according to one former employee. You want 10 euros worth of bitcoin? That’ll be 20 euros worth of gift cards. Coincidentally, money launderers are usually quite happy to pay fees on the order of 50%. Schaback thinks Paxful is still a viable enterprise. [CBS, 2016; CoinDesk]

As you might expect, OPNX, the new exchange for tokenized crypto debt run by the founders of the failed Three Arrows Capital and CoinFLEX, has gotten off to a feeble start. Trading volume in the first 24 hours was $13.64. [The Block]

The Winklevoss twins made a $100 million loan to Gemini. The move came after Gemini had informally sought funding from outside investors in recent months without coming to any agreements. We can’t find if the loan was in actual dollars or in crypto — or if it was just an IOU. [Bloomberg]

Binance relinquished the financial services license for its Australian derivatives business, Oztures Trading, after the Australian Securities and Investments Commission said they were likely to suspend it. Customers have until April 21 to close their accounts. [ASIC]

Who were the unnamed “VIP” traders on Binance mentioned in the CFTC suit? Jane Street, Tower, and Radix. [Bloomberg]

The Mt. Gox payout window has opened! Slowly. [Mt Gox, PDF; The Block]

Cryptadamus thinks that Crypto.com’s Canadian bank accounts are frozen. [Mastodon]

Good news for bitcoin

The Ethereum Shanghai upgrade went through on April 12. You can now withdraw your staked ether! As we predicted, there wasn’t a rush for the exits. [CoinDesk]

Bitfinex money mule Reggie Fowler will be sentenced on April 20. His lawyer wrote a lengthy letter to the judge asking for clemency — no jail time — because Fowler lived a hard life and never did anything wrong before. Nothing he was busted in court for, anyway. [Letter, PDF]

Michael Saylor’s MicroStrategy has bought yet more bitcoin, digging itself ever deeper. The company purchased an additional 1,045 BTC for $23.9 million, or an average price of $28,016, between March 23 and April 4. [8-K filing]

Tether got its tendrils into the US dollar system via Signet — former Signature Bank’s real-time payments system. Tether instructed crypto firms to send dollars to its Bahamas-based banking partner Capital Union Bank via Signet. We’re not clear on whether this violated the New York settlement — though if they lied about who they were, it broke banking law. [Bloomberg]

Cross River Bank, the banking partner of Coinbase and Circle, built its business on buy-now-pay-later (BNPL) and pandemic loans. What could go wrong? [Dirty Bubble]

With its firm commitment to quality cryptocurrency journalism, CoinDesk is hot on getting into generating its hopium space-filler using AI text generators. [CoinDesk]

Media stardom

“Ukraine wants to fund its post-war future with crypto” — with quotes from David. [Techmonitor]

“A lot of ordinary people who got into crypto just lost everything in various ways or lost chunks of it,” Gerard said. “And this is a lot of why I think retail investors should just keep the hell away from crypto.” [Business Insider]

Posted on April 16, 2023April 16, 2023 by Amy Castor 0

Do Kwon arrested, White House hates crypto, Coinbase Wells notice, SEC charges Justin Sun, Signature sold, FTX Bahamas party fund returns

By Amy Castor and David Gerard

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“hello I am Don’t Kwoff, yes I may look like Do Kwon with a fake moustache and wig but rest assured I am a completely separate person.”
— Boxturret

Deploying more capital — steady, lads

Do Kwon, co-founder of Terraform Labs and creator of the failed UST/luna cryptocurrency pair that took down the rest of crypto when it collapsed, was arrested in Montenegro on March 23. Kwon was detained at Podgorica Airport with falsified documents. [Twitter; CoinDesk; YNA, in Korean]

Also arrested was Han Chang-Joon, Terraform’s former chief financial officer. The two were sitting in a private plane bound for Dubai when authorities nabbed them. They used forged travel documents from Costa Rica and also had documents from Belgium and South Korea on them. Three laptops and five mobile phones were also seized. [Pobjeda, in Montenegrin; DLNews]

Kwon was wanted by South Korea for violating capital market rules (by stealing everyone’s money). South Korea had also issued a “red notice” via Interpol, asking global law enforcement for help finding him. Kwon has been tweeting, talking to reporters, and insisting he was not on the run since September.

After South Korea stripped him of his passport, Kwon was suspected of being in Serbia. He was likely trying to flee the region before authorities caught up to him. [YNA, 2022, in Korean]

Here’s a video of Kwon and Chang-Joon leaving the Montenegrin court in handcuffs. [Twitter, video]

In February, the SEC charged Kwon with securities fraud over the UST/luna/Anchor Protocol scam.

Following Kwon’s arrest in Montenegro, the US Department of Justice also charged him with conspiracy to defraud, commodities fraud, securities fraud, wire fraud, and conspiracy to engage in market manipulation. [Complaint, PDF]

Dark Brandon has had it with your blockchain malarkey

The 2023 Economic Report of the President is out, with Chapter 8 devoted exclusively to digital assets: “This chapter primarily examines crypto assets, whose proponents have been relearning the lessons from previous financial crises the hard way.” [White House, PDF, pp 237-272]

This chapter lays out the Biden administration’s policy toward crypto. It is strident, as you’d expect just after a huge disaster like FTX. This is the no-coiner view coming from the highest levels of power.

Crypto bros and their pet politicians have long claimed that if you overregulate crypto, you’ll kill innovation. The White House is saying that, for all the promises and hot air, there is no innovation here — so the path is clear to regulate the hell out of you.

The chapter begins with crypto’s promises. Crypto assets could be investment vehicles. Crypto could offer money-like functions. Crypto could enable fast digital payments. Crypto could increase financial inclusion. Crypto assets could improve the US’s current financial structure.

“Could” is a word that means “doesn’t.” The report contrasts crypto’s claims with “the reality of crypto assets” — in which crypto falls flat in every instance.

Crypto is mostly used for speculative trading, the report states. The reason tokens are volatile is that many “do not have a fundamental value.” Bitcoin was supposed to be a hedge against inflation — but “as inflation increased globally in the second half of 2021 and in 2022, the prices of crypto assets collapsed, proving them to be, at best, an ineffective inflation hedge.”

The report also goes through bitcoin’s failure as money — in part because you can’t have something both serve as a speculative asset and as money: “the riskier an asset is, the less likely it can effectively serve as money.”

Crypto’s main role in finance is to create new and ever-riskier derivatives with poor regulation. That’s where the “innovation” is. This carries a tremendous risk of economic contagion. The other innovative financial use cases are ransomware and money laundering.

Stablecoins are subject to run risk — just like a bank run — which could “lead to disruptions in the markets for the reserve assets and reduce the market value of the issuer’s remaining reserves because the sales of the reserve assets put further downward pressure on the prices of remaining reserves.”

The report doesn’t miss the horrors of crypto mining either: massive energy waste, e-waste, and noise pollution. “Evidence suggests that cryptomining has substantial costs for local communities and has few, if any, attendant benefits.”

Blockchain, or digital ledger technology (DLT), isn’t magic either. It’s stupendously inefficient for supply chains — if the blockchain bit even does anything. Helium, the fraudulent wireless network project, was an a16z-funded token pump-and-dump.

DLTs are at best experimental. They could be of economic value in the future! Which means they aren’t at all in the present. A private, centralized blockchain is just a clunky, slow database.

One bit of actual news from the report: FedNow, the Fed’s new instant payment service due in July, shoots the idea of a US CBDC through the head, despite all of CBDC’s ill-specified hypothetical potential — “the benefits of circulating digital money after FedNow is launched may be minimal.”

Crypto could be all manner of fabulous things. It just isn’t actually any of those things in practice.

Crypto cannot be allowed to break laws in the pursuit of hypothetical tech-magic benefits — “regulators must apply the lessons that civilization has learned, and thus rely on economic principles, in regulating crypto assets.”

Coinbase guesses wrong about Earn

The SEC has sent Coinbase a Wells notice — a threat that action is imminent. This notice is about the current version of the exchange’s Earn product — the one that Coinbase said in its 10-K earnings call was definitely not a security, probably.

Coinbase’s previous Earn product got a Wells notice before launch, in September 2021. Coinbase didn’t post the notice itself that time — they blustered, then folded. But they posted the notice this time. [blog post; Wells Notice, PDF; 8-K]

Rarely do companies receiving a Wells notice make those notices public. The last crypto firm to disclose a Wells notice was Canadian chat app Kik in 2018, as it geared to do battle with the SEC over whether its KIN token was a security. The SEC sued. Kik went to court, and the judge ultimately ruled against Kik.

Paul Grewal, Coinbase’s chief legal officer, complains that Coinbase spoke to the SEC more than thirty times. Sure — but it turns out that if you sit down with a cop and tell him all the bad things you’re doing, he might be taking notes, and then he might tell you to stop doing the bad things.

Matt Levine thinks the SEC wants Coinbase to stop trading in securities at all, and possibly just go away: [Bloomberg]

If Bernie Madoff came to the SEC and said “if you want a higher class of more trustworthy Ponzi schemes, you will need to write a few new rules adapting the disclosure regime to Ponzi schemes,” the SEC would have said “no we absolutely do not want that, we want much less Ponzi scheming, and we certainly do not want to give our approval to Ponzi schemes by writing rules for them.” One gets the sense the attitude to crypto is similar.

… If you run a crypto exchange and you want to set up a meeting with regulators to talk about how to write regulations to prevent a repeat of the recent crypto collapses, they will not trust you, because that is what FTX was saying too. There is not much goodwill left.

John Reed Stark goes through Coinbase’s public response and why it’s nonsense. “Not only are Coinbase’s argument weak, misguided, and more akin to public relations than legal positions, but Coinbase’s arguments are also proven failures of crypto-mumbo-jumbo and ludicrous jaundiced rhetoric.” [LinkedIn]

Dirty Bubble is shorting $COIN because it’s “a cash-burning regulatory nightmare with limited upside.” [Substack]

Regulatory clarity

In a class action against the Uphold exchange, Judge Denise Cote in the Southern District of New York has found that the Electronic Funds Transfer Act applies to crypto, specifically Reg E of the act. This is a finding that this complaint in the class action can go ahead — but the order is very clear, and if this order isn’t used in later cases we’ll be amazed. Reg E provides consumer protections over unauthorized transactions, error resolution, and provision of receipts and periodic statements. Crypto exchanges are not at all set up for dealing with any of this — so they might want to get onto it. [Credit Slips; Order, PDF; Consumer Finance]

In a letter calling Binance a “hotbed” of illegal activity, Senator Elizabeth Warren (D-MA) along with two other Senators had asked Binance to provide balance sheets, data on the number of US users, internal policies relating to AML, as well as written policies regarding the relationship between Binance and Binance US. Binance responded with a 14-page letter describing its compliance history — and saying it has a team of 750 compliance staffers! — without addressing financials. [Bloomberg]

Crypto advertising in Belgium will need to be submitted to the Financial Services and Markets Authority ten days in advance for approval, from May 17. [FSMA]

The SEC has issued a new alert to investors: “Those offering crypto asset investments or services may not be complying with applicable law, including federal securities laws.” [SEC]

Fun in the Sun

The SEC’s really going for it lately. It’s charged Justin Sun of Tron with issuing unregistered securities — the TRX and BTT tokens — and wash-trading those securities.

Eight celebrities have also been charged, including YouTuber Jake Paul and actress Lindsay Lohan, for illegally touting TRX and BTT without making the proper disclosures. You have to say what you’re being paid to tout for securities, as Kim Kardashian found out previously. [SEC press release; complaint, PDF]

Paul, Lohan, and four of the other celebrities agreed to pay a total of $400,000 to settle the charges. Sun did not settle. Instead, he tweeted that the charges lack merit. So, he’s going to fight this? [Twitter, archive]

Selling Signature for its organs

Signature Bank has been sold! Well, mostly. Flagstar Bank has acquired most of Signature’s deposits and some of its loans. Flagstar did not acquire $4 billion of deposits from Signature’s crypto operations — those are being left with the FDIC. The Signet inter-crypto-exchange network is also being left behind. [FDIC; Bloomberg]

The FDIC anticipates losses on its insurance fund of up to $2.5 billion. Approximately $60 billion in likely-bad loans will remain in the receivership for later disposition by the FDIC.

Senator Warren wrote another one of her letters to bankers, this time to Joseph DePaolo, the former CEO of Signature, on March 15. Warren asks DePaolo to describe the full scope of his lobbying efforts to roll back Dodd-Frank. She also wants to know details of executive bonuses, including if DePaolo received bonuses related to his efforts to limit the regulation of Signature. [Warren, PDF]

In 2018, President Trump signed into law the Economic Growth, Regulatory Relief, and Consumer Protection Act, scaling back Dodd-Frank regulations. The Act exempted mid-size banks with under $250 billion in assets from strict regulatory scrutiny. By the time Signature collapsed, it was over the old threshold of $50 billion, but under the new one. Warren sees this as the main cause of Signature’s failure.

Patrick McHenry is chair of the House Financial Services Committee, which is investigating the collapse of Signature and SVB. Signature threw a fundraiser for McHenry 10 days before it collapsed. McHenry’s campaign has said it won’t process any of the donations from the event. [Bloomberg]

The Wall Street Journal tells the story of the last days of Signature. “On Sunday afternoon, March 12, the Fed told Signature that it wouldn’t lend it any more money.” [WSJ]

Why was Signature shuttered? Maybe it was insolvent, but insolvency isn’t the only reason regulators take over a bank. Dirty Bubble suspects the takeover relates to misuse of Signature’s Signet payment network. As well as FTX, the bank “collected a laundry list of other bad actors in the crypto space despite their allegedly strict KYC practices.” [Dirty Bubble]

Freeing crypto from the legacy fiat system

After the demise of Silvergate and Signature, US crypto firms lament that they can’t find new banking partners. CoinDesk asked several banks about crypto — and those that bothered replying said they didn’t want crypto customers. [Bloomberg; CoinDesk]

The Kraken crypto exchange will no longer support ACH transfers following the implosion of Silvergate. “Beginning March 27th, you’ll no longer see a deposit option via Plaid or withdrawal option via ACH Silvergate.” [Twitter; Reddit; CoinDesk]

The Australian Prudential Regulation Authority has told banks to improve their reporting on crypto assets and provide APRA with daily updates. [AFR]

The Federal Reserve has just published its full order denying Custodia Bank’s application for an account at the Fed. We’ll detail this more next time, but we’d summarize it as: “no way are we letting you bozos near the financial system.” [Federal Reserve, PDF] (Update, April 9: Our Custodia report is finally out!)

Return of the FTX Bahamas party fund

FTX US says that FTX Digital Markets (FTX DM) — FTX’s Bahamas entity, whose main practical role was to fund Sam Bankman-Fried’s partying — is a legal and economic “nullity,” and that its bankruptcy should just be folded into the US proceeding in Delaware.

The joint provisional liquidators (JPLs) in the Bahamas have apparently been threatening avoidance actions over payments made by the entities in US bankruptcy. The JPLs also applied in the Bahamas for a ruling that FTX US does not own “core assets.”

FTX US is asking Judge Michael Dorsey for declaratory judgments that FTX DM has no ownership interest in FTX’s cryptos, money, intellectual property, or customer information. In an adversarial preceding, FTX wants the court to assert that the assets lodged under the Bahamas unit were “fraudulent transfers,” and are therefore rightfully owned by FTX US. [Complaint, PDF]

We covered the tale of FTX’s very dodgy Bahamas entity previously. FTX US had reached an agreement with the JPLs, but that agreement appears to have failed.

The US Trustee is appealing Judge Dorsey’s refusal to appoint an examiner in FTX. The bankruptcy appellate panel — three bankruptcy judges from another district within the circuit — will hear that appeal. [Doc 1123, PDF]

The FTX bankruptcy estate is set to get back $404 million from Modulo Capital, a hitherto-unknown Bahamas hedge fund that received $475 million in seed capital from Sam Bankman-Fried in 2022. The court needs to approve the deal. [Bloomberg]

Crypto is really a large derivatives market propped up by an ever-shrinking spot market. Traders want leverage. We predicted in December that a new crypto futures exchange would spring up to replace FTX. A new one hasn’t sprung up yet — but a number of existing exchanges are thinking of buying FTX-owned LedgerX to do this job for them. [Bloomberg]

Image: Dont Kwoff

Posted on March 24, 2023April 9, 2023 by Amy Castor 1

Crypto collapse: The Great Unbanking continues, Bitcoin pumps, FTX, Voyager, Tether

The latest from David and me! In this edition:

The process of cutting Signature up for its organs
Other banking woes across crypto
FTX foolishness
Tether is pumping
Voyager appeal
and we stick our necks out again and predict the near-term obvious

Posted on March 18, 2023 by Amy Castor 0

Crypto collapse: Binance hits reserves, FTX’s Singh sings, miners’ creative accounting, bitcoin markets are thin

This is our second post this weekend! You’ll find our latest on the crypto collapse on David’s blog. [David Gerard]

Also, please support our work via Patreon, if you haven’t already. Our stories are free to read for everyone, but if you want to help us get the word out, become subscribers. Links in post!

In this episode:

More documents have come out on Binance’s “Tai Chi” plan to subvert US regulation.
Binance appears to have been channeling bridged USDC reserves to Cumberland/DRW.
Senators write a scathing letter to Binance, asking for a slew of documents.
We told you bitcoin miners were fiddling accounts!
Nishad Singh, another member of SBF’s inner circle, turns against Sam.
Also, lawyers propose tighter bail restrictions for Sam — a flip phone and virtually no internet access.

Posted on March 5, 2023 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 March 2, 2023 by Amy Castor 0

Crypto collapse: Binance USD shut down, Celsius insiders sued, Paxos, Voyager, FTX

By Amy Castor and David Gerard

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“somethings are better left unsaid. Recommend no more news like these, for the sake of the people, our industry (and your business)”
— Changpeng Zhao, Binance

Binance USD shuts down — party like it’s 2008

Binance USD (BUSD) is a $16 billion stablecoin — an Ethereum ERC20 token — issued by New York-based Paxos. It’s backed by actual dollars in bank accounts.

There’s also a version of BUSD on the Binance BNB Blockchain, bridged from Ethereum. Sometimes the Binance-peg BUSD is fully backed by Paxos BUSD! Other times, it isn’t.

Both the SEC and the New York Department of Financial Services have acted against Paxos and its issuance of BUSD.

The NYDFS has told Paxos to cease issuing BUSD — so there will be no new BUSD after February 21. Paxos has told customers it will proceed with orderly redemptions, as long as they have proper KYC. In its consumer alert, the NYDFS wrote: [WSJ, paywalled; NYDFS; Paxos; PR Newswire]

DFS has ordered Paxos to cease minting Paxos-issued BUSD as a result of several unresolved issues related to Paxos’ oversight of its relationship with Binance in regard to Paxos-issued BUSD.

… It is important to note that the Department authorized Paxos to issue BUSD on the Ethereum blockchain. The Department has not authorized Binance-Peg BUSD on any blockchain, and Binance-Peg BUSD is not issued by Paxos.

The SEC has sent Paxos a Wells Notice alleging that BUSD is an unregistered security. Paxos issued a statement saying it disagrees and is prepared to “vigorously litigate if necessary.” Of course, Paxos is already stopping issuing new BUSD. [WSJ, paywalled; Paxos]

A Wells Notice is a heads-up that an enforcement action is very close to coming your way. Paxos can respond with a Wells Submission — where they try to convince the SEC not to sue them — but we doubt they will because any response would be public. More likely, Paxos will negotiate a settlement.

We don’t know the SEC’s precise issue with BUSD because Paxos hasn’t released the Wells Notice, and the SEC hasn’t filed a complaint yet. But we can make a few educated guesses:

Paxos-issued BUSD is not an “investment contract,” per the Howey test, because there is no expectation of profit. But an investment contract is only a subset of securities. Paxos BUSD is more akin to a “note” — a promise to pay a specified sum — which is presumptively a security, especially since it can be traded. The correct test for a note is the Reves Test. [Justia]
Dollar-backed stablecoins resemble unregistered money market funds. MMFs are also regulated by the SEC.
The SEC may not like Paxos’ relationship with Binance, who do all manner of security-like things with BUSD.
The process of creating a liquid tradeable instrument from a less liquid one is called “securitization.” So Binance peg BUSD, as a more liquid form of Paxos BUSD, is likely a security.
The SEC may also be taking aim at Binance through Paxos. Binance auto-converts all other stablecoins — and incoming actual dollars — to BUSD. So if you have 1 USDC on the Binance exchange, Binance will automatically convert that to 1 BUSD. This makes the BUSD more liquid.

Now that Paxos has stopped issuing BUSD, Binance will have to find another stablecoin to auto-convert to, probably Tether. Coincidentally, Tether just minted another billion USDT. [Twitter]

The BUSD price is still very close to $1. But the Binance exchange has had a surge in withdrawals — $831 million net outflows in 24 hours — and the price of Binance’s free-floating BNB token has crashed. [Coindesk; Twitter]

What does all this mean for Binance? The US has already cut off Binance’s banking by forcing Silvergate and Signature to cut ties with the exchange. Europe and other jurisdictions have done the same. Binance can’t get access to actual dollars, and now it can’t get access to dollars via BUSD either.

Frances Coppola and Dirty Bubble have excellent posts on Binance and its stablecoins. [Coppola Comment; Dirty Bubble]

Fox News reporter Eleanor Terrett posted a rumor on February 14 that the SEC had issued Wells notices to other US stablecoin companies including Circle — ordering them to cease and desist sales of unregistered securities. This turns out not to have been the case! As yet, anyway. [Twitter, archive; Twitter, Twitter]

Celsius and creditors sue the insiders

Based on the jaw-dropping criminality revealed in the examiner’s report, Celsius Network and the Unsecured Creditors’ Committee have filed suit against past executives of Celsius to recover as much money from them as possible. [Doc 2054, PDF]

Celsius and the UCC are suing co-founders Alex Mashinsky, Daniel Leon, and Hanoch “Nuke” Goldstein; former CFO Harumi Urata-Thompson; former general counsel Jeremie Beaudry; former head of trading Johannes Treutler; former vice-president of lending Aliza Landes, who is also Daniel Leon’s wife; and Kristine Mashinsky, wife of Alex.

The suit itself starts on page 25 of the PDF. Most of the complaint reiterates the events detailed in the examiner’s report. The claims are:

breach of fiduciary duty (Celsius was insolvent);
breach of fiduciary duty of loyalty (CEL price manipulations, KeyFi purchase, not avoiding conflicts of interest);
breach of the director’s duties to exercise independent judgment (multiple failures to act);
preferential and fraudulent transfers from July 2021 to May 2022 (insider withdrawals — full list in Exhibit A, PDF page 149).

The plaintiffs ask for actual and punitive damages.

Celsius: Hang on lads, I’ve got a great idea!

Meanwhile, Celsius has a recovery plan! We outlined the various recovery proposals previously. Celsius and the UCC have picked the NovaWulf plan — transfer substantially all assets and businesses to a NewCo, 100% owned by the creditors, and issue SEC-compliant “revenue share tokens.” NovaWulf will contribute $45 million to $55 million in actual cash and manage the company. [Doc 2066, PDF]

The shares will be tokens, but the share issuance has to pass SEC registration. It’s just an ordinary equity stock. But it’ll run on a blockchain, apparently.

“Earn” creditors with claims below $5,000 get liquid crypto (BTC, ETH, and USDC) up to about 70% of their claim.

Other Earn creditors will get liquid crypto and equity in NewCo, which will own illiquid crypto, mining, retail and institutional loans, and other assets. The NewCo will actively seek out new business.

The large Earn creditors will also get an interest in a “well-funded litigation trust” to “vigorously pursue designated litigation claims against certain former insiders of Celsius and other third parties.” (See above.)

Insider CEL claims get zero; outsider CEL claims get $0.20 per CEL.

NovaWulf Digital Management has previously provided services for bitcoin mining (TeraWulf and Marathon). For their $45 million, NovaWulf get … to manage NewCo? There are some Management Share Tokens in the plan.

We think this looks a bit speculative and hopeful. It’s not clear that it’s better than just liquidating. But at least it’s a plan? Celsius creditors large and small seem to be very receptive to hope right now.

FTX examiner denied; Sam’s sportsball shenanigans

In the FTX bankruptcy, Judge Michael Dorsey has denied the US Trustee’s motion to appoint an examiner. It would cost too much time and money: “I have no doubt that the appointment of an examiner would not be in the best interest of the creditors,” he said. “Every dollar spent in these cases on administrative expenses is one dollar less to the creditors.” He thinks John Jay Ray III is sufficiently independent of the previous management’s malfeasance to investigate what happened here just fine. [The Block]

In the FTX criminal case, Judge Lewis Kaplan has ordered the names of Sam Bankman-Fried’s two additional bail bond co-signers to be unsealed. Both are from Stanford. The signer for $200,000 is Andreas Paepcke, a senior research scientist at Stanford University. The signer for $500,000 is Larry Kramer, the former dean of Stanford Law School, and a close friend of Sam’s parents. Neither has had to put in any actual cash as yet. [Bloomberg]

Prosecutors are not happy that Sam has been using a VPN to access the internet. Sam’s lawyers say he used the VPN to access his NFL Game Pass subscription to watch the AFC and NFC championship games, as well as the Super Bowl. We flatly don’t believe that Sam has the faintest interest in any variety of sportsball. [Doc 66, PDF, Coindesk; Bloomberg]

FTX gave $400 million to obscure hedge fund Modulo Capital. The money is currently sitting in a JPMorgan account. JPMorgan was Modulo’s prime broker, handling its stocks and stock futures. In November, the holdings were converted to cash. It’s unclear why federal prosecutors haven’t seized the funds yet. [NYT]

Daniel Friedberg, the former FTX chief regulatory officer, was also a George Santos donor. Truly a fitting donor. [Seattle Times]

Patrick McHenry (R-NC) and Bill Huizenga (R-MI) from the House Financial Services Committee have questions for the SEC about the arrest of SBF. He was arrested the night before he was supposed to testify before the Committee, on charges that the SEC had a part in authorizing. “The timing of the charges and his arrest raise serious questions about the SEC’s process and cooperation with the Department of Justice.” Was the SEC conspiring to get Sam arrested? Huge if true. [Financial Services, PDF]

**Voyager Special Committee [*redacted***]

In Voyager, the Special Committee of the Board of Directors of Voyager LLC has produced an Investigation Report, conducted by Quinn Emanuel Urquhart & Sullivan, which has been filed in redacted form. [Doc 1000, PDF]

Judge Michael Wiles let the company redact the document for privileged information and attorney-client work product, and the Voyager UCC was okay with this. So the executive summary states the report’s conclusion as:

Upon consideration of the factual record developed over the course of the Investigation and research and analysis of relevant legal theories, Quinn Emanuel has concluded [rest of paragraph redacted]

In summary: Voyager, and crypto itself, were both just too good and pretty for such fragile beauty to survive macroeconomic factors and “severe industry headwinds.” Also, a quarter of Voyager’s loan book was an entirely unsecured loan to 3AC. Blame them, they screwed everyone! It is not our fault that we were making blitheringly stupid loans while number was going up — our Risk Committee was only “kind of” formalized. It’s definitely not worth suing the directors or officers, okay?

The report’s entire “CONCLUSIONS AND RECOMMENDATIONS” section is redacted.

Furthermore, [redacted] [redacted] [redacted]

More good news for bitcoin

The trouble with an 18% interest rate is that anything offering those sort of returns in the real world is a Ponzi scheme, and the company offering 18% will go broke and you’ll lose all your money. Celsius and Voyager investors are discovering the other problem — you have to pay tax on that 18% interest, even if the company is in chapter 11 and you can’t get your money out. [Bloomberg]

The Bank of Lithuania has shut down another payment processor, Payrnet UAB — which used to issue credit cards for various crypto companies, including Crypto.com. [Twitter]

Paul Grewal, chief legal officer at Coinbase, argues that none of the prongs of the Howey test of whether a financial product is a security apply to Coinbase’s staking product, which takes money from customers and gives them a return on it. Oookay. [Coinbase, archive]

Every crypto ATM in the UK has been illegal since the FCA refused to license any of the operators in March 2022 and told them to shut down or else. Police, working with the FCA, are finally raiding the operators. [Guardian]

Image: Paxos hosted a party with synchronized swimmers at the Versace Mansion at Bitcoin 2022 in Miami. James Jackman for WSJ.

Posted on February 15, 2023February 15, 2023 by Amy Castor 0

Crypto collapse: Unbanking crypto, Genesis offers DCG shares to creditors, Binance suspends US dollar transactions, SEC goes after staking

Latest from David and me! In this episode:

US banking regulators are sick of crypto’s nonsense
Genesis offers creditors an IOU for future magic beans
Binance loses US dollar access
SEC goes after staking
Frances Coppola dissects Celsius
Paxos
FTX
The death of LocalBitcoins

Posted on February 12, 2023 by Amy Castor 0

Crypto collapse: Crypto.com’s shadow bank Transactive, US banks and crypto, Binance not so good with actual money

By Amy Castor and David Gerard

For your convenience, we still have banking. Contribute to our Patreons — here’s Amy’s, and here’s David’s.
Our patrons can also get a couple of “Bitcoin: It Can’t Be That Stupid” stickers just by messaging one of us and asking.
David has signed author copies of his books for sale. Books are getting through fine, but international stickers may still be delayed after the Royal Mail got ransomwared. [BBC; Royal Mail]
Sign up on Amy’s blog to see every new post she makes as it goes up, and click here and enter your email address for every new post on David’s blog as it goes up.

“funds are safe. we’ve done a risk assessment and found that 100% of hacks happen when someone has access to their coins, so we’re revoking that access to make them even safer”
— Boxturret

Transactive: Lithuania shuts down a money laundromat

Crypto exchanges have trouble finding stable gateways for actual money. Proper banks won’t talk to them, so they turn to shadow banks, which cater to high-risk clients and use lots of tricks to skirt the traditional banking system.

Sometimes the exchanges just lose their gateway — and your money.

We wrote earlier about how Crypto.com customers’ euro deposits were seized by the Lithuanian government as part of an anti-money laundering enforcement action against the exchange’s payment provider, Transactive Systems UAB. Cryptadamus has a great post explaining what happened. [Substack]

If you had EUR on Crypto.com before this, it’s gone. The “EUR” you see in your account is unbacked. Work out what you can do to extract value from your outstanding balance, while Crypto.com gives you the runaround.

Transactive was also the payment channel for crypto lender Nexo, whose Bulgarian offices were recently raided by authorities. Transactive has an office in the UK as well — Transactive Systems Ltd. [Transactive]

After getting authorization from the UK Financial Conduct Authority and the Bank of Lithuania to act as an electronic money institution (EMI), Transactive grew astonishingly quickly in just five years — thanks to its clientele in crypto, gambling, and forex, and whoever else they were processing money for. [Bloomberg, archive]

Given Transactive’s sordid history, it’s amazing that the FCA authorized them at all.

Transactive emerged from the rubble of PacNet Services, an international payments company that started in Vancouver. PacNet was forced to wind down after the US Treasury sanctioned it as a “transnational criminal organization” — specifically, being the middleman for mail-fraud scam artists. Several PacNet executives were charged with fraud and money laundering. [US Treasury, 2016; DOJ, 2019]

A CNN investigative report from 2016 details how PacNet employees moved large piles of money around the world. PacNet set up bank accounts in the names of shell companies, they sent packages of cash labeled “legal documents,” they bribed Russian banking officials, and they even used a private plane to ferry cash to customers. [CNN, 2016]

So the money launderers left PacNet and moved over to a totally legitimate new business —Transactive, co-founded by convicted healthcare scammer Scott Roix.

In February 2022, the Bank of Lithuania fined Transactive 20,000 EUR for commingling customer and company funds. Transactive had also misreported its customer balances and its equity capital. [Lieutvos Bankas, in Lithuanian]

In January 2023, the Bank of Lithuania accused Transactive of massive money laundering and froze the company’s funds. It ordered Transactive to stop servicing clients in finance, forex, and crypto, pending a review. [Lietuvos Bankas, in Lithuanian]

Transactive notified clients about this trivial hiccup and said their funds were being “safeguarded” — a word meaning “you’ll never see your money again.” If an investigation discovers any of the money was dirty (if!), the government will seize the funds. [Reddit]

Crypto.com has told its euro-using customers that their SEPA (Single Euro Payments Area) transfers are being migrated to a new provider. Now the exchange has to find a new provider.

Here are Crypto.com customers screaming into the void to get their funds back. Crypto.com has yet to tell them what actually happened to their money. [Twitter, Twitter]

Unless Crypto.com had euros stored somewhere other than Transactive Systems UAB, they are likely insolvent in EUR and will have to start from scratch, paying withdrawals with new deposits until they can somehow fill the gap — or not.

US crypto banks are out of favor

In the US, Crypto.com still banks with Silvergate, which allows their institutional clients to transfer USD from their bank accounts to the exchange. This channel may have problems in the near future, due to Silvergate’s dealings with FTX.

The US Federal Reserve really, really hates banks touching crypto and is not putting up with it even a bit — especially after Silvergate needed a $4.3 billion bailout. The Fed issued a policy statement on January 27: [Federal Reserve; Federal Reserve, PDF]

“The statement makes clear that uninsured and insured banks supervised by the Board will be subject to the same limitations on activities, including novel banking activities, such as crypto-asset-related activities.

In particular, the preamble would provide that the Board would presumptively prohibit SMBs from holding most crypto-assets as principal, and also would provide that any SMB seeking to issue a dollar token would need to demonstrate, to the satisfaction of Federal Reserve supervisors, that the bank has controls in place to conduct the activity in a safe and sound manner, and to receive a Federal Reserve supervisory nonobjection before commencing such activity.”

That second paragraph directly addresses Silvergate’s plan to revive Diem (née Facebook’s Libra) and do their own private stablecoin for retail customers. Yeah, no. Silvergate says it’s written off its Diem investment after previous regulator refusals to let them print private money, but the Fed evidently thought it was still worth emphasizing their “no.”

The US Department of Justice is investigating Silvergate over its FTX and Alameda Research dealings. FTX customers were wiring money to Alameda and to Alameda’s dubious subsidiary North Dimension via the bank, thinking that money was going directly to FTX. The DOJ wants to know what Silvergate knew, and when they knew it. [Bloomberg]

Binance: increasingly freed from the chains of filthy fiat

In the UK, the Binance crypto exchange should have no access to pounds, ever. After the Financial Conduct Authority warned in March 2022 that “in the FCA’s view, Binance Markets is not capable of being effectively supervised,” UK banks cut off direct deposit to Binance immediately. [FCA, 2022]

But Binance knows you can’t keep a dedicated gambling addict down, so they keep trying to weasel their way back into the UK’s Faster Payments network, most recently through payments processor Paysafe. Sometimes this works. Binance recommends UK customers send money in and out via Visa — but even that’s being cut off by the banks. [Twitter; CoinDesk]

Cryptadamus traces Binance’s Visa connection — Binance owns crypto debit card issuer Swipe, which it bought in 2021! Swipe also issued a crypto debit card for FTX. [Twitter; Binance; FX Empire]

Australian users also report payment issues with Binance — even via Visa. [Twitter]

In the US, Binance users say they can’t withdraw funds in amounts of less than $100,000 from American banks. Binance says that’s fake news and everything is fine. Cryptadamus has been documenting the difference between Binance’s official statements and what customers report. [Reddit]

When Bitfinex was cut off from banking in 2017, users would buy bitcoins just to get their funds out of the exchange. This drove the price of bitcoin up and may have helped trigger the 2017 crypto bubble. So all of this is good news for bitcoin!

FTX in bankruptcy

At the next FTX bankruptcy hearing on February 6, Judge John Dorsey will hear arguments for and against appointing an examiner. FTX and the Unsecured Creditors’ Committee are against hiring an examiner, but the US Trustee and various state regulators want one. John Reed Stark thinks it’s absolutely necessary. [Agenda, PDF; LinkedIn]

Brian Glueckstein of Sullivan & Cromwell for FTX filed a declaration in support of FTX’s objection to an examiner. It’s 3,855 pages of mainly exhibits. But the US Trustee wants it stricken from the record because the deadline to file was January 25, and Glueckstein filed on February 3, one business day before the hearing. Oops. [Declaration, PDF; Doc 617, PDF]

FTX is suing Voyager for repayment of $446 million of loans. After Voyager filed for bankruptcy in July, it demanded repayment of all outstanding loans to FTX and Alameda. FTX paid the money back for Alameda — but because they paid it back so close to FTX’s bankruptcy filing, FTX wants to claw it back again. [Complaint, PDF; Reuters]

In the legal case against Sam Bankman-Fried, Judge Lewis Kaplan has barred Sam from using Signal or Slack and from contacting any former FTX employees without lawyers present until February 9, when he’ll hear arguments. He wasn’t impressed when Sam reached out to a key witness, who we assume is FTX US counsel Ryne Miller, to “vet” things on the phone. [Order, PDF]

SBF’s bail conditions required two more sureties. These are now in, with their names redacted: $200,000 and $500,000. Judge Kaplan has agreed to unseal the names, but they’ll remain redacted pending possible appeals. [Bond, PDF; Bond; PDF, Memorandum Opinion, PDF]

Digital Currency Group

The second day hearing in the Genesis bankruptcy is February 22. No agenda yet. We wonder if anyone will attempt to go after Genesis’ owners, DCG. [Notice, PDF]

The Gemini crypto exchange implied to its Gemini Earn customers in 2022 that their deposits were protected by FDIC insurance, and customers took Gemini’s statements to mean they were protected by the FDIC from Genesis failing. But Gemini didn’t technically say that! So it must be fine, right? [Axios]

DCG’s crypto news site CoinDesk claimed to have prospective buyers approaching them unsolicited and offering hundreds of millions of dollars for the site. The new rumor is that the prospective buyers are looking at buying only parts of the site — the conference business or the media outlet — and certainly not at paying hundreds of millions of dollars. [Twitter]

Other good news for bitcoin

Coinbase was fined 3.3 million EUR (USD$3.6 million) by De Nederlandsche Bank for not registering as a money transmitter in the Netherlands. [Reuters]

Coinbase bragged about having proper registration in September 2022. But the violation occurred in the years prior when they weren’t properly registered. [Coinbase, 2022]

MicroStrategy posts another loss. This is its eighth straight quarterly loss in a row. Before former CEO Michael Saylor started to amass bitcoin in 2020, the company had $531 million in cash. Now it’s down to $43.8 million in cash. [Bloomberg]

MicroStrategy is one of the loans that Silvergate is particularly worried about. In March 2022, MicroStrategy borrowed $205 million in a three-year loan from Silvergate. The loan was collateralized with bitcoin — and Silvergate will need to worry about that too.

Image: PacNet’s part owner Don Davis (on the left) posted on LinkedIn. Airplanes are great for moving piles of cash.

Posted on February 5, 2023February 6, 2023 by Amy Castor 0

Crypto collapse: FTX family subpoenas, SBF witness tampering, Celsius bids revealed, more crypto banking woes

By Amy Castor and David Gerard

For your convenience, we still have banking. Contribute to our Patreons — here’s Amy’s, and here’s David’s.
Our patrons can also get a couple of “Bitcoin: It Can’t Be That Stupid” stickers just by messaging one of us and asking.
David has signed author copies of his books for sale. Books are getting through fine, but international stickers may still be delayed after the Royal Mail got ransomwared. [BBC; Royal Mail]
Sign up on Amy’s blog to see every new post she makes as it goes up, and click here and enter your email address for every new post on David’s blog as it goes up.

FTX: It’s a family affair

FTX’s lawyers have questions. Specifically, they have questions for Sam Bankman-Fried’s brother Gabriel and his parents, Joseph Bankman and Barbara Fried.

Joseph advised FTX. He recruited its first lawyers and joined FTX staff in meetings on Capitol Hill. When visiting the FTX offices in the Bahamas, he and Barbara stayed in a $16.4 million house with its title in their names. Barbara founded a political action committee called Mind the Gap, which received donations from FTX.

Gabriel launched Guarding Against Pandemics, an organization funded by Sam. Gabriel purchased a multimillion-dollar property in Washington D.C., which John Jay Ray III’s current FTX team believe was purchased using FTX customer funds.

Every member of Sam’s family had some involvement in FTX — and they aren’t responding to requests for documents. So Ray’s team and the Unsecured Creditors’ Committee (UCC) want to subpoena Joseph, Barbara and Gabriel under rule 2004. [Doc 579, PDF; Bloomberg]

We’ve detailed rule 2004 previously. Federal Rule of Bankruptcy 2004 allows tremendously broad discovery and deposition. A witness is not always entitled to attorney representation or cross-examination and has only a limited right to object to questions. 2004 exams are sometimes referred to as “fishing expeditions” — because they need to be.

Included in the same 2004 motion, Ray is also asking the court’s permission to subpoena Sam and several other FTX insiders, including FTX cofounders Gary Wang and Nishad Singh, former Alameda CEO Caroline Ellison, and former FTX COO Constance Wang. Along with SBF’s family, they have not been very responsive:

“Mr. Wang and Ms. Ellison expressly declined to provide the requested information, and Ms. Fried has ignored the Requests altogether. The Debtors have not received meaningful engagement or any response from Mr. Singh or Mr. Gabriel Bankman-Fried.”

Ray’s team are investigating the FTX hack on November 11-12, which saw $300 million in crypto siphoned off the exchange while crypto Twitter watched in horror. They’ve requested an order pursuant to Rule 2004 here too — under seal, because the information in the motion could “reveal or lead to evidence that will reveal the identity and activities of the perpetrator(s).” It sounds like they already have a very good idea who was behind the hack. [Doc 581, PDF]

A mostly-unredacted list of FTX creditors is now available. It includes investment banks, such as Goldman Sachs and JPMorgan; media companies, such as the New York Times and Wall Street Journal; commercial airliners, including American, United, Southwest, and Spirit; as well as several large tech players, including Netflix, Apple, and Meta. Individual customers’ names remain withheld. [Doc 574, PDF]

FTX objects to the US Trustee’s request to appoint an independent examiner. They argue an examiner would duplicate work that’s already underway by FTX, the UCC, law enforcement, and regulators. “Indeed, if history is a guide, the cost could near or exceed $100 million.” They point out that “it is difficult to imagine an examiner candidate whose qualifications exceed those of Mr. Ray.” Which is a good point. The UCC concurs. [Doc 573, PDF; Doc 571, PDF]

What’s a little witness tampering between friends?

SBF is playing fast and loose with potential witnesses in his criminal trial. He contacted “Witness-1,” the “current General Counsel of FTX US” (Ryne Miller) to work out a story with. We doubt Miller would want anything to do with such a scheme. But this was enough for the government to ask Judge Lewis Kaplan to modify Sam’s bail: [DOJ letter to judge, PDF]

“Specifically, the Government respectfully requests that the Court impose the following conditions: (1) the defendant shall not contact or communicate with current or former employees of FTX or Alameda (other than immediate family members) except in the presence of counsel, unless the Government or Court exempts an individual from this no-contact rule; and (2) the defendant shall not use any encrypted or ephemeral call or messaging application, including but not limited to Signal.”

SBF’s lawyers responded by pounding the table. Judge Kaplan has told both sides to chill. The government should get its reply in, with substantiation of its claims, by February 2. [letter, PDF; order, PDF]

Dirty Bubble has found another link between FTX and the fraud-riddled binary options industry. In September 2021, FTX purchased the ZUBR derivatives exchange for $11 million. The exchange was registered in Gibraltar. By the time Gibraltar rescinded ZUBR’s license, the exchange had no active customers. The exchange was a collaboration ~~between Belarusian binary options and crypto “billionaire” Viktor Prokopenya and his former business partner~~ Said Gutseriev, the son of one of Russia’s wealthiest oligarchs. [Dirty Bubble]

(Update, March 15, 2023: Viktor Prokopenya tells us he “never had any commercial interest or other involvement in ZUBR.” Dirty Bubble has updated his story to note that FTX purchased ZUBR directly from Prokopenya’s business partner Said Gutseriev. Dirty also notes interesting connections between ZUBR and Prokopenya’s other entities in his story.)

Would it surprise you to learn that FTX made political donations to George Santos? [SFGate]

Celsius Network: Let’s make more magic beans!

Celsius has rejected the Binance US bid for Celsius assets, and four other bids. In the January 23 hearing, Ross Kwasteniet of Kirkland & Ellis, speaking for Celsius, said the bids “have not been compelling.”

Instead, Celsius have concocted a plan to reorganize into a publicly traded company and issue a new “Asset Share Token” to creditors. Those following the Celsius disaster will recognise this as Alex Mashinsky’s very dumb and bad Kelvin Plan from September 2022.

Creditors weren’t told about the other bids. As it happened, Tiffany Fong — Celsius creditor and YouTuber — got all the bids in a leak in December. Bidders included Binance US, Bank To The Future (Simon Dixon), Galaxy Digital, Cumberland DRW, and NovaWulf. Fong posted full text of the leaked bids. [Substack; Youtube]

Binance US: buy just the crypto, assume liabilities (with a haircut); excludes FTT, CEL, and other illiquid trash tokens. Pay $15 million cash.
Bank to the Future: crypto returned to customers pro rata. Other Celsius assets to special-purpose vehicles, customers get an ownership share. Cash to be raised through rights offering to creditors.
Galaxy Digital: Acquire illiquid assets and staked ETH. Pay $66.8 million cash.
Cumberland DRW: Purchase certain tokens and portfolio of alternative investments, excluding CEL. $1.8 billion total payment, includes various haircuts.
NovaWulf: Transfer substantially all assets and businesses to SEC-compliant NewCo, 100% owned by the creditors. Issue revenue share tokens. NovaWulf to pay $60-120 million, mostly in tokens. This is also a version of the Kelvin plan.

Many ad hoc creditors were disappointed that the Binance bid was rejected — but it shouldn’t be surprising, given the issues that Binance is already having with its bid for Voyager.

Frankly, we don’t think the other bids look all that great either — they’re fanciful coiner dreams that first assume the crypto market is healthy, which it isn’t.

We think Celsius should have just liquidated in July rather than taking several months and handing millions of dollars to bankruptcy professionals to get to the same place.

Banks

Silvergate is short on cash, so it’s suspended dividend payments on its preferred stock. [Business Wire]

The stock in question (NYSE:SI) is going down the toilet. It’s crashed from $220 in November 2021 to below $14 in January 2023. Signature Bank (NASDAQ: SBNY) has gone from $365 to $127 over the past year.

Moonstone Bank says that “recent events” — FTX tried to use them as a financial laundromat — and “the changing regulatory environment around crypto businesses” — the regulators are on the warpath — have prompted it to ditch the “innovation-driven business model” it adopted in recent years. [WSJ, paywall]

Federal bank regulators are not keen on dodgy crypto banks authorized by captured Wyoming state regulators. Custodia Bank can’t get a Fed account: [Federal Reserve]

“The Board has concluded that the firm’s application as submitted is inconsistent with the required factors under the law. Custodia is a special purpose depository institution, chartered by the state of Wyoming, which does not have federal deposit insurance. The firm proposed to engage in novel and untested crypto activities that include issuing a crypto asset on open, public and/or decentralized networks.”

Crypto.com’s old gateway for GBP and EUR was Transactive Systems of Lithuania. Transactive has been cut off by the Bank of Lithuania, after it found “significant violations and shortcomings of the Law on the Prevention of Money Laundering and Terrorist Financing.” Transactive had apparently been giving accounts to a long list of low-quality institutions in low-quality jurisdictions. Transactive can no longer serve financial institutions, forex, or crypto clients. They also got cut off from the UK Faster Payments system. Your EUR and GBP sent to Crypto.com via Transactive are probably now stuck. [Twitter; Offshore CorpTalk; Bank of Lithuania, in Lithuanian]

Before Crypto.com got kicked off Silvergate, it used to get US dollar deposits via an oddly roundabout method: customers would send USD to Circle’s account at Silvergate, and Circle would mint that much USDC and send the USDC to Crypto.com. It is possible this was not in full compliance with KYC and AML regulations. [Twitter; crypto.com, archive]

Other happy little accidents

London-based crypto exchange Luno, a subsidiary of DCG, is laying off 35% of its staff. About 330 employees will be let go from the firm, which has offices in Africa, Asia, and Europe. [WSJ, paywall; archive]

DeFi volumes are right down. The amount of money (or “money”) involved has been flat for months, and — most importantly — you can’t get the ridiculous yields you could in the bubble. Oh no! Anyway. [Bloomberg]

Happy Penis Day, to those who celebrate

It was five years ago today, January 28, 2018, that the Prodeum initial coin offering took everyone’s money and disappeared, leaving behind only a new jargon term for “exit scam” or “rugpull.” You get a penis! And you get a penis! And you get a penis! Everybody gets a penis! [The Next Web, 2018]

Image: Sam Bankman-Sopranino and family.

Posted on January 28, 2023March 16, 2023 by Amy Castor 2

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Independent Journalist

A perfect backer

Tether’s banking dilemma

Tether pivots to AI

How the money, if any, flows

Get rich quick

I’m totally good for it, bro

The SEC rap sheet

The Fed and DFPI rap sheet

What happens in the SEN stays in the SEN

Silvergate and FTX

Whoops, liquidity!

Borrowing to cover debts

What does this mean?

Coinbase gets out the conspiracy board

Bill’s beautiful launderette

Paolo’s beautiful launderette

FTX: Salame sliced

The war on Terra

Regulatory clarity

Still good news for bitcoin

The amended complaint

FTX/Alameda: MONEY PARTY THE BEST PARTY

Moonstone Bank

North Dimension: Ipad 11 “ich Cell Phone

Tether and Deltec

FTX’s alleged Tether scam

Attachments to the complaint

Harborne corrects the record by lawsuit

Squeal!

Just in case

Heading for the trillion

And now, a word from our sponsors

Tightening Tether’s tethers

SEC answers Coinbase’s prayers: “No.”

4 (continued)

FTX: The IRS wants its money

Three Arrows Capital

Crypto media in the new Ice Age

Regulatory clarity

Santa Tibanne

Trouble down t’ pit

More good news for bitcoin

Regulatory clarity for Kraken

SEC trashes Celsius bankruptcy plan

My beautiful launderette

Now that’s effective altruism

Stablecoins for the UK

Bitfinex suffers hardly any data leakage to speak of

More good news for bitcoin

What happened?

How Earn worked

Paper thin

DCG’s piggy bank

If you owe Gemini a billion dollars, then Gemini has a problem

Customer service

The consequences

Crypto’s not dead! Look, it’s still twitching

Coinbase: We didn’t do it, nobody saw us, and it wasn’t even a thing

Tether: Yes! We have no Chinese commercial paper

FTX versus the venture capitalists to the stars

More news from Chapter 11

Three Arrows Capital: What Su and Kyle did next

Regulatory clarity

The ETF trick will surely work this time

The good news for bitcoin continues its monotonous patter

“Attorney-1” was a bad boy

Following the money

No, no, it’s research

Time travel by document

Sam the philanthropist

FTX sues Friedberg

Chief noncompliance officer

Hush money

Other FTX news

Temperature drop

DCG: When your left pocket can’t pay your right pocket

Binance is outraged at Reuters catching them out again

Hong Kong brings some regulatory clarity

Regulatory clarity around the world

**Terraform Labs did nothing* wrong**

**Voyager Special Committee [*redacted***]