Tag: FTX

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 by Amy Castor 0

Silvergate, banker to the crypto world, is going down

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

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

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

Now it has to pay that money back.

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

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

Posted on by Amy Castor 0

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

  • By Amy Castor and David Gerard

“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 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

“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 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

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 by Amy Castor 2

Crypto collapse: Genesis bankrupt, CoinDesk for sale, Bankman-Fried attacks FTX lawyers, Bitzlato busted

  • By Amy Castor and David Gerard

I think we made some tremendous progress in the six months before I left.

— Jeffrey Skilling, Enron

Media stardom

Amy’s first piece for Foreign Policy is out now! “The Crypto Dominoes Are Still Falling: The bankruptcy of Genesis shows the need for regulators to have teeth.” She advises that regulators be given the power to act much more quickly against obvious nonsense. [Foreign Policy, paywalled]

Genesis goes down — DCG is fine, fine

The lending arm of Genesis finally filed for chapter 11 in the Southern District of New York on January 19. This has been expected for months, as they froze withdrawals in November. [Amended Petition, PDF; docket on Kroll; press release; Bloomberg; Michael Lito declaration, PDF]

The corporate entities that filed were Global Holdco and its lending subsidiaries Genesis Global Capital and Genesis Asia Pacific, which managed Genesis lending for Three Arrows Capital. Genesis’ derivatives, spot trading, broker-dealer, and custody businesses were not part of the bankruptcy.

Genesis owes its top 50 creditors — mostly unnamed on the petition — over $3.4 billion. Gemini Earn clients are collectively owed $765.9 million. Other big claims include a $78 million loan payable from Donut (a “high-yield” DeFi platform — “high yield” is a euphemism for “Ponzi”) and a VanEck fund with a $53.1 million loan payable. [Reuters]

But fear not! Genesis has a plan to exit the bankruptcy by May 19. It will try to sell its assets at auction within three months. [Chapter 11 Plan, PDF]

The settlement proposal is written in a confusing and opaque manner — but DCG controls the bankrupt entities utterly. DCG is trying to declare its left hand solvent and its right hand bankrupt, and stick the creditors with the losses.

Page 50 of the chapter 11 plan (page 54 of the PDF) sets out the street corner shell game. Claims are shuffled between the bankrupt Genesis entities and the non-bankrupt DCG entities such that heads DCG wins, and tails the creditors lose. Any Gemini Earn creditor who accepts this settlement relinquishes all claims against DCG, Gemini, and the Winklevoss twins personally.

We think DCG screwed up by covering for Genesis in July 2022, when it took on the claim to 3AC and issued Genesis a $1.1 billion promissory note in return. It’s clear that nobody at Genesis could refuse the offer — that this was entirely in the control of DCG. Also, the 3AC loan was secured in part by shares of GBTC, as issued by DCG’s Grayscale. Genesis should have declared bankruptcy then.

In addition to the $1.1 billion note, DCG owes Genesis another $575 million, in cash and cryptos. The Genesis bankruptcy is all about shielding DCG from liability.

“This SHOULD be criminal,” Nicholas Weaver said. “You sell a billion dollars worth of unregistered investments (it is called ‘securities fraud’), they go sour, your victims should be able to go after you. But this is all designed to basically be a perfect crime: a billion dollar theft, in plain sight, and with legal protection.” He advises the unsecured creditors’ committee to reject the offer. [Mastodon]

Gemini Earn claims against Genesis are part of the bankruptcy. It’s unlikely the customers will get all their money back in chapter 11. The question is: will Gemini make Earn depositors whole, or will the Winklevosses argue that Earn depositors are creditors of Genesis?

Cameron Winklevoss is still fighting to get Genesis to pay up. He threatened to sue DCG over the bankruptcy: “Unless Barry and DCG come to their senses and make a fair offer to creditors, we will be filing a lawsuit against Barry and DCG imminently.” [Twitter]

As we noted previously, the SEC case against Gemini Earn makes Gemini and Genesis jointly and severally liable to pay back customers in full, should the SEC win or the defendants settle. And Gemini has the funds and isn’t bankrupt. So Cameron really wants DCG to pay.

Who wants to buy CoinDesk?

DCG’s crypto news site CoinDesk is exploring a partial or full sale. CEO Kevin Worth says that CoinDesk has received multiple unsolicited offers of over $200 million. We raised an eyebrow at this claim, but hey. We doubt the offers were in actual cash dollars, though. [WSJ] 

CoinDesk claims it received $50 million in revenue in 2022. It’s unclear where from. Its main income source was events — which are not so huge in the crypto winter. There are a few ads on the site. Staff expansions in the past year, particularly at CoinDesk TV, won’t have been cheap.

CoinDesk has been propped up by DCG since 2016 when Barry Silbert bought the site for $500,000. We understand that CoinDesk was about to go broke when Silbert dived in and rescued it. CoinDesk was still a small crypto blog then, but Silbert took it into the big time just in time for the 2017 bubble.

CoinDesk’s job is to be a PR machine for Silbert’s empire — often quite explicitly. [CoinDesk memo, archive] The only reason to buy CoinDesk would be to make it your PR machine.

3AC and CoinFLEX — a remarkable team

Three Arrows Capital founders Zhu Su and Kyle Davies are looking to raise $25 million for a new crypto claims exchange. That is, an exchange for claims against bankrupt crypto companies. 3AC are, of course, experts in going bankrupt in a really big way.

Zhu and Davies were going to name their new thing GTX — a take on FTX because G comes after F. They claimed this was just a temporary name after everyone made fun of them.

The pair are working alongside CoinFLEX founders Mark Lamb and Sudhu Arumugam. CoinFLEX filed for restructuring in the Seychelles in June after it suffered $84 million in losses from a large individual customer — Roger Ver. 

GTX will run on CoinFLEX’s software and a legal team will oversee the onboarding of claims for all the recent crypto bankruptcies —including Celsius, Voyager, FTX, and Mt. Gox. Creditors who transfer their claims to GTX will receive credit in a token called USDG. [The Block]  

In its pitch deck, GTX estimated there was a $20 billion market for crypto claims, based on the notional value of those claims. “We can dominate the crypto claims market within 2-3 months of go-live.” [WSJ, paywalled; FT, paywalled; pitch deck, archive, PDF]

The pitch deck ends with a splash detailing 3AC and CoinFLEX’s extensive crypto market successes. This fails to mention that both companies went broke — and that 3AC went broke so hard they took out much of crypto all by themselves.

GTX gets full points for audacity, and here’s to Zhu and Davies going to jail.

FTX: Judge says Sullivan & Cromwell can stay

Amy and Molly White live-tweeted the FTX hearing on Friday, January 20. It was about FTX’s applications to retain various bankruptcy professionals, mainly Sullivan & Cromwell. [Twitter; Twitter, Agenda, PDF]

Judge John Dorsey ruled FTX could continue using Sullivan & Cromwell, despite claims the law firm was too conflicted. [Order, PDF; Motion, PDF]

The US Trustee and the UCC had originally objected to S&C on the grounds the firm failed to make relevant disclosures regarding its prior dealings with FTX. But leading up to the hearing, the parties worked things out, and now the UST and UCC are on board. The only remaining objections came from FTX creditor Warren Winter, with a joinder from FTX creditor Richard Brummond. [Objection, PDF; Joinder, PDF]

In support of Winter’s objection, former FTX (and Ultimate Poker!) lawyer Daniel Friedberg filed a hilariously terrible declaration. Friedberg describes how shocked he was to learn that $8 billion of FTX customer money was missing. After reviewing his “ethical obligations” — a bodily organ hitherto unknown to Mr. Friedberg — he resigned. He tries to imply that S&C took FTX into bankruptcy so they could loot the corpse, helped from the inside by S&C’s former law partner, Ryne Miller. [Declaration, PDF]

Because Friedman filed his declaration late, White followed with an emergency motion to adjourn the hearing, so the court would have more time to chew on it. [Motion, PDF]

S&C’s James Bromely said Sam Bankman-Fried was behind all of this troublemaking. Friedberg’s declaration came hot on the heels of social media posts by SBF attacking the law firm. SBF is living in his parent’s home with an ankle bracelet and Friedberg has been questioned by the FBI. The pair were part of the inner circle that brought down FTX, said Bromely:

“If you are Mr. Bankman Fried or Mr. Friedberg, there is a concern about what is going on and what could happen to them. They can’t throw stones at the US attorney’s office. But they can throw stones at the Debtor’s counsel who are providing information to the prosecutors and the regulators, which is exactly what is happening.” 

As far as Friedberg goes, Bromely added: “He’s got a checkered past. It takes a lot of guts for him to put something in writing that says, ‘I was the chief compliance officer at FTX.’”  

Judge Dorsey dismissed everything in the Friedberg declaration saying, “It’s full of hearsay, innuendo, speculation, and rumor… certainly not something I would allow to be introduced into evidence in any event.”

FTX CEO John Jay Ray III said in his declaration S&C are not the villains. The villains are being pursued by criminal authorities. [Ray declaration, PDF]

We concur that S&C may be conflicted. But they’re competent to do the job, they’ve already spent 70 days on the case, which new counsel would have to do over, and it’s not like someone else would be cheaper.

The Trustee also wants to appoint an examiner in the case. The examiner motion will be heard on February 6. 

FTX: mycrimes.blog

A new mycrimes.blog just dropped, with more drafts from Sam’s forthcoming book* If Caroline and CZ and John Ray and Sullivan & Cromwell Did It. SBF claims that FTX US was solvent when he passed it off to the lawyers, Sullivan & Cromwell. John Jay Ray III responds: “This is the problem, he thinks everything is one big honey pot.” [Substack; WSJ]  

FTX secretly channeled a $50 million loan to Deltec Bank in the Bahamas, in a deal struck with Deltec chair Jean Chalopin. “Deltec is emerging as a central figure in the scrum of lawyers, banks and unwitting associates FTX pulled into its orbit.” Our regular readers will recognize Deltec as the known banker for Tether, who have occasionally claimed to hold more dollars for Tether than are documented in the entire Bahamas banking system. [Forbes, paywall]

It was obvious to executives and software developers at FTX that financial arrangements between FTX and Alameda were somewhat odd as early as 2020. FTX employees have been leaking documents to the New York Times. [NYT]

CFTC commissioner Christy Goldsmith Romero gave a speech on FTX’s failure and the nature of public trust in crypto firms. She goes in hard, particularly after the professional gatekeepers: “lawyers, accountants, auditors, compliance professionals and other gatekeepers for crypto firms failed customers in their essential duties.” Venture capitalists and pension funds too. She wants Congress to give the CFTC more power over crypto exchanges. [CFTC]

Romero also went after FTX’s venture capital backers on Bloomberg TV: “What kind of due diligence did they conduct? Why did they turn a blind eye to what should have been really flashing red lights?” [Bloomberg]

* c’mon, you know he will

Bitzlato: Ladies and gentlemen, we got ’em

Everyone heard about the huge Fed announcement of an international cryptocurrency bust and went … who the hell is Bitzlato? Some tiny Hong Kong exchange run by some Russian living in Shenzhen? [Press release; order, PDF; affidavit, PDF]

Bitzlato, formerly called ChangeBot, was a small exchange with a peer-to-peer service, similar to LocalBitcoins. Its user base was Russian crooks doing crooked things with fake accounts. Users with valid Know-Your-Customer info would create “drop” accounts which they would then sell to crooks. So Bitzlato could say it had KYC, even if it didn’t do anything.

Bitzlato was not systemic to the crypto economy. But it was important to the Russia-based ransomware economy, and it was the exchange of choice for users of the Hydra darknet market that was busted in April 2022.

The Feds basically enacted Nicholas Weaver and Bruce Schneier’s 2021 plan to take out ransomware: hit the very few exchanges willing to touch such tainted coins. [Slate, 2021]

The fun part of the FBI affidavit is the tales of Bitzlato’s criminal customer service, page 10 onwards:

•‌ On or about December 27, 2017, a user with the username “Dude Weed” wrote to Bitzlato’s customer service portal, stating: “I have a bitcoin wallet in my account on the Hydra site. I also have a wallet here … How do I recharge a Hydra wallet”? The user also provided transaction details. Based on my training and experience, this query reflects the user’s desire to send funds from Bitzlato to Hydra. A Bitzlato representative responded: “Hello dude weed,” apologized for the delay in the transaction, and stated that “The transaction successfully went online.” The Bitzlato representative provided a link to an online blockchain explorer, reflecting a completed Bitcoin transaction whose total amount was then equivalent to approximately $14,600.

•‌ On December 17, 2020, a Bitzlato representative asked a user to provide his identity documents. The user protested, writing, “I don’t quite understand why you need a photo of this card? It’s not mine[.]” In further conversations, the user clarified that “everyone on the site trades with other people’s cards … they often discuss so-called ‘drops.’” The user commented that he had been told to create an account using credentials supplied by an online cryptocurrency training course that he had found on Instagram. The Bitzlato representative asked the user to provide his true identity documents and, rather than terminate that user, said the user could keep trading on Bitzlato.

Image: Cameron Winklevoss on Instagram

Posted on by Amy Castor 1

Crypto collapse: DCG’s problem is Grayscale, FTX Bahamas agreement, DeFi trading arrest, Silvergate Bank, Huobi, Binance

  • By Amy Castor and David Gerard

Oh, what a tangled web we weave, when first we practice to deceive!

— Sir Walter Scott, 1808

DCG: Congratulations, you played yourself

The Department of Justice’s Eastern District of New York and the SEC are looking into money flows between Barry Silbert’s Digital Currency Group and its lending subsidiary Genesis, and what investors were told about the transfers. [Bloomberg]

DCG has been playing all the same games as the rest of crypto — trying to create the illusion of money where there is no money, to keep the party going a little bit longer.

Genesis should have declared insolvency in June when Three Arrows Capital (3AC) blew a $2.4 billion hole in its accounts — but DCG purchased 3AC’s defaulted loan from Genesis and financed the purchase with a promissory note of $1.1 billion, to be paid back over 10 years.

That is: DCG and Genesis counted an internal IOU as money, to claim Genesis was still solvent.

The catch with the promissory note is that if the 10-year loan is “callable” — meaning DCG would have to pay Genesis the full amount immediately in the event of a liquidation or bankruptcy — then it could give Genesis creditors a claim on DCG itself, and take all of DCG down with it.

“The Promissory Note is like a noose wrapped tight around the neck of DCG. If Genesis goes over the cliff, it drags DCG with it,” said Ram Ahluwalia, the co-founder of Lumida, an investment advisory firm that focuses on crypto. [Twitter]

In a letter to shareholders in November, Silbert disclosed that DCG borrowed another $575 million from Genesis — due in May 2023. The funds were used for “investment opportunities” and buying back shares of DCG stock from outside investors. [Twitter]

A creditor committee that includes crypto exchange Gemini presented Genesis and DCG with a plan to recover the assets. Silbert had until January 8 to respond. Cameron Winklevoss threatened that “time is running out.” [Twitter; Twitter]

We think Gemini will try to force Genesis into involuntary chapter 11 — they just need three creditors to file a petition with the bankruptcy court. The judge then holds a hearing and decides if the matter will go through. [11 U.S. Code, section 303]

Gemini Earn, Genesis, GBTC, and 3AC

As is usual in crypto, DCG screwed itself by greed. DCG also owns Grayscale, which operates the Grayscale Bitcoin Trust (GBTC) — DCG’s cash cow. Grayscale collects a whopping 2% annual fee on its assets under management — currently, 633,000 BTC.

GBTC traded above the face value of the bitcoins in the fund up to early 2021 — then it dropped below net asset value (NAV).

Genesis took the crypto it got from Gemini Earn customers and lent those funds out to institutional investors and crypto hedge funds — such as Three Arrows Capital.

3AC was one of the biggest investors in GBTC, taking advantage of a lucrative arbitrage opportunity. They would borrow bitcoins from Genesis and swap those for GBTC shares at NAV from Grayscale. After a six-month lockup, 3AC could dump the shares on retail for a handsome profit. Rinse and repeat, and when GBTC was trading at 20% above NAV, they could make a 40% profit a year that way

This GBTC arb played a big role in keeping the price of bitcoin above water in 2020, setting the stage for the 2021 bitcoin bubble.

At the end of 2020, 3AC was the largest holder of GBTC with a position worth $1 billion at the time. After February 2021, the GBTC premium dried up, and GBTC began trading on secondary markets at a steep discount to NAV. 

3AC had hoped the discount would be reversed when the SEC approved Grayscale converting its bitcoin trust to an ETF. But the SEC rejected the application, and the GBTC discount continued to widen. [Bloomberg]

When 3AC defaulted on its $2.4 billion loan to Genesis, Genesis seized the collateral backing the loan, including 17.4 million shares of GBTC, and filed a $1.1 billion claim against 3AC — a claim that is now on DCG’s books. [Coindesk; Affidavit Russell Crumpler, PDF]

Class action against Gemini Earn

Gemini partnered with Genesis for their Earn program. After Genesis lost $175 million in FTX in November, it froze withdrawals. Gemini Earn froze withdrawals in turn. Now Gemini Earn customers are out $900 million.

In an effort to get those funds back, three Gemini Earn customers are seeking class arbitration against Genesis and DCG.  

Gemini and Genesis had a “master digital asset loan agreement,” which Gemini Earn customers entered into — when you became an Earn customer, you agreed you were lending money to Genesis.

The complaint alleges that Genesis breached this agreement by hiding its insolvency through a “sham transaction,” whereby DCG “bought” the right to collect a $2.3 billion debt owed to Genesis by 3AC with the aforementioned $1.1 billion promissory note. The plaintiffs also claim that the Genesis loan agreement created an unregistered sale of securities. [Press release; Complaint, PDF; Master Digital Asset Loan Agreement]

The master loan agreement states that: “Each Party represents and warrants that it is not insolvent and is not subject to any bankruptcy or insolvency proceedings under any applicable laws.”

This is why Silbert keeps insisting that Genesis has a liquidity issue and not a solvency issue — even as those are functionally identical in crypto. If Genesis was found to be insolvent and took customer funds in, it would be in violation of that contract. (As well as promptly calling that promissory note from DCG.)

Amidst all of this, Larry Summers, the former US Treasury Secretary and World Bank Chief Economist, has quietly left DCG — going so far as to remove all mention of DCG from his own website. Summers joined DCG as a senior advisor in 2016, a year after the company’s founding. [Protos]

Silvergate Bank

Moody’s has downgraded Silvergate Bank’s long-term deposit rating to Ba1 from Baa2 after the crypto bank announced that its customers — who are almost entirely crypto firms now — withdrew $8 billion in deposits in Q4 2022: [Moody’s] 

The negative outlook reflects Moody’s view that the bank’s profitability over the near term will be weak along with the risk of further declines in deposits from crypto currency centric firms further pressuring profitability. In addition, the negative outlook reflects the increasing regulatory and legal risks that the firm is currently facing.

Silvergate’s other customers are worried about the bank’s solvency and about the regulatory heat coming its way. Silvergate was key to FTX/Alameda having access to actual money — they helped funnel money to FTX from accounts in the name of Alameda and of Alameda’s dubious subsidiary, North Dimensions. 

If Silvergate are found to be complicit in FTX’s fraud, they will be fined. But if there was money laundering and sanctions busting, they could be shut down. They will at the very least be fined. We would guess some individuals will also get a bar from being bankers. Here’s a list of enforcement actions on Federal Reserve member banks. [Federal Reserve]

Silvergate’s 8-K SEC filings this year are full of bad news. We noted Silvergate’s layoffs and writing off its Diem investment last time. [SEC 8-K; SEC 8-K; SEC 10-Q]

FTX

After a series of knock-down-drag-out filings — and the hilarious revelations of how FTX Digital Markets (FTX DM) was functionally Sam Bankman-Fried’s Bahamas partying fund — the US and Bahamas bankruptcies are working together now. John Jay Ray III and his team met in Miami with the joint provisional liquidators (JPLs) handling the FTX DM liquidation, and they’ve reached an agreement. [press release; agreement, PDF]

The Bahamas JPLs will handle everything to do with FTX DM, and the US administrators will handle everything to do with all the other FTX companies. The JPLs will handle the Bahamas real estate and the cryptos being held by the Securities Commission of the Bahamas. (This doesn’t mean that the Bahamas will handle the disbursement of the crypto they have under their control — only that FTX is fine with them holding the funds for now.) The parties will share information. FTX DM’s chapter 15 foreign entity bankruptcy in the SDNY will continue.

We suspect it was clear the US side would win in court, and the Bahamas liquidators realized they weren’t being paid enough to damage their reputations this way. The agreement is subject to approval by the courts in the US and the Bahamas, but it would be surprising for them not to allow it.

The Department of Justice has put out a call for victims of “Samuel Bankman-Fried, a/k/a ‘SBF.’” That’s his rapper name now. [Justice]  

Huobi’s real-time meltdown

Huobi has always been a dodgy crypto exchange — even before it was run by Justin Sun from Tron. Huobi has $2.6 billion in reserves, and 40% of that is its own HT token. If you don’t count its own internal supermarket loyalty card points, Huobi is insolvent. [Twitter]

Huobi is desperately searching its pockets for spare change. On December 30, Wu Blockchain reported that Huobi was canceling year-end bonuses and planning to slash half its staff of 1,200 people and cut the salaries of senior employees. Sun denied the rumors. [Twitter; South China Morning Post; Twitter] 

Other unofficial reports from small accounts on Twitter said that Huobi was offering to pay its employees in stablecoins — USDC and tethers — instead of actual-money yuan. If they objected, they would lose their jobs. [Twitter] 

Employees revolted at being paid in magic beans — so Sun cut off internal communications. On January 4, Bitrun said that “all communication and feedback channels with employees” had been blocked. [Twitter] 

Here’s the unofficial details on how Huobi is treating its employees. Those who quit because they’re getting paid in tethers get no severance pay either. This is what a doomed company does. [Twitter]  

After initially denying Huobi was cutting staff, Sun finally admitted that Huobi was indeed laying off 20% of its employees in the first quarter of 2023 — after rumors swirled that half of all employees would be let go. [FT]

Huobi users rushed to get their funds off of the exchange. Blockchain analytics platform Nansen noted a wave of withdrawals on January 5 and 6. Following the withdrawals, Peckshield reported a wallet associated with Tron moved $100 million in stablecoins — USDC and tethers — into Huobi. [Twitter, Twitter]

In a lengthy Twitter thread, Sun assures you that your funds are totally safe. We fully expect the exchange to blow up at any moment. [Twitter]

Binance

US prosecutors for the Western District of Washington in Seattle are sending subpoenas to hedge funds for records of their dealings with Binance. John Ghose, formerly a Justice Department prosecutor who specialized in crypto and now a lawyer at compliance vendor VeraSafe, thinks this is about money laundering. [Washington Post]

We noted previously that “BUSD” on Binance is not the BUSD issued by Paxos, which claims to be backed by actual dollars in Silvergate Bank. Binance “BUSD” is a stablecoin-of-a stablecoin, maintained internally. This is the sort of arrangement that’s fine until it isn’t.

It turns out that Binance has been issuing uncollateralised “BUSD” on its own BNB blockchain. Data Finnovation looked at the Ethereum and BNB blockchains and saw that Binance has a history of minting fake “BUSD” internally on BNB. At some points in 2021, there were $500 million to $1 billion of fake dollars circulating on BNB. They’re caught up now, though — so that’s all fine, right? [Medium]

Dirty Bubble thinks Binance US isn’t meaningfully separate from Binance.com, if you look at how the cryptos flow. But that shouldn’t be news to anyone here. [Dirty Bubble]

Reuters is still on the Binance beat. Here’s a special report on Binance’s accounts, as far as can be told. Reuters calls Binance’s books a “black box.” Private companies don’t have to disclose their financials, especially if they’re operating outside all effective regulation — but even Binance’s former CFO, Wei Zhou, didn’t have full access to the company’s accounting records in the three years he was there. We’ve noted previously how regulators have a heck of a time getting the most basic information out of Binance. [Reuters] 

John Hyatt from Forbes notes how Binance is spending tens or hundreds of thousands of dollars sponsoring Politico’s Playbook newsletter to reach politicians and bureaucrats. Worked great for FTX! [Twitter thread]

DeFi: Go directly to jail

Discussions of crime on the blockchain hardly ever point out that almost all of what goes on in DeFi was always just straight-up illegal under US law.

Pretty much every token was always an unregistered security. The sort of market manipulations that are standard practice in the DeFi trash fire have been illegal under Dodd-Frank since 2010. And that’s before we get to the rugpulls, hacks, and “hacks.”

The authorities are finally moving in. Every DeFi trader should consider themselves on notice.

Hotshot DeFi trader Avraham “Avi” Eisenberg was arrested in Puerto Rico on December 27 on a Department of Justice (Southern District of New York) indictment for commodities fraud and commodities manipulation in the $110 million trade that took out Mango Markets. [indictment, PDF; case docket]

Mango Markets is a decentralized exchange that runs on Solana. Users can lend, borrow, swap, and trade on margin. The exchange is overseen by a DAO, made up of people who hold MNGO — the native token of the exchange.

On October 11, someone drained the project of $110 million by manipulating the platform’s price oracle. After others had traced it to him, Avi Eisenberg came forward and explained the trade.

Eisenberg sold MNGO perpetual futures from one account he controlled to another account also under his control. He then bought large amounts of MNGO, which had the effect of increasing the value of his large holding of MNGO perpetuals. He then borrowed against these holdings and withdrew $110 million in assorted cryptocurrencies. 

This also rendered the Mango platform insolvent. Eisenberg himself explained that the insurance fund in place was “insufficient to cover all liquidations.” He gave back some of his trading profits. [Twitter; Bloomberg]

Eisenberg tweeted: [Twitter, archive]

I believe all of our actions were legal open market actions, using the protocol as designed, even if the development team did not fully anticipate all the consequences of setting parameters the way they are.

Eisenberg’s lawyer will likely explain his client’s erroneous legal reasoning to him.

Eisenberg wasn’t just arrested, he was denied bail as a flight risk — he has significant ties outside the US, he already left the US for two months just after the alleged offense, he likely has crypto stashed away somewhere, the charge carries a heavy penalty, and his background could not be checked. (Compare Sam Bankman-Fried’s release on bail.) [Order of detention pending trial, PDF]

It’s not clear why prosecutors went after Eisenberg in particular. We’d guess the CFTC and DoJ were looking for someone to make an example of. The bit where Eisenberg tweeted a complete confession probably helped, much as SBF’s confession tour of the press helped get him indicted.

What Eisenberg did to Mango was not remarkable at all. DeFi traders pull this nonsense all the time. Perhaps you don’t think DeFi trading shenanigans should be crimes, and that’s nice for you that you think that.

As Avi tweeted on October 19: “What are you gonna do, arrest me?” [Twitter, archive]

Posted on by Amy Castor 1

FTX Bahamas vs. John Jay Ray, Bankman-Fried pleads not guilty, DoJ seizes FTX assets

  • By Amy Castor and David Gerard

i wonder how many times someone’s managed to hack in to a bitcoin exchange and found there wasn’t any money there and just left

— Boxturret, SomethingAwful

FTX vs the Bahamas

There’s a turf war going on between the FTX Digital Markets (FTX DM) liquidation in the Bahamas and the FTX Trading Ltd bankruptcy proceedings in the U.S. We wrote about it earlier, along with some of the fishy stuff going on in the Bahamas.  

The Securities Commission of the Bahamas (SCB) filed their liquidation for FTX DM, a small subsidiary of FTX Trading, just one day before John Jay Ray III filed for Chapter 11 on behalf of FTX. Sam Bankman-Fried helped the SCB get in before Ray by waiting until the wee hours of November 11 to hand control over to Ray. Now the SCB feels it is entitled to FTX assets so that the liquidators can distribute them to creditors of FTX DM — whoever those might eventually turn out to be. [PwC]

The Bahamas side seems to be working on the theory that FTX DM was the operating center of the FTX companies. But FTX DM wasn’t even incorporated until July 22, 2021. It lay dormant for nearly a year and didn’t start operating in any manner until May 13, 2022. Note that’s a few days after the Terra-Luna collapse — FTX and Alameda were already utterly screwed by the time FTX DM was used for anything, suggesting that that may have been part of SBF’s reason to activate it.

The SCB pissed off Ray even further when, on December 29, they valued the FTX funds they seized late in the night on November 11 — in violation of the Chapter 11 stay — at $3.5 billion. This is mostly a pile of FTT tokens, whose market value is way less than $3.5 billion. FTX says the assets were worth just $296 million — “assuming the entire amount of FTT could be sold at spot prices at the time.” [SCB press release, PDF; FTX press release]

Christina Rolle, SCB executive director, said the Commission sought control of the crypto held by FTX after SBF and FTX cofounder Gary Wang told them about “hacking attempts overnight” — a perfect justification to seize the assets. Her affidavit, filed with the Supreme Court of the Bahamas, confirmed that SBF and Wang were behind the transfers on November 11 and 12. [Affidavit of Christina R. Rolle, PDF]

U.S. Federal prosecutors are looking into the $370 million hack — or “hack.” [Bloomberg]

Rolle also said that Tether gave the SCB 46 million tethers (USDT). SCB had asked Tether to freeze some USDT held by FTX DM or FTX Trading Ltd (it’s not clear which entity), then create 46 million fresh USDT and send it to SCB: 

76. Additionally, the Commission sent instructions for the transfer of approximately US $46 million Tether tokens to a secured wallet under the control of the Commission. These Tether tokens were not transferred to the Commission’s wallet but, after a meeting with Tether representatives, the Commission agreed that Tether, in light of the Chapter 11 proceedings, would maintain a freeze over the Tether tokens until ownership of the tokens is resolved.

This sounded odd to us — a “meeting with Tether representatives”? Coincidentally, the Bahamas Attorney General, Ryan Pinder, used to work for Deltec Bank, the bank associated with Tether.

The SCB then put out a press release on January 3 accusing Ray of “material misstatements” and having a “cavalier attitude to the truth.” They claim Ray is “promoting mistrust of public institutions in the Bahamas.” Well, yes, he is. [LinkedIn]

The joint provisional liquidators (JPLs) handling the FTX DM liquidation in the Bahamas have been pushing for access to substantial amounts of FTX data. Ray and his lawyers are working to make sure that never happens. Ray’s team has submitted piles of evidence pointing to the Bahamas government acting in bad faith.

FTX has filed an incendiary objection to the JPLs’ motion to compel the turnover of electronic records. This is a 37-page must-read rant: [FTX objection, PDF]

10. Finally, the stunning press release issued late yesterday, on December 29, 2022, by the Commission, along with certain related materials, is a game changer. The press release (and the supporting affidavit of the Executive Director of the Commission) boldly admits that the Commission violated the automatic stay in taking certain of the Debtors’ digital assets and then recklessly values the assets taken at $3.5 billion. As described in more detail below, yesterday’s disclosures demonstrate conclusively that the JPLs and the Commission are cooperating closely to do an end run around this Court and chapter 11. In a situation where maximizing recoveries for creditors should be the primary goal of all concerned, one can only wonder why.

We expect Ray isn’t wondering at all. He believes that “an elaborate and intentional game is being played” by the JPLs, the SCB, and the Bahamas government. As FTX says in their objection: “The fact that the founders left the Debtors more closely resembling a crime scene than an operating business cannot be ignored.”

FTX lawyer James Bromely filed a 675-page declaration, presenting exhibits to support their case. FTX financial advisor Edgar Mosley at Alvarez & Marsal also filed a 185-page declaration loaded with exhibits. [Bromely declaration, PDF; Mosley declaration, PDF]

The Mosley declaration details what business FTX Digital Markets actually did. FTX DM seems to have been Sam’s local partying fund:

17. The Debtors’ records reflect that $15.4 million for “Hotels & Accommodation” was paid primarily to three hotels in The Bahamas: the Albany ($5.8 million), the Grand Hyatt ($3.6 million), and the Rosewood ($807,000). The $6.9 million for “Meals & Entertainment” was paid primarily to Hyatt Services Caribbean ($1.4 million), Six Stars Catering ($974,000), and to three other catering and delivery services ($2.3 million in total).

18. The Debtors’ records reflect that in the first three quarters of 2022, FTX DM had total operating expenses of approximately $73 million, including over $40 million labeled “other expenses.”

19. The Debtors’ records reflect that FTX DM’s 2022 income statements show that FTX DM made no disbursements in connection with transaction, engineering or product expenses.

The newly formed Unsecured Creditors’ Committee in the U.S. chapter 11 also objects to the Bahamas motion. “These requests are sweeping and appear to be based on the faulty theory advanced by the JPLs that FTX DM was actually the nerve center of the FTX enterprise.” [Committee objection, PDF]

Just seizing some assets, don’t mind us

There was a scheduling conference in the Delaware FTX bankruptcy hearing on January 4. This wasn’t expected to be interesting — but Department of Justice Attorney Seth Shapiro made a surprise appearance over Zoom to let Judge Michael Dorsey know that the DoJ has been seizing assets.

SBF held a 7.6% stake in day trading brokerage Robinhood. He admitted to borrowing from Alameda in April and May to purchase the shares, in an Antigua court affidavit shortly before his arrest. [CoinDesk; affidavit, PDF]

SBF pledged the Robinhood shares to multiple companies as loan collateral. Who was getting the shares in the bankruptcy was a point of some contention. Now the DoJ has seized the shares.

Various bank accounts connected to the FTX Digital Markets (Bahamas) case and the JPLs motions for provisional relief, and the money in them, have also been seized. “We didn’t just want the court to read that in the papers filed by Silvergate and Moonstone” (FTX’s banks), said Shapiro. The DoJ also seized some cryptocurrency, though Shapiro didn’t say who from — the banks? The DoJ is working things out with the parties.

Shapiro told Judge Dorsey that the bank accounts had been seized with a view to “a criminal or asset forfeiture proceeding at some point down the line, in the Southern District of New York, to which entities could file claims.”

Shapiro said: “We either believe that these assets are not the property of the bankruptcy estate or that they fall within the exceptions under sections 362(b)(1) and/or (b)(4) of the bankruptcy code.” 362(b) is about criminal proceedings. [LII]

The Bahamas JPLs, who were also hoping for the contents of these bank accounts, are in touch with the DoJ.

Sam did nothing* wrong

Sam Bankman-Fried stood before U.S. District Judge Lewis A. Kaplan on January 3 and pleaded not guilty to all eight counts against him. SBF actually flew to New York for his arraignment and had to squeeze through a mob of reporters to enter the courthouse. The judge set a tentative trial date of October 2. [Twitter; Twitter thread; NYT]

Sam thinks he’s too smart, rich, and pretty to go to jail. He just needs to explain things properly to the people in charge, and it’ll all be fine. 

SBF’s not-guilty plea doesn’t necessarily mean a trial will happen. SBF and his lawyer Mark Cohen are likely just buying time so they can negotiate a better deal with the prosecutors. We very much doubt the case will go to trial, or that Sam’s parents would be able to foot the legal bill if it did.

More funds mysteriously moved out of Alameda wallets on December 27, mainly illiquid altcoins being swapped for ETH and BTC. Over $1 million in funds were sent through crypto mixers, according to crypto intelligence firm Arkham. [Twitter; Decrypt]

This isn’t the work of a liquidator. Sam says it wasn’t him, even though Sam, FTX co-founder Gary Wang, and FTX director of engineering Nishad Singh were the only ones who had access to the keys. Reddit user Settless notes that SBF had previously claimed to own these addresses: “The pattern is similar — the wallet receives funds and swaps them via no-KYC exchange to launder the funds.” [Twitter; Reddit]

The U.S. isn’t happy about this movement of crypto. During SBF’s arraignment in Manhattan, the prosecutors asked the court to add a new condition to the bond: that Sam be prohibited from accessing or transferring any FTX or Alameda assets. Judge Kaplan agreed. 

Molly Crane-Newman from the NY Daily News said: “SBF became animated when prosecutors successfully requested that the judge prohibit him from accessing or transferring FTX assets — furiously writing notes to his attorneys on a legal pad and pointing to them with a biro.” [Twitter]

The judge also agreed to the redaction of names and addresses of Sam’s two additional bail signers — who he may not have actually found yet. The press has until January 12 to file any objections to this. Matthew Russell Lee of Inner City Press has already filed an application to unseal the names. [Motion, PDF; Twitter; Application to Unseal]

Two of SBF’s associates, Caroline Ellison and Gary Wang, have already pleaded guilty in the hopes of getting a lesser sentence. John Reed Stark ordered and posted their plea agreements and hearing transcripts. [LinkedIn; Ellison plea, PDF; Ellison agreement, PDF; Wang plea, PDF; Wang agreement, PDF]

* except all the things he may possibly, hypothetically, have done wrong

Other perfectly normal happenings in FTX

North Dimension, the company that FTX customers were unknowingly sending their actual U.S. dollars to, was a fake online electronics retailer. North Dimension has two accounts at Silvergate Bank. [archived website; NBC News]

The assorted shenanigans with FTX likely explain why Silvergate Bank (NASDAQ: SI) has 54% of its shares sold short. Smart investors know how this will end. [Fintel]

John Reed Stark discusses FTX investors getting hosed on CNBC Squawkbox. [YouTube]

“Beyond Blame: The philosophy of personal responsibility has ruined criminal justice and economic policy. It’s time to move past blame” — by Barbara H. Fried. Now, you might say that if Sam’s circumstances are to blame for his apparent crimes, then Barbara happens to be one of those circumstances. [Boston Review, 2013]

Someone made an NFT with actual artistic value. We’ve used it as the feature image for this article. [OpenSea]

Posted on by Amy Castor 0

Crypto collapse: Binance is not so fine, FTX Delaware vs FTX Bahamas, Celsius, Voyager, Gemini, Tether

due to a mistake in the internal reporting system, it didn’t tell him that he’d taken all the customers’ money and given it to his hedge fund to gamble with

— Qwertycoatl on SomethingAwful

When your auditor quits, that’s bad

Binance is broke. It’s got the same problem as the rest of crypto — the assets are imaginary, but the liabilities are real.

Remember the 2 billion BUSD bailout fund for distressed crypto enterprises that Binance announced in November? Bitfinex’ed suggested it was for a hole in Binance’s accounts — and now we’re seeing that Binance is sure behaving like there’s a huge hole in their books.

But Binance got an audit! Well, not an audit as such. But it was done by accountants who sometimes audit other things!

The “proof of reserves,” issued by Paris-based accounting firm Mazars, specifically disclaims being anything meaningful. But it makes sure to use the word “proof.”

The report didn’t address any of the tricky bits — it didn’t include non-crypto liabilities, it didn’t assess the effectiveness of internal financial controls, and it didn’t actually vouch for the numbers. Michael Burry: “The audit is essentially meaningless.” [Mazars, archive; WSJ; Twitter, archive] 

Mazars has been issuing these “proofs of reserves” for Crypto.com and Kucoin as well. But now Mazars has abruptly halted all work for crypto firms — and scrubbed all mention of such work from its website. This is Mazars running like hell to get as far away from the bomb as possible before it goes off. [Bloomberg]

Meanwhile, users have been taking their cryptos off Binance and going home. Binance outflows hit $6 billion in the week Mazars halted its work for crypto. [FT]

Binance cut off USDC withdrawals again, claiming a “wallet upgrade.” It just looks a bit like a “wallet inspector.” [Twitter] 

CZ went on CNBC Squawk Box to reassure everyone that everything is fine … though he didn’t seem as at ease as he usually does:

CZ: “We are financially okay.”

Rebecca Quick: “Can you have a 2.1 billion withdrawal?”

CZ: “We will let our lawyers handle that.”

CZ was asked why he wouldn’t engage a Big Four auditor to pick up where Mazars left off. CZ said most of these big firms “don’t even know how to audit crypto exchanges.” Andrew Ross Sorkin then pointed out that Coinbase has a Big Four auditor, Deloitte. Quick rolls her eyes at the end of CZ’s stumbling explanation (0:26 in the Twitter link). [YouTube; Twitter]

Why Binance may not have as much money as they want you to think

When FTX bought out Binance’s share in the company, Binance got paid $2.1 billion in funny money. CZ told Squawk Box that “it was all in FTT tokens, which are now worthless.” [Twitter]

70% of Binance’s reserves are in BUSD, Tether, and BNB — the last of which is their internal exchange token, akin to supermarket loyalty card points, in the style of FTX’s FTT.

The BNB token has crashed in the past week, from $290 to $240, according to Coingecko. 

Keep in mind that BUSD on Binance is internal magic beans, and absolutely not the same as Paxos dollar-backed BUSD. If Binance thinks it could get away with cashing in the bridged BUSD at Paxos, that’s $2 billion of actual US dollars Binance could secure for itself.

BUSD on Binance is on their own BNB blockchain, formerly known as Binance Smart Chain — a very hacked-up fork of the Geth software for Ethereum. The idea is to have a platform that runs the Ethereum Virtual Machine, lets you rug pull, and so on. This “blockchain” features transactions that seem to parachute assets into the system from space with no verifiable history. Data Finnovation digs into the weird bits. “It’s probably not fair to call this a ‘blockchain’ anymore.” [Twitter, archive]

And there’s still no verifiable evidence that tethers can actually be cashed in for dollars — even if you’re Binance.

Sounding smart doesn’t mean you are smart

Confidence men are called that because they can say the most outlandish things and not bat an eye. CZ has mostly come across in media as fundamentally being on the ball.

But remember that Sam Bankman-Fried projected being smart as well — until we got a look inside FTX, and saw how incredibly stupid every single smart guy in FTX really was. 

After Reuters published multiple reports of money laundering at Binance — including Binance letting Iran cash out bitcoins in violation of international sanctions — the U.S. Justice Department is “split” over charging Binance with money laundering. The split seems to be whether to charge them now or later: “Some of the at least half dozen federal prosecutors involved in the case believe the evidence already gathered justifies moving aggressively against the exchange and filing criminal charges against individual executives including founder Changpeng Zhao, said two sources.” The DoJ has discussed various plea deals with Binance’s lawyers. The investigation has been going on since 2018. [Reuters]

Binance was also slashing staff in late November. [Twitter, archive]

It’s only a matter of time before Binance starts freezing withdrawals — just like FTX, Voyager, Celsius, and so many other crypto exchanges in the last seven months.

Who can bail out Binance? Only Tether is left. Perhaps some new crypto exchange will pop up and achieve improbable volumes in a remarkably short time. There should be some Jane Street wunderkind on hand to front the operation.

Strange things in the Bahamas 

The FTX liquidation proceedings in the Bahamas are distinctly odd and in direct conflict with FTX’s Chapter 11 proceedings in the U.S. [Bloomberg]

FTX froze withdrawals on November 8. The Bahamas government placed FTX Digital Markets, FTX’s Bahamas subsidiary, into liquidation on November 10. And John Jay Ray III, who took over as CEO of FTX Trading, filed for Chapter 11 in the US on November 11.

The joint provisional liquidators (JPLs), the three men in charge of liquidating FTX Digital Market’s assets, now want dynamic access to FTX systems — they don’t want just lists of specific data, they want to be able to go fishing through the system themselves.

Ray, who cut the JPLs off from the system on November 12, is saying “no way.” He and his team are pissed because of all the pillaging of FTX that occurred after FTX froze withdrawals.

FTX objected to the Bahamas motion saying there was no urgency and the other side was being utterly uncooperative: [Objection, PDF]

“Debtors have made repeated overtures to JPLs and Commission to meet and those overtures were met with avoidance and obfuscation. The JPLs and the Commission have refused to provide responses to Debtors’ questions about the assets ‘secured’ by the Commission. Instead, the JPLs file baseless motions seeking extraordinary relief on an unnecessarily truncated timeframe.”

Ray thinks FTX cofounders Bankman-Fried and Gary Wang, the JPLs, and the Bahamas Securities Commission are all in cahoots. He told Congress: [Twitter, archive]

“The process in the Bahamian islands is not a transparent process. We have opened up the ability to share everything we have with the Bahamian government, similar to how we share with other liquidators around the world not only in this case but in other cases. It’s meant to be a very cooperative situation. The pushback that we’ve gotten is sort of extraordinary in the context of bankruptcy. It raises questions, it seems irregular to me, there are lots of questions on our part, and obviously, we’re investigating.”

James Bromley, one of FTX’s attorneys in the bankruptcy, has filed a declaration with rancorous correspondence between FTX and the Bahamas liquidators attached as exhibits. [Declaration, PDF]

Judge Michael Dorsey, who is presiding over the Chapter 11 proceedings in Delaware, told lawyers for the JPLs and Ray to try to find a middle ground. (His job is to be a referee, after all.) If they can’t work things out, they’ll be facing off in an evidentiary hearing tentatively scheduled for January 6, 2023. [Doc 197, PDF; Doc 203, PDF] 

So that you can understand FTX’s concerns, here’s a rundown of all the questionable stuff that’s happened so far:

On November 9, the day after FTX froze withdrawals, SBF told Bahamas attorney general Ryan Pinder that he would open withdrawals for Bahamian customers. Pinder previously worked at Deltec Bank — Tether’s banker since 2018 — but we’re sure that hasn’t influenced his decision-making, probably. [Doc 203, PDF]

From November 10 to 11, roughly 1,500 individuals, who claimed to be Bahamian residents, withdrew $100 million in crypto from FTX. Every other FTX customer in the world remained locked out of the system.

SBF said the Bahamas Securities Commission had told him to let the local customers in. The BSC denied this. [Twitter, archive]

SBF later told Tiffany Fong that he let the locals get their cryptos out because “you do not want to be in a country with a lot of angry people in it.” Could he have had in mind, not a mob, but particular individuals who might have had very robust opinions about not getting their cryptos back? [YouTube]

Separately from these withdrawals, at least two actors accessed FTX systems and withdrew another $477 million — hours after Ray filed for Chapter 11 on November 11. They also minted new FTT tokens. [Elliptic]

Ray and his lawyers say that SBF and Wang, who, acting on orders from the Bahamas Security Commission, minted FTT and transferred funds to a cold wallet under the control of the Commission. Ray still hasn’t figured out who the other actor was, but he’s working on it.

The JPLs have been tight-lipped as to what assets the Commission seized or how the assets were transferred.

There’s also the issue of the $256 million that FTX spent on 35 properties in the Bahamas — including land for a massive headquarters that never got built. The Bahamas regulators want to claim the properties back and they want the sale of the properties administered locally. Ray is likely to push back on this as well. [CNBC]

It’s hard to say for sure what’s going on here. We are beginning to suspect that FTX was a money-laundering chop shop, with some crypto businesses on the side. This would further suggest possible bribery of some local authorities. But the dots aren’t yet joined up.

Rats turn on each other

After four days, SBF has decided that Bahamas prisons aren’t so great, and he would rather be in a nice U.S. jail instead. [Reuters] 

Ryan Salame, co-chief executive of FTX Digital Markets, is the first FTX insider on record as spilling the beans on SBF. He told the Bahamas Security Commission on November 9 that FTX customer funds had been used to cover losses at Alameda Research. [Doc 225, PDF, page 34; FT, archive]

In 2021, Salame was a budding megadonor to U.S. Republican Party candidates — in step with SBF donating to Democratic candidates. Salame took out a $55 million loan from FTX, paid cash for a $4 million home in Maryland, and was buying up restaurants in Lenox, a town in Western Massachusetts. [NYT]

We’re not saying that’s what he used it for — but restaurants are notorious as a vehicle for laundering dubious cash.

Total donations by FTX to US politicians seem to be about $89 million when you trace all the darkish money as best as possible. [Institute for New Economic Thinking] 

$73 million of those political donations are at risk of being clawed back in the bankruptcy proceedings. [Bloomberg]

The correct regulator for crypto is the Department of Justice

Molly White live-tooted the Senate hearing on FTX and summarized it in her newsletter. [Mastodon; Substack] 

Here are all of the written testimonies. [Senate Housing Committee, PDFs] 

John Jay Ray III wants to sell FTX subsidiaries, starting with LedgerX, FTX Japan, and FTX Europe AG. [Doc 233, PDF]

FTX now has an official creditors’ committee of nine firms or individual investors, including crypto trading firm Wintermute. They still need to pick counsel, which should happen any day now. One of the first matters they will be weighing in on is a proposal to redact personal information rather than publishing a full list of creditors. [Doc 231, PDF]

When the Ontario Teachers’ Pension Plan invested in FTX, it asked the company a slew of questions related to their financial affairs — but received answers only to a few of them. OTPP put in $95 million anyway. [Globe and Mail, archive] 

How a crypto exchange can inveigle itself into the banking system — and how FTX seems to have done this with its Farmington equity purchase. Buy a bank, convert to a Federal Reserve member bank, notify the Fed that you’re going into digital assets and you’ve determined it’ll all be fine and you’re totally going to set up risk management. “If you’re lucky, your bank won’t be examined for a year or two. By then, you might have cranked up quite a dumpster fire.” [American Banker; Wall Street on Parade]

Canada has tightened crypto regulation even further in the wake of FTX. Client cryptos must be stored with a custodian and have no margin or leverage for Canadian customers. Non-Canadian platforms with Canadian customers will also be required to follow these rules. The Ontario Securities Commission had already refused FTX permission to operate in the province, but other provinces didn’t — and many Canadian FTX customers got caught up in the bankruptcy. [Leader Post]

Eliezer Yudkowsky, the AI risk guy who named “Effective Altruism,” advises his fellow Effective Altruists to take the FTX money and run. For the sake of charity, you understand. Others mention that clawbacks in bankruptcy exist — but ehh, it’ll probably be fine, right? [Effective Altruism forum, archive]

David spoke on CBC on Tuesday about FTX. It went pretty well. “TWO AND TWO MAKES FOUR! GRAVITY WORKS! MAGIC DOESN’T HAPPEN!” [Twitter; Yahoo News]

Celsius and Voyager

There’s no interesting news in the Celsius Network or Voyager Digital bankruptcies. Looking through the filings, it’s all procedural sports ball and not matters of real import. Everyone’s on holiday and nothing is going to happen until January. Perhaps Celsius won’t have run out of cash by then.

The next report of the examiner on Celsius was supposed to be out in December — but the court still hasn’t resolved the question of who investigates whether Celsius was Ponziing, which is the big bomb here.

Voyager is just sitting around and giving money to expensive bankruptcy professionals. Binance was talking about buying Voyager’s assets — but frankly, that’s a deal we suggest the creditors not take. They only just escaped being caught up in FTX’s bankruptcy.

Celsius has filed a motion to commence a $7.7 million clawback action against Voyager, as well as an extension of time to file a claim against Voyager’s estate. The Voyager Unsecured Creditors’ Committee is reviewing Celsius’ motion with the intention to object. [Twitter, archive]

Bankruptcy professionals will cost Celsius $115 million in the three months leading up to mid-February. [Doc 1676, PDF] 

Gemini

Crypto broker Genesis owes the Gemini exchange $900 million. Gemini has now formed a creditors’ committee to recoup the funds from Genesis and its parent DCG. [FT]

Did you know that 80% of the current market cap (613 million) of Gemini’s dollar stablecoin GUSD was printed in the weeks before the FTX collapse? Even odder, one unlabeled wallet appears to have minted 460 million GUSD. [Twitter, archive] 

On September 30, 2022, Gemini sought to incentivize GUSD adoption by increasing GUSD deposits to MakerDAO’s PSM (peg stability mechanism). MakerDAO was unimpressed. [The Defiant] 

Tether

Tether’s accountant, BDO Italia, is reconsidering whether it wants to do crypto attestations. “In common with several other professional service firms, we are currently evaluating our approach to this sector and the work we undertake for our clients.” Tether only hired them in August. [WSJ, paywalled]

In the lead-up to FTX going down, CZ from Binance was very upset that SBF appeared to be destabilizing Tether’s peg with … a mere $250,000 trade. We know this because there’s a secret chat group for the exchanges to conspire, er, sort out issues. SBF also put screenshots from these chats into the Congressional Record in his bizarre written testimony before the hearing, which he didn’t manage to attend. [WSJ; Forbes]

The secret ingredient is still crime. Police in China have arrested a gang who laundered $1.7 billion via crypto, including Tether — even after Beijing’s crackdown on crypto. [CNBC]

Other crypto firms who are fine

Three Arrows Capital (3AC)’s liquidator Teneo estimates 3AC’s assets at $1 billion as of July. That’s $37 million of actual money, $238 million in cryptos, $22 million in NFTs, and $502 million in venture and other investments. A lot of those “assets” are obviously imaginary. 3AC’s liabilities, which are extremely real, are over $3 billion. [The Block]

Grayscale wanted to turn GBTC into an exchange-traded bitcoin fund. The SEC said “LOL, no.” Grayscale sued claiming unequal treatment compared to the bitcoin futures ETFs, and even questioning whether the SEC had the right to decide against its ETF proposal. Now the SEC has written a 73-page response to Grayscale’s dumb lawsuit. [SEC, PDF]

Argo Blockchain Plc, a UK-incorporated bitcoin miner, has had trading in its shares suspended by the Financial Conduct Authority. The company is planning to file for bankruptcy. [Twitter; Bloomberg]

MicroStrategy is still going down the toilet. Bitcoin prices fell well below the “low watermark” for carrying value in Q3 2022. The company will likely face a new record digital-asset impairment charge in Q4. [Marketwatch] 

Dump on retail managed: Coinbase founder Brian Armstrong no longer holds any Coinbase stock. But he’s very bullish on crypto, he wants to make clear! [Protos] 

Image: Robyn Damianos for the Wall Street Journal

Posted on by Amy Castor 7

Crypto collapse: Regulatory altruism at FTX — Sam Bankman-Fried arrested

While I’ve been sick with a bug for a few days, David was able to finish up and post our latest. This one is on his blog. [David Gerard]

“Take the money and run” is a plan with just two parts. Sam Bankman-Fried completely failed to get around to the second part.  

After SBF’s extensive tour of confessing financial crimes to anyone from the press who would listen, the Weasel of Wall Street was arrested in the Bahamas at the request of the U.S. on Monday, December 12, where he awaits extradition.

Image by npcdad on Reddit

Posted on by Amy Castor 0

Crypto collapse: FTX headed for examiner, Bahamas crypto shenanigans

We just posted a new crypto update. This one is on David’s blog. [David Gerard]

In this episode, we cover:

  • SBF is fried, because the US Trustee wants to appoint an examiner. 
  • Your funds are on a holiday in the sun: The mystery of the disappearing FTX funds in early November. 
  • Alameda lost $1 billion on a trade involving Mobilecoin. We’re sure this had nothing to do with money laundering.
  • Sam is willing to go before the House Committee on Financial Services, as soon as he has figured out what happened to everyone’s money! 

Image: “We are all trying to find the guy who did this!”

Posted on by Amy Castor 0

Crypto collapse: BlockFi even deader, crypto miners going broke, Sam will not shut up, Binance and Tether are fine

the wonderful thing about bitcoin is that ‘sorry i was too dumb to do things properly so it all collapsed’ is not only a feasible explanation but historically likely

— Boxturret on SomethingAwful

Shut up, Sam

If you may be in legal trouble, any lawyer has one piece of advice: stop talking. If you’ve just filed a high-profile bankruptcy with maybe billions of dollars missing: stop talking. If you’ve got prosecutors sniffing around your activities: stop talking.

Sam Bankman-Fried never got the memo, or he did and threw it in the trash. In reference to his lawyers, he told Tiffany Fong: “they know what they’re talking about in an extremely narrow domain of litigation. They don’t understand the broader context of the world.” [YouTube; Twitter]

Despite producing reams of potential “evidence” that could one day be used against him, SBF will talk to any reporter, anywhere, any time of day. On Wednesday, November 29 he spoke on an NYT DealBook panel. On Thursday, November 30, he spoke to Good Morning America.

He loves the camera. But he still can’t tell you where the money went.

In the DealBook interview with Andrew Ross Sorkin, SBF said he “never tried to commit fraud,” and he didn’t knowingly commingle $10 billion in customer funds. He frames the whole matter as he seemingly lent Alameda customer funds from FTX as a risk management problem that got out of hand. Well, it sure did that. [Video; Transcript] 

George Stephanopoulos from Good Morning America, who actually flew to the Bahamas to talk to SBF, was a lot tougher on him. SBF again denied “improper use of customer funds,” saying he failed at oversight. “You said one of your great talents in a podcast was managing risk.” “That’s right.” “Well, it’s obviously wrong.” [GMA; Twitter]

As Lying for Money author Dan Davies points out, prosecutors just have to show that SBF intentionally deceived clients as to what was happening to their money. When you tell people their money is segregated and it’s not, that’s fraud. “The offence was committed the minute it went in the wrong account.” [Twitter]

If you ignore your lawyer because you’re smarter than everyone, no lawyer is going to work with you. Martin Flumenbaum at Paul Weiss already dumped SBF. We’re hearing unconfirmed rumors that David Mills, his father’s colleague at Stanford, who was advising SBF, is also refusing to work with him further. [Semafor; Twitter]

A lot of FTX employees bailed after the company filed for bankruptcy. But a few have soldiered on — likely so they can nail SBF, who screwed them over about as much as he screwed over all of his customers and investors. While SBF is telling his side of the story to reporters, FTX employees are leaking emails. NYT wrote about the absolute chaos that FTX lawyers and execs endured in wresting power away from the deluded SBF in the wee hours of November 11. [NYT]

If Sam’s lawyer had jumped in front of the camera and ripped Sam’s larynx out with his bare hands, he could reasonably bill it as extremely valuable and important legal services to his client.

Extremely predictably, there goes BlockFi 

In January, there were three big crypto lenders — Celsius, Voyager, and BlockFi. Now all three are bankrupt, and our emails are clogged with new bankruptcy filings.

After weeks of frozen withdrawals, BlockFi filed for voluntary Chapter 11 on November 28 in New Jersey. [Petition, PDF; bankruptcy docket on Kroll; CNBC; press release]

BlockFi was already a dead firm walking. They were dead after Three Arrows blew up in May. FTX kept BlockFi’s head above water with a $400 million credit facility — but then FTX imploded. [Twitter] 

The New Jersey firm doesn’t just have more liabilities than assets — a lot of the assets are missing too. All of BlockFi’s cryptos were in FTX. They were using FTX as their crypto bank.

BlockFi has over 100,000 creditors. Assets and liabilities range between $1 billion and $10 billion. There’s $1.3 billion in unsecured loans outstanding and $250 million in customer funds locked on the platform.

BlockFi has $256.5 million cash on hand — after selling their customers’ crypto:

In preparation for these chapter 11 cases, BlockFi took steps to liquidate certain of its owned cryptocurrency to bolster available cash to fund its business and administrative costs. Through the process, BlockFi was able to raise $238.6 million of additional cash, for a total unencumbered cash position as of the Petition date of $256.5 million.

Ankura Trust is BlockFi’s largest unsecured creditor to which it owes $729 million. Ankura is typically brought in to represent the interest of others in bankruptcy. If so, who are those creditors? We’d love to know.

FTX US is BlockFi’s second-largest unsecured creditor, with a $275 million stablecoin loan. This is the credit facility that SBF “bailed out” BlockFi with in June.

BlockFi’s fourth-largest unsecured creditor is the SEC — BlockFi still owes $30 million of its $50 million in penalties from February. The total settlement was $100 million, with half owed to the SEC and half owed to state regulators. [SEC; Twitter]

All the other creditors’ names are redacted. Very crypto.

BlockFi is entangled in FTX in multiple ways. BlockFi had a $680 million loan to SBF’s Alameda Research. This was collateralized by SBF’s personal shareholding in popular day-trading broker Robinhood — just days before FTX filed for bankruptcy. BlockFi is suing SBF for his stake in Robinhood. It doesn’t help that SBF was shopping his Robinhood shares around as collateral after he’d pledged them to the BlockFi loan. [Filing, PDF; Complaint, PDF; Bloomberg] 

Crypto miners — we told you so

We set out in detail in August this year how publicly traded bitcoin mining companies were always going to leave their lenders and investors as the bag holders.

We predicted that the miners would default on billions of dollars in loans, leaving the lenders with worthless mining rigs and unsaleable piles of bitcoins. They would then go bankrupt — with all the paperwork in order.

The miners depreciated their mining rigs over five years — and not the 15 months they should have — to make their companies look like better investments.

And miners are now defaulting on their rig-backed loans. Lenders — New York Digital Investment Group, Celsius, BlockFi, Galaxy Digital, NYDIG, and DCG’s Foundry — are getting stuck with worthless e-waste. [Bloomberg]

Iris Energy (IREN) faced a default claim from its lender NYDIG on $103 million “worth” of mining equipment. The company’s miners aren’t making enough money to service their debt. So Iris defaulted! And NYDIG now owns some obsolete mining rigs. [SEC filing, Global Newswire; Coindesk; CoinTelegraph]

Shares in Argo Blockchain (ARBK) dropped 40% after the firm announced that its plans to raise $27 million by selling shares were no longer happening. [Twitter; Decrypt]

Core Scientific hired law firm Weil, Gotshal & Manges and financial advisors PJT Partners to help figure out ways to stave off bankruptcy. The options include exchanging existing debt for equity or additional debt, asset sales, equity, or debt financing. They’re gonna go bankrupt — because that was always the exit strategy. [The Block]

Binance goes shopping

In the financial crisis of 2008, when banks were dropping like flies, some big banks would buy smaller banks that had healthy books — so they could patch the holes in their own books. Bigger and bigger shells to hide the Ponzi under. 

Crypto is doing the same. FTX was buying up, and planning to buy up, small bankrupt crypto firms to try to hide the hole in its own books. And Binance, the largest crypto exchange, just bought Sakuro Exchange BitCoin (SEBC), a Japanese exchange that is already licensed with the country’s Financial Services Agency. [Binance; Bloomberg]

Japan learned its lesson early. Tokyo-based Mt. Gox, one of the first big bitcoin exchanges, blew up in 2014. Japan went on to become one of the first countries to regulate crypto exchanges with a licensing system. Crypto exchanges in Japan are required to keep customer assets separate, maintain proper bookkeeping, undergo annual audits, file business reports, and comply with strict KYC/AML rules. They are treated almost like banks! [Bitcoin Magazine]

Binance tried to set up operations in Japan in 2018, after getting kicked out of China — but Japan’s FSA told Binance they needed to play by the rules and apply for a license or pack their bags. [Bitcoin Magazine]

Binance’s bogus bailout fund 

Binance announced a $2 billion “industry recovery fund” to prop up all of the other flailing crypto firms that have been struggling since FTX blew up. They claim that 150 crypto firms have applied for a bailout. [Bloomberg] 

Binance has its own stablecoin, BUSD, that it claims is run by Paxos and Binance, “and is one of the few stablecoins that are compliant with the strict regulatory standards of NYDFS.” The crypto bailout fund is $2 billion in BUSD.

BUSD is a Paxos-administered dollar stablecoin. Each BUSD is backed by an alleged actual dollar in Silvergate Bank, and attested by auditors. (If not actually audited as such).

That’s true of BUSD on the Ethereum blockchain. It’s not true of BUSD on Binance.

BUSD on Binance is on their internal BNB (formerly BSC) blockchain, bridged from Ethereum. It’s a stablecoin of a stablecoin. Binance makes a point of noting that Binance-BUSD is not subject to the legal controls that Paxos BUSD is under. We’re sure it’ll all be fine if there are any issues, which there totally won’t be. [Binance] 

Treating FTX’s claims about other crypto firms as confessions would have given you pretty detailed correct answers — it was all projection. FTX was accusing others of what they were doing themselves. You should look at what Binance has been saying the same way.

We’re going to go so far as to assert that Binance is a hollow shell too, and the bailout fund is most likely for a hole in its own books.

Every one of the crypto companies accounts for their value in dollars by calculating their mark-to-market value. “We have a billion dollars of $CONFETTI!” Even if they couldn’t get $10,000 in actual money for it.

All of crypto is bankrupt if you account for the crypto assets at realizable value rather than mark-to-market. Realizable value depends on the inflow of actual dollars into crypto — and that inflow has plummeted because the retail suckers went home. 

All crypto companies are Quadriga. Pull back the curtain and you’ll see Celsius/FTX-style non-accounting, a Google spreadsheet if you’re lucky, and incompetence. Such utter blithering didn’t-understand-the-question incompetence. It’s been this way since 2011.

Tether is fine, you FUDster

Tether has been issuing tethers by lending out its USDT stablecoin, rather than exchanging the USDT one-to-one for dollars (LOL).

As of Tether’s attestation for September 30, 2022, 9% of USDT are loans to Tether customers. Tether claims these are collateralized — but they won’t say who the borrowers are or what the collateral is. [Tether; WSJ, paywalled]

In their long-winded response to the WSJ writeup, Tether blames …. the media. [Tether]

We know from the CFTC settlement in October 2021 that Tether was issuing USDT to its big customers with a kiss and a handshake. Now they’re admitting it publicly.

Other crypto exchanges/firms in trouble

CoinDesk’s report on the hole in Alameda’s balance sheet and Alameda’s close ties to FTX did so much damage to the crypto industry — and to Coindesk’s parent company Digital Currency Group — that the news site has attracted take-over interest. [Semafor] 

CoinDesk did not blow apart the crypto industry. This was an unexploded bomb that was set up in May.

It was all going to explode eventually as soon as someone looked inside the box. As CZ told The Block’s Larry Cermak in 2019: “some things are better left unsaid.” [Twitter] 

Japanese social media company Line is shutting down Bitfront, a US-based crypto exchange that it launched in 2020. They said the closure was unrelated to “certain exchanges that have been accused of misconduct.” [Announcement; Bloomberg]

AAX exit scam completed. Hong Kong-based exchange AAX froze withdrawals on November 13, and its executives quietly slipped away as opposed to filing bankruptcy — social media pages removed, LinkedIn profiles deleted. Sources tell us that employees have been laid off and the founders are nowhere to be found. [Hacker News; AAX]

John Reed Stark: Since the FTX debacle, Big Crypto’s SEC hit pieces and talking points calling for “regulatory clarity” are pure pretense and subterfuge, intended to distract and dissemble the truth — that the crypto-emperor has no clothes. [Duke FinReg Blog] 

Image: Sam talking on GMA

Posted on by Amy Castor 3

Crypto collapse: FTX first-day hearing, Genesis screws DCG, Silvergate Bank

We just posted our latest on the crypto crash series. This one is on David’s blog. [David Gerard]

Here’s some of what we cover in this episode:

  • FTX had its first-day hearing in its Delaware bankruptcy.
  • The SEC was told to back off from FTX by eight members of Congress, five of whom got donations from FTX founders.
  • Genesis sets parent company DCG teetering.
  • Gemini Trust was exposed to risk via Genesis.
  • DCG is not bailing out Genesis this time around.
  • Silvergate said its FTX exposure was limited to deposits. It’s not about the deposits!
  • Binance is fine, and nothing is wrong! Probably!

Image: The FTX legal team entering the court.

Posted on by Amy Castor 0

Al Jazeera: FTX meltdown threatens to end ‘Wild West’ era for crypto

The editor of Al Jazeera Asia contacted me for a story about crypto, so I wrote about how the collapse of FTX will result in regulators coming down hard on the space. This was my first story for Al Jazeera. [Al Jazeera]

South Korea, Singapore, and Japan had the greatest number of users on FTX, according to CoinGecko. After Binance pulled out of Singapore last year, many crypto traders in the city-state switched to FTX.

This story was a bit of work because I had to interview five different people. You may recognize some of them — David Gerard, Martin Walker, and Stephen Diehl, among others.

One of my favorite quotes is from Stephen, who predicted: “the crypto industry will mostly be relegated to the dark corners of the financial system as it slowly slides into irrelevance.”

Posted on by Amy Castor 0

Declaration of John Jay Ray — FTX is worse than Enron

John Jay Ray III took over FTX in the wee hours of November 11. Hours later, he filed for Chapter 11 in a Delaware court.

The new CEO filed his first-day declaration this morning. It’s incredible. David Gerard and I summarize it — this one is on David’s blog. [David Gerard]

  • In his 40-year career, Ray, who oversaw the Enron liquidation, has never seen “such a complete failure of corporate controls.”  
  • Ray has divided SBF’s empire into four silos, but the accounting is all unreliable because he’s gotten the numbers from SBF. 
  • Ray and his team will have to create a balance sheet and financial statements from scratch using what records they have of cash transactions.
  • FTX Digital Markets, the company’s Bahamas subsidiary, filed a for Chapter 15 in SDNY. Ray’s team is asking the court to move the Chapter 15 case to Delaware. 
  • Ray thinks the filing in SDNY was shenanigans by SBF and unnamed agents of the Bahamas government!
  • SBF’s late night DMs with a Vox reporter, published the next day, make it looks like he was in on the plot.
Posted on by Amy Castor 0

Crypto.com’s bad weekend — crypto exchanges are shaky

  • By Amy Castor and David Gerard

“i have a lot more respect for the binance guy, having seen a competitor stumble and taken the opportunity to very publicly shank them five or six times while they’re on the ground, under the guise of trying to help”

— infernal machines, SomethingAwful

We’re exhausted keeping up with all the good news for bitcoin.

Crypto.com didn’t have the greatest weekend. As we write this, withdrawals are clogged, but some are reported to be coming through okay.

The test an exchange faces is: can it stand a run on the bank?

The test bitcoin as a whole faces is: how will the price hold when lots of people are dumping for cash?

Number go down

After the bitcoin price had been floating at around $20,000 for several months, FTX crashed. On the day Binance reneged on its offer to buy FTX’s remains, BTC dropped below $16,000. It’s a bit above that now.

The actual dollars have gone home, and the wider crypto casino is having to pretend harder and harder that the alleged mark-to-market value of illiquid trash means anything.

Real dollars continue to disappear from crypto. Retail trading at Coinbase was down 43% in the third quarter of 2022, compared to Q2.

Reddit /r/buttcoin has a new header image

A slight case of the runs

Crypto.com is not having a great time.

The crypto markets are jittery. After the dramatic collapse of FTX, crypto holders are left shell-shocked and traumatized. They don’t trust any centralized exchange now at all.

It doesn’t take much to set the markets off. 

Despite claiming to have near-zero exposure to the fallout of FTX, over the last year, Crypto.com sent multiple very large stablecoin transfers to FTX, totaling approximately $1 billion. [Reddit, Australian Financial Review]

On November 12, crypto Twitter caught wind of the fact that Singapore-based Crypto.com and China-based Gate.io were passing funds back and forth to post stronger-looking proof of reserve statements, suggesting they didn’t have the funds they purported to have.   

Crypto.com CEO Kris Marszalek waved it off as just a whoopsie, saying they accidentally sent $400 million of their ETH to Gate.io on October 21, instead of their cold wallets, but that Gate.io had sent the money back. Everything was fine. [Twitter, archive; WSJ]

The crypto market wasn’t buying it. Instead, the news set off an FTX-style bank run, as panicked users raced to get their funds off Crypto.com. Within hours, more than 89,000 transactions pulled customer funds out of Crypto.com wallets. You could watch it in real time on Etherscan. [Chainsaw, Twitter]

Picture old-timey cartoons of guys in a stock exchange, hats popping off their heads and cigars falling out of their mouths in shock, shouting, “SELL! SELL! SELL!” Crypto.com was like that but in basements around the world.

By Monday, the run had made mainstream international news —  Sky, AFP, and Reuters, as well as financial outlets such as Bloomberg. [SkyNews]

Crypto.com should have collapsed right then, but it didn’t. Binance bailed Crypto.com out with infusions of ETH and USDC from their “recovery fund.” Cryptocurrency just reinvented the idea of a central bank as a lender of last resort. [Twitter; Twitter; Twitter]

Of course, given what he had just done to FTX, is it really a smart idea to let CZ know you have liquidity problems?

The following day, Marszalek did an Ask-Me-Anything to reassure everyone that the funds were safe. “At no point were the funds at risk of being sent somewhere they could not be retrieved,” he said. “It had nothing to do with any of the craziness from FTX.” [YouTube] 

Binance also held an AMA to tell everyone that everything is fine. [Twitter; Verge]

The life and times of Kris Marszalek 

Kris Marszalek co-founded Crypto.com in 2016. It was initially called Monaco but bought the “crypto.com” domain from cryptographer Matt Blaze in 2018.

Based in Singapore, the firm has spent huge money on ad campaigns, including a $700 million deal to put its name on LA’s sports arena (formerly Staples Center) and a “Fortune Favors the Brave” Super Bowl commercial featuring Matt Damon. [GQ]

The company makes money by charging fees for trades on its smartphone app. It promises Ponzi-like yields — up to 14.5% annually, paid out in stablecoins. 

To access the higher stake yield, you have to buy Cronos (CRO), the platform’s native trader token, whose price floats freely. CRO tanked over the weekend over concerns about Crypto.com’s reserves. [BeinCrypto]  

Marszalek, 42, is a Polish-born serial entrepreneur who lives in Hong Kong. He dropped out of college and started his career selling computer equipment. He doesn’t appear to have any trading experience at all prior to Crypto.com.

You’ll be delighted to hear that Marszalek has the sort of background you want in a crypto CEO. Specifically, running a voucher sales company that collapsed in 2016 and stiffed everyone.

Founded in 2010 in Singapore, Ensogo offered Groupon-style “daily deals” and so forth. After going through multiple name changes and acquisitions, Ensogo was listed as a standalone company on the Australian Securities Exchange. It pivoted to an “open marketplace platform” in late 2015. [ASX, PDF]

By April 2016, Ensogo had closed its Malaysian office and had stopped paying merchants. The company’s first-quarter report to the ASX showed an AUD$5 million deficit, despite firing half its staff in the first quarter of 2016. It had already lost AUD$67 million in 2015. Ensogo finally stopped operations in June — leaving merchants and consumers in the lurch. One Hong Kong merchant lost HK$20,000. [Tech in Asia; Tech in Asia; Tech in Asia]

Other exchanges 

In the third quarter of 2022, US exchange Coinbase suffered “another tough quarter.” Institutional trading was down 22% and retail volume was down 43%, compared to the previous quarter. Net revenue in Q3 was $576 million, down from $803 million in Q2, and $1.2 billion the year before. The company lost $545 million in Q3, compared to a net profit of $406 million in the same period last year. [FT, archive; Shareholder letter, PDF]

In Hong Kong, AAX has suspended withdrawals. The crypto exchange had just blogged that it had no exposure to FTX and that user funds were never exposed to counterparty risk. [AAX; AAX; Coindesk]

What’s a user to do?

The FTX collapse has taken out a variety of firms across crypto, including other exchanges and crypto hedge funds. Many projects used FTX like it was a bank. So many projects are now wrecked because they treated FTX like it was a safe place to store their cryptos.

Expect more trouble and possible bankruptcies to come. People keep treating crypto exchanges as banks. They are not banks.

The hard part is: what do you do instead?  

Loud and weird crypto nerds, particularly bitcoin maxis, are saying “not your keys not your coins” again a lot.

Back in the real world, approximately 100% of crypto users are in it for the money. And that’s only achievable with the coins on an exchange, where they can actively buy and trade them.

More importantly, almost all crypto users have flat zero technical knowledge. They have no idea how any of it works. They trusted the newspaper headlines. They just about get “number go up.” They won’t be self-custodying en masse.

DeFi traders will tell you that self-custodying is the only way to do anything, but they also get rekt a whole lot.

We concur that users should treat centralized exchanges as risky places to store cryptos. The trouble is, what else to do with them? If you don’t want to do the sensible thing — i.e., dump your coins and get the heck out of crypto — you’re going to have to learn way more about how the technology works than you ever wanted to.

It’s going to suck because — despite the user-friendly Super Bowl ads — crypto is not a product. It’s a pile of wires on a lab bench. Get out your soldering iron, you’re gonna be your own bank.

Posted on by Amy Castor 3

FTX files for bankruptcy, and the fallout begins. Who’s next?

It’s been an exhausting week trying to keep up with the chaotic news coming out on FTX. Here’s our latest crypto collapse update and analysis. This one is on David’s blog. [David Gerard]

While many people have been comparing the fall of FTX to Enron or Lehman Brothers, it’s really more like MF Global, a major global financial derivatives broker that went belly-up in 2011.

MF Global’s fatal flaw was the same as FTX-Alameda: They failed to segregate funds and used billions of dollars in customer money to cover up losses in trading.

Everyone should have seen this crash coming, especially the “sophisticated” venture capitalists who neglected to do due diligence on FTX and instead kept shoveling money into the fire, creating the myth of Sam Bankman-Fried, boy genius, in the process.

You should assume that every offshore crypto firm is like the failed Canadian exchange Quadriga — Zeppelins flying high, waiting for a single spark to set them off.  

Image: Hindenburg exploding

Posted on by Amy Castor 1

Crypto collapse: J. Pierpont Moneygone — FTX rekt, bought by Binance

  • By Amy Castor and David Gerard
  • Send us money! Our work is funded by our Patreons — here’s Amy’s, and here’s David’s. Your monthly contributions help greatly!

The 2021–2022 crypto bubble made a lot of traders look like geniuses. Then the bubble popped, the tide went out, and the traders turned out to be hugely overleveraged formerly-lucky idiots.

Sociologists know that when a cult prophecy fails, most cultists exit the cult, and the remaining factions turn on each other.

Crypto watchers know that this can also be exceedingly funny.

Imaginary assets, real liabilities

Sam Bankman-Fried’s boosters compare him to the legendary banker J. P. Morgan. He’s spent the crypto collapse bailing out ailing companies to keep the entire market afloat.

Bankman-Fried runs three large crypto enterprises:

  1. Alameda Research, his crypto hedge fund;
  2. FTX, his unregulated offshore crypto casino that doesn’t allow US customers;
  3. FTX US, his exchange for US customers that purports to operate under US law and accepts actual dollars.

On November 2, Coindesk’s Ian Allison posted an explosive story on a partially leaked balance sheet for Alameda. [CoinDesk]

Of Alameda’s $14.6 billion in claimed assets, $5.8 billion is FTT — FTX’s internal exchange token. You can use FTT for cheaper trading fees and increased commissions. FTT is also traded outside FTX.

Allison also noted that $5.8 billion is actually 180% of the circulating supply of FTT!

Alameda’s liabilities are listed at $8 billion, most of which is $7.4 billion of loans — quite a bit of that from FTX.

Alameda is super cashed-up … if you account for FTX’s own FTT token at mark-to-market, and not what you could actually get for that much of their private illiquid altcoin.

To make matters worse, Dirty Bubble notes that a lot of Alameda’s other assets are crypto tokens from other Sam Bankman-Fried enterprises. [Dirty Bubble Media]

Alameda and FTX seem to have printed FTT, pumped its price using customer assets — FTX was quite open that it was the FTT market maker, and there’s no other real demand — and used the mark-to-market value of their illiquid made-up token as collateral for loans, or as evidence that pension funds should invest in crypto companies.

This works great while number is going up!

Regular readers will know that this sort of flywheel scheme is precisely what Celsius Network tried to run with their CEL token and Nexo with their NEXO token. Celsius is bankrupt, and regulators have noticed that Nexo is only solvent if you allow them this particular tricky bit of accounting.

Alameda CEO Caroline Ellison said the leaked balance sheet Coindesk got a hold of was “incomplete,” and there were $10 billion in assets not listed there. [Twitter, archive] 

The crypto world spent a few days wondering if Alameda was the next Three Arrows Capital.

CZ pulls the plug

Large flows of FTT were noticed on the blockchain on November 6. Binance CEO Changpeng Zhao confirmed that this was Binance selling off its FTT: [Twitter, archive]

“As part of Binance’s exit from FTX equity last year, Binance received roughly $2.1 billion USD equivalent in cash (BUSD and FTT). Due to recent revelations that have came to light, we have decided to liquidate any remaining FTT on our books.”

The remaining FTT that Binance sold was worth $530 million. [Bloomberg]

CZ was also annoyed at Bankman-Fried’s lobbying efforts for crypto regulation in Washington: “We won’t support people who lobby against other industry players behind their backs.” [Twitter, archive]

The crypto market is incredibly shaky. Alameda and FTX operate as separate corporations, but the market seems to think they’re closely entwined. Trouble at Alameda leads to worry about FTX.

So panicked holders, thinking Alameda might be insolvent, started withdrawing funds from FTX as fast as possible — and hardly deposited anything at all.

FTX paused all withdrawals on the Ethereum, Solana, and Tron blockchains around 11:37 a.m. UTC on November 8, according to Steven Zheng at The Block. [The Block]

Finally, just after 4 p.m. UTC, Bankman-Fried and CZ announced that Binance was buying FTX. Specifically, they have a non-binding letter of intent, pending due diligence. [Twitter, archive; Twitter, archive]

Essentially, CZ started a bank run on FTX, then swooped in to buy his competitor after breaking it. CZ did to Bankman-Fried what Bankman-Fried has been accused of doing to a string of others.

At present, this is only a letter of intent, not a done deal — CZ is making Bankman-Fried suffer. He could just let FTX go hang.

How screwed are FTX and Alameda?

CZ said FTX was in a “significant liquidity crunch.” This is the sort of “liquidity crunch” that everyone else calls “insolvency.” If it were just liquidity, FTX could have borrowed against its assets and found another way out of this. [Twitter, archive]

We don’t know for sure that Alameda was trading with FTX customer funds — but this sort of fractional reserve operation is the only not-entirely-fraudulent reason that FTX could have run out of customer funds in this way.

Bankman-Fried claimed on November 7 that “FTX has enough to cover all client holdings. We don’t invest client assets (even in treasuries).” This appears not to have been true, and he later deleted the tweet. [Twitter, archive]

If FTX couldn’t get its funds back from Alameda quickly, that would have then led to the liquidity crunch.

What about FTX US?

Bankman-Fried was quick to reassure customers that FTX US was not affected and that it was “fully backed 1:1, and operating normally.” So at least FTX US explicitly claims it isn’t playing the markets with your deposits. [Twitter, archive]  

FTX US is also attempting to buy the remains of the bankrupt Voyager Digital, a deal that we think is likely to go through.

The separation of customer funds and platforms is the whole point of FTX US versus FTX. It’s there to make Sam look good to regulators.

But it’s all Sam Bankman-Fried. It’s Sam’s left pocket versus his right pocket.

We think that if your paycheck goes into FTX US, you probably want to stop doing that immediately.

What happens next? It’s contagion time!

Alameda has likely been borrowing against the FTT it held — the FTT that is now crashing. (Earlier today, FTT was worth $19; as we post this, it’s trading at $4.60.)

Binance might rescue FTX, but it’s sure not going to rescue Alameda.

This means a series of margin calls by everyone who’s lent to Alameda. If Alameda defaults, those lenders will likely end up with worthless FTT.

BlockFi and Genesis have a pile of money in Alameda. BlockFi is or will be owned in some unspecified manner by FTX US, but that doesn’t make the books balance — there’s already a rumor of a 24-hour margin call by BlockFi against Alameda. [Twitter]

Remember that Three Arrows Capital collapsed when their UST turned out to be worthless. This then took out a pile of other crypto trading firms — most notably Celsius Network and Voyager Digital.

We’re left with two questions:

  1. Who is lending to Alameda?
  2. Who’s lending to those lenders — and risks going down in turn?

The crypto market is not happy. Bitcoin has been up and down like a yo-yo today, from $19,500 just before 4 p.m. UTC to a peak of $20,500 and a trough of $17,500.

We predict more market excitement to come — specifically, a possible Alameda collapse, a chain reaction of lender failures, and attempts to cover sudden balance-sheet holes, much as we saw after the Terra-Luna and Three Arrows collapses.

But Caroline Ellison from Alameda insists there’s another $10 billion behind the sofa or something. Maybe it’s all fine!

Image: FT Alphaville

Posted on by Amy Castor 2

Crypto collapse: 40 states chasing Celsius for possible securities fraud; Texas chasing Voyager and FTX for possible securities fraud

  • By Amy Castor and David Gerard

“Of all the offspring of Time, Error is the most ancient, and is so old and familiar an acquaintance, that Truth, when discovered, comes upon most of us like an intruder, and meets the intruder’s welcome.” 

~ Charles Mackay, Extraordinary Popular Delusions and the Madness of Crowds

Celsius: dodge the cops by diving down the drain

Celsius Network seems to be admitting the company’s dead and it’s not coming back. The debtor companies filed a motion on September 29 to sell off whatever assets remain.

The leading contender is, wait for it, Sam Bankman-Fried of FTX, who was previously noted to be sniffing around the gaping balance sheet hole called Celsius. [Bloomberg]

Here’s the filing to sell off everything, with its marvelous title in full: Debtors’ Motion Seeking Entry of an Order (I) Approving the Bidding Procedures in Connection with the Sale of Substantially All of the Debtors’ Assets, (II) Scheduling Certain Dates with Respect Thereto, (III) Approving the Form and Manner of Notice Thereof, (IV) Approving Contract Assumption and Assignment Procedures, and (V) Granting Related Relief. [Motion, PDF]

The filing asks to start a bidding process, in a conventional manner, for any remaining spare change to be found in the stiff’s pockets. Celsius would like bids to be put in by November 15, with a hearing to approve the winner around November 28. Celsius hopes to sell any remaining assets by December 20. The auction would be advertised in the New York Times and CoinDesk.  

This isn’t actually a bad idea. We’ve said repeatedly that taking Celsius out of everyone’s misery is the right move. Celsius is an ex-parrot. It is bereft of life. There’s no viable business here. In any ordinary bankruptcy, selling off whatever’s left would be the correct thing to do at this point.

But this isn’t an ordinary bankruptcy. Vermont’s filing sets out the issues. There have been shenanigans here, and Vermont doesn’t want those put aside before the examiner can report: [Objection, PDF]

“As of the Petition Date, at least 40 state securities regulators were engaged in a multistate investigation arising from, inter alia, concerns about potential unregistered securities activity, mismanagement, securities fraud, and market manipulation by Celsius and its principals. At least six of those states had taken regulatory enforcement action against Celsius as of the Petition date, and several more states have done so since then.”

Ownership of the “custody” and “withhold” accounts have yet to be resolved. Do the accounts belong in full to the named creditors or are they part of the general pool of assets? (See our list of Celsius account types.) And who owns the stablecoins?

If any of the assets constitute securities, Vermont wants those to be registered as offerings of securities. (Spoiler: many of them are likely to constitute securities, and none are registered.)

Also unresolved: Celsius insiders withdrew nearly $18 million in cryptos in the weeks before Celsius froze withdrawals on June 12.  

Texas, Alabama, Arkansas, California, the District of Columbia, Hawaii, Maine, Missouri, New York, North Dakota, and Oklahoma all concur with Vermont’s objections. The states want to see the examiner’s report before any sale goes forward. They also want to approve the bidders to verify that they are compliant with state regulations, or can become compliant in a timely manner. [Texas objection, PDF; Coordinating states’ objection, PDF]

The US Trustee also objects to the auction. As well as the above objections, the Trustee asks that a privacy ombudsman be appointed, as “customers of these Debtors have significant concerns regarding transparency and irregularities.” [Objection, PDF]

Some individual creditors object on the same grounds — e.g., Daniel Frishberg, who thinks the examiner’s report may show that Celsius was a Ponzi scheme. Immanuel Herrmann has objected on behalf of an unofficial “Steering Committee” of Earn, Loans, and CEL depositors — they don’t object to an asset sale but do feel this current proposal is rushed. [Frishberg objection, PDF; Herrmann objection, PDF]

The forlorn quest for your money

The US Trustee held a 341 creditors’ meeting on October 13. Celsius interim CEO Chris Ferraro responded to questions under oath — and Ferraro knows nothing, nothing! Most of his answers amounted to “I’ll have to follow up on that,” “I don’t know,” and “I need to consult with my lawyers.” [Reddit]

The next Celsius hearing is on October 20 at 10 am ET. There’s an omnibus hearing on November 1 at 11 a.m. ET.  Custody and withhold hearings are scheduled for December 7 and 8 at 9 a.m. ET. [Schedule, PDF]

Celsius has requested to set a “bar date,” the deadline for customers to submit proofs of claims, of December 13, 2022. [Motion, PDF]

If you agree with the schedules of assets and liabilities that Celsius filed earlier, you don’t need to file a claim. Go to page 92 to check your claim. [Schedule, PDF]

If you do need to file a claim, Celsius has submitted a form for approval with the bar date motion. 

An inspector calls

As soon as she was appointed examiner in the Celsius bankruptcy on September 29, Shoba Pillay, previously an assistant US attorney, set to work.

She has already spoken to the debtors. She has outlined the various documents she will be requesting and has set forth a plan on how to avoid duplicating work already done.

Pillay has also filed a “Rule 2004 Motion,” to collect almost anything she might need. This motion will be heard on October 20 and is sure to be granted. [Rule 2004 motion, PDF; Notice motion, PDF]

Federal Rule of Bankruptcy 2004 — that’s a rule number, not a year — allows tremendously broad discovery and deposition. A witness in a 2004 examination 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, in order to do their job. [Cullen Dykman; Nolo]

Pillay has proposed a work plan: [Motion, PDF]

  • Interview 15 to 25 witnesses under Rule 2004.
  • Monitor investigations by governmental entities.
  • Hire professionals as needed. She’s already put forth a motion to retain as counsel Jenner & Block, the Chicago law firm where she serves as a partner.
  • Hire Huron Consulting Group as her forensic accounting and financial advisor. 
  • Ascertain if the scope of the investigation needs to be expanded.

Hosting services

Core Scientific provides hosting services to Celsius Mining. Core claims the bankrupt company owes them $5.4 million. They’re tired of subsidizing Celsius’ failing mining business. They want their money, or they want out of their contract before Celsius turns them into a dead parrot too.  

Celsius argues that Core breached their agreement by failing to deploy mining machines on time, and is unjustly trying to pass on power charges. They say Core is in violation of the automatic stay, which stops creditors from trying to collect debts until court bankruptcy proceedings are completed. They have called for a hearing on October 20 to ask the court to enforce the stay. [Filing, PDF; Coindesk; The Block]

Core responded saying that Celsius’ claims were “premised on the incorrect notion that Core Scientific must subsidize the Debtors’ money-losing mining business to the tune of millions of dollars a month.” 

Core says they have deployed all of the mining equipment Celsius gave them and are paying out of pocket to keep the machines running. They are seeking relief from the court to either terminate their contract or to get paid. They want to delay the hearing on October 20 and they are requesting a status conference. [Letter, PDF]

Celsius’s lawyers responded that Core’s request for a status conference is “unwarranted and premature.” We think Celsius is dragging this out for as long as they can run up a tab with Core that will never be paid. [Letter, PDF]

Cold, so cold

There’s a new tool that lets you search the Celsius creditor database with your name and find your coinage! You can use the leaderboard to find the top losers. [Celsiusnetworth; Gizmodo]

US federal prosecutors from the Southern District of New York subpoenaed Celsius days after it blocked withdrawals in June. The subpoena was issued by a grand jury. Federal grand juries are used by Department of Justice prosecutors to conduct criminal investigations and potentially issue indictments. [FT, archive] 

The SDNY subpoena is disclosed on p. 48 of this October 5 filing. Pages 48-50 list investigations by multiple state regulators. [Filing, PDF]

Celsius has filed its proposal for a key employee retention plan (KERP). They want to divvy up $2.96 million amongst 62 key non-insider employees — so as to keep them working on the dumb “Kelvin” plan to revive this dead parrot. Celsius currently has 275 employees in total. [Motion, PDF]

Alex Mashinsky, who recently stepped down as Celsius CEO, is dumping his CEL tokens for USDC dollar-equivalent stablecoins. [Twitter, Twitter] 

Celsius cofounder Daniel Leon, who also just stepped down, sold $11.5 million worth of CEL in 2020 and 2021. [FT]

Jason Stone of KeyFi, a.k.a. DeFi whale 0x_b1, used to manage Celsius’ investments. Stone sued Celsius in July, saying they hadn’t paid him and called Celsius a Ponzi scheme. Celsius countersued in August, claiming Stone was an incompetent thief. Anyway, Celsius has just updated their counterclaim. [Complaint, PDF] 

Voyager Digital, FTX, and Texas

In a Chapter 11 bankruptcy, the debtor has to file a disclosure statement with their bankruptcy plan. The statement needs to provide “adequate information” about the debtor’s financial affairs so creditors can make an informed decision when they go to vote on the bankruptcy plan. 

Voyager filed its first amended disclosure statement related to its second amended joint plan on October 5. The plan involves selling off all of its assets to FTX US. [Statement, PDF]

The US Trustee objected to Voyager’s disclosure statement. The plan doesn’t say it’s a liquidation plan, but the proposal is basically to liquidate Voyager. The plan also shields Voyager CEO Stephen Ehrlich and his assets from third-party claims. The Trustee wants clearer disclosure for creditors of precisely what this statement is. [Objection, PDF]  

The Texas State Securities Board objects to the sale of Voyager to FTX, “because, at this time, the Debtor and FTX are not in compliance with Texas law.” Texas thinks the plan “attempts to limit the Debtors’ liability for unlawful post-petition — but pre-sale closing — conduct for which state-regulatory fines and penalties may apply.” That is, they think the quick sale is an attempt to hide malfeasance. [Objection, PDF]

Specifically, Texas thinks FTX has been offering investment contracts that constitute unregistered securities to Texas residents. The affidavit from Joe Rotunda, Director of the TSSA Enforcement Division, details Texas’ ongoing case against Voyager since April 2022 for unlicensed offerings of securities — and then it gets stuck into FTX.

Rotunda states that the interest-bearing accounts offered by FTX US are likely unregistered securities. FTX US claims to be registered with FinCEN as a money transmitter — but it isn’t registered with Texas as a money transmitter. FTX Capital is registered with Texas as a broker-dealer, so that’s nice. 

The FTX trading app lets US customers use FTX non-US despite FTX Trading’s claims not to serve US customers, and despite Rotunda correctly entering his address as Austin, Texas. Rotunda transferred ether to a wallet on FTX. Rotunda is pretty sure the FTX (US or not) yield program is an investment contract and not a registered one.

Rotunda also confirms that “The Enforcement Division is now investigating FTX Trading, FTX US, and their principals, including Sam Bankman-Fried.” [Affidavit, PDF]

The lawyers want their money 

Bankruptcies are expensive. The professionals operating on behalf of Voyager Digital and Celsius Network have begun submitting their bills. 

Kirkland & Ellis in Voyager: $2,994,615.46 for July 5 to July 31. [Fee statement, PDF]

Kirkland & Ellis in Celsius: $2,570,322.67 for July 13 to July 31 July — yes, that’s only two and a half weeks. [Fee statement, PDF]

Akin Gump in Celsius: $741,898.56 for July 13 to Aug. 31. [Fee statement, PDF]

Alvarez & Marsal in Celsius: $2,961,249.80 for July 14 to Aug. 31. [Fee statement, PDF]

Other good news for crypto finance

South Korean crypto investment firm Blockwater Technologies defaulted on a loan from TrueFi, a decentralized lending protocol. TrueFi issued a “notice of default” to Blockwater on October 6 after Blockwater missed a payment on a loan of 3.4 million BUSD. TrueFi said the debt represents about 2% of its total outstanding value. Blockworks’ loan was “restructured” in August, and they paid back 654,000 BUSD at that time. TrueFi wants “a potential court-supervised administrative proceeding” —i.e., putting Blockwater into something like bankruptcy. [TrueFi blog; Bloomberg; Twitter]

Do Kwon is the founder of Terraform Labs, whose UST “stablecoin” collapsed in May, took the rest of crypto down with it, and started us on writing this newsletter series. Kwon talked to Laura Shin for her Unchained podcast on October 14 from a totally legitimate unknown location where he definitely isn’t on the run. The podcast comes out on October 18. [Twitter; Unchained]

Grayscale runs crypto investment funds, most notably GBTC, which Amy has dissected at length. Grayscale is now creating Grayscale Digital Infrastructure Opportunities, to buy up used bitcoin mining rigs from distressed mining companies. These will be used for mining by Foundry Digital, which is also owned by Grayscale owner Digital Currency Group. This will be made available as a fabulous investment opportunity to “accredited investors such as hedge funds and family offices at a minimum investment of $25,000.” [Bloomberg]

The Department of Justice has issued a new report on crypto crime: “The Role Of Law Enforcement In Detecting, Investigating, And Prosecuting Criminal Activity Related To Digital Assets.” This report was as required by President Biden’s March 2022 executive order on crypto. [DOJ, PDF]

Posted on by Amy Castor 0

Crypto collapse: Celsius, Voyager, SkyBridge — the liabilities are real, the assets are fake

“To the crowd there assembled, I was the realization of their dreams….The ‘wizard’ who could turn a pauper into a millionaire overnight!”

~ Charles Ponzi

Celsius Network

For years, Celsius founder Alex Mashinsky told people banks were the enemy, and Celsius was your friend. Now everyone is wondering where their money went. Here’s our summary of the current situation at Celsius:

  • The money is gone. There’s almost nothing left for creditors.
  • The lawyers are stripping the last shreds of meat off the bones. 
  • Celsius’ ludicrous plan to run a bitcoin mining operation to get out of debt is a way for execs to put off liquidation a bit longer while they fill their pockets. 
  • Insiders will keep paying themselves with the remaining funds for as long as they can get away with it.
  • An examiner report could lead to a liquidation, possibly more. Any party can file a motion to convert to a liquidation “for cause.” The sooner that happens, the better, as far as we’re concerned. It’s time to close the curtains on this clown show.
  • We can hope for criminal charges — but those would require something like solid evidence of a deliberate Ponzi scheme, which could well come from the examiner, once appointed. 
  • Both the Trustee and the judge have the power to refer a case to the Department of Justice. If the examiner finds evidence of federal crimes, the case will have already been made. 

Let’s review the four types of Celsius customers:

  • Earn: Celsius promised up to 18% APY if you gave them your crypto to invest in … secret things. Crypto deposited into Earn accounts became the property of Celsius. The Earn product resembled an unregistered securities offering. When you give someone your money and they do stuff with it to make more money, that’s an investment contract — a security.

    Not registering such an investment contract when offering it to the public is why BlockFi had to fork over $100 million to state regulators and the SEC, and why Coinbase ultimately had to abandon its Coinbase Lend product.
  • Borrow: Celsius let you take out loans against your crypto assets. Borrow customers were usually crypto gamblers borrowing USDC (casino chips) to play the DeFi markets. You paid interest monthly, and then paid the principal in one lump sum at the end. Similar to Earn, the crypto you put up as collateral became Celsius property.
  • Custody: Celsius launched a Custody solution on April 15, 2022 — 89 days before it filed for bankruptcy, making all of those funds subject to a 90-day clawback under the bankruptcy code.

    Custody was a response to state regulators casting an acerbic eye upon Celsius’ Earn product. “New transfers made by non-accredited investors in the United States will be held in their new Custody accounts and will not earn rewards,” Celsius said. [Celsius blog post, archive]

    Custody essentially served as storage wallets. In the bankruptcy proceedings, this has led to ongoing discussion on whether Custody account holders are secured creditors who will get their money back right away … or unsecured creditors, whose funds are now part of the bankruptcy estate. Judge Martin Glenn, who is preceding over the bankruptcy, says he hopes to resolve the matter sooner rather than later.
  • Withhold: If you lived in a US state where Celsius became unable to offer serviceable Custody accounts, you had to move your Earn funds to Withhold accounts, where they remained frozen. The Withhold group accounts for $14.5 million of the $12 billion in digital assets stuck on Celsius when it stopped withdrawals in June.

The big question now in the Celsius bankruptcy is how to classify creditors: who’s first in line to get their money back, and who’s last in line? This is why, in addition to the official Unsecured Creditors’ Committee (UCC), there are currently three ad-hoc groups, all vying to get the judge’s attention. 

Celsius believes that funds held in Earn and Borrow accounts are property of the bankruptcy estate, meaning those customers will have to wait until the lawyers finish to see what’s left. But Celsius wants to return money held in specific Custody and Withhold accounts to customers now. [Motion, PDF]

Celsius argues that $50 million of the $120 million in Custody and Withhold accounts should go back to customers, if they meet one of the following criteria: [Twitter]

  • The accounts are pure Custody or pure Withhold with funds that were transferred from an external wallet — not Earn or Borrow programs.
  • In instances where the Custody and Withhold accounts do contain funds transferred from the Earn or Borrow programs, they want customers to have their money back, if the transfers were less than $7,575, a specific legal threshold under the bankruptcy code clawback provision, 11 U.S. Code § 547(c)(9). This is an adjusted amount. [Twitter; LII; LII]

Much of the discussion at the third bankruptcy hearing on Sept. 1 centered around whether custody holders should be able to get their money back. [Coindesk]

During the hearing Judge Martin Glenn also emphasized: “Nobody is getting their money back if they remain anonymous. Let me make that clear.” [Twitter]

According to new financial docs, Celsius seems to have magically found $70 million “from the repayment of USD denominated loans.” Imagine that! The company originally forecasted it would run out of money by October, but now it has more runway. [Docket #674, PDF; Coindesk]  

Last month, the Trustee called for an independent examiner and filed a motion to show cause. [Motion, PDF] Creditors — the UCC and the ad-hoc groups — are worried that an examiner will drain more of their dwindling pool of funds.

David Adler, a lawyer with the firm McCarter & English, representing four Celsius borrowers, says an examiner will cost too much money. The group thinks the job can be done with a Chapter 11 Trustee. [response, PDF]

The Vermont Department of Financial Regulation says Celsius sure looked like a Ponzi scheme and is urging the court to appoint an examiner. Vermont is concerned about Celsius’ offerings of unregistered securities. “At a minimum, Celsius has been operating its business in violation of state securities laws. That improper practice alone warrants investigation by a neutral party.” Vermont also alleges that without Celsius’s holdings of its own native CEL token, the firm has been insolvent since at least February 2019. [FT; court filing, PDF]

Celsius has agreed to the Trustee hiring an examiner — as long as the examiner does not duplicate work already done by the UCC. Celsius says they’ve reached an agreement with the Trustee on this point. [response, PDF]

The next Celsius bankruptcy hearing is set for Sept. 14. There is also a hearing scheduled for Oct. 6 to discuss the custody account holders.

Meanwhile, Celsius has announced a Celsius-themed Monopoly game! It appears to be an unlicensed knockoff — not officially endorsed by Hasbro. This seems to have been in the works since well before the bankruptcy. [Web 3 Is Going Great]

Alex Mashinsky had a favorite slogan: “Unbank Yourself.” His wife Krissy is now selling a new T-shirt: “Unbankrupt Yourself.” [Twitter]

Daniel Leon, one of the founders of Celsius, says his 32,600 shares of Celsius stock are worthless. It looks like he wants to use them as a tax write-off. [Docket 719, PDF] 

Voyager Digital

On Aug. 30, the US Trustee held the first 341 creditors’ meeting for Voyager, where the Trustee and the creditors got to ask CEO Steven Ehrlich questions about the bankruptcy — under oath. The Trustee is an agent of the federal government. If you lie to the Trustee, it is like lying to the FBI — a federal crime. 

(We wrote about Celsius’ 341 meeting previously.)

Listening to creditors, it’s clear that they’re upset and confused as to why their crypto, including USDC, has become part of the bankruptcy estate. They thought the money was theirs and they could have it back at any time. It didn’t help that Voyager gave users the false impression that their money was FDIC insured.

Ehrlich kept referring the distraught creditors back to the customer agreement, which many had never read, or never fully understood.

Ehrlich noted during the meeting that Voyager is still staking crypto. He said the firm had filed a motion asking the court if it’s okay to stake even more. The court has allowed Voyager to continue staking pursuant to their ordinary business practices. The UCC oversees their staking. [Docket 247, PDF]

Staking is risky!

Some staking, such as proof-of-stake staking, doesn’t risk losing the coins in that currency. Once Ethereum switches to proof-of-stake and, perhaps several months later provides a way for you to withdraw your stake, there’s little risk when your ETH staking is denominated in ETH.

But most staking activity involves first moving your liquid crypto (such as ETH) into a company’s own crypto (such as CEL or UST), which is basically a self-assembled Ponzi scheme for staking. And a lot of “staking” is just lending to a DeFi structure, which means you’re at risk even when it’s denominated in that staked crypto.

Voyager says it got multiple bids to buy the company. The deadline for bids was Sept. 6 — extended from Aug. 26 — so now it’s headed to auction. The auction will be held on Sept. 13 at 10 a.m. ET in the New York offices of Voyager’s investment bank Moelis & Co. A court hearing to approve the results is scheduled for Sept. 29. [Bloomberg; court filing, PDF]

Sam Bankman-Fried’s FTX and Alameda disclosed a joint bid for Voyager in July. Voyager dismissed this as a lowball bid — but we think SBF is the one who is most interested in Voyager. Maybe they’ll up their offer in the auction?

What is there left to buy anyway? That’s what we want to know. Voyager is in much the same position as Celsius — its liabilities are real, but its assets are fake. What does FTX get if it buys Voyager?

The Georgia Department of Banking and Finance has a limited objection to the sale of Voyager. Voyager is a licensed money transmitter in the state of Georgia. If the auction is a success, the department is asking the court to stay the acquisition unless or until the new buyer is also licensed in the state as a money transmitter. We wonder how harshly that will limit the field of buyers. [limited objection, PDF] 

Bankruptcies are expensive. Quinn Emanuel, special counsel for Voyager, has submitted their first-month fee statement: $244,080. That’s for 196.7 hours of work. The lead lawyer ​​charges $2,130 an hour for his services. Voyager brought Quinn Emanuel on board in July to look into the possibility of insider trading at 3AC. [Doc 358, PDF; Bloomberg Law]

The next Voyager omnibus meeting is on Sept. 13 at 11 ET. The deadline for filing a proof of claims is Oct. 3. 

SkyBridge

FTX is paying an undisclosed sum for a 30% stake in Anthony Scaramucci’s SkyBridge, and SkyBridge will buy $40 million of crypto to hold “long-term.” Scaramucci is not giving up any of his own share of SkyBridge. [Bloomberg; FT]

SkyBridge used to be a general hedge fund then went hard into crypto. “We will remain a diversified asset management firm, while investing heavily in blockchain,” says Scaramucci.

The weird part of this is that SkyBridge is already an investor in FTX and FTX US. We’re reminded of how FTX “bailed out” Voyager, then it turned out that Voyager owed FTX a bundle.

Other stuff

Three Arrows Capital (3AC) withdrew 20,945 staked ether (worth about $33.3 million) from Curve and $12 million in various assets (wrapped ETH, wrapped bitcoin, and USDT) from Convex Finance. Nobody seems to know why they withdrew the funds. [The Block]

The Algorand Foundation has admitted it had $35 million (in USDC) exposure to collapsed crypto lender Hodlnaut. [Algorand blog]

Another class action has been brought against Terraform Labs. This one was brought by Matthew Albright. He is represented by Daniel Berger of Grant & Eisenhofer. The claim alleges Terraform violated the RICO act by artificially inflating the price of their coins and publishing misleading information following UST and luna’s collapses to cover up for an $80 million money laundering scheme. “UST amounted to a Ponzi scheme that was only sustained by the demand for UST created by Anchor’s excessive yields.” The proposed class is all individuals and entities who purchased UST and luna between May 1, 2019, and June 15, 2022. [Complaint, PDF]

From May: Chancers, the Korean crypto streamer who went to Terraform CEO Do Kwon’s house. [BBC] 

Posted on by Amy Castor 0

Crypto collapse: Celsius sues KeyFi, BlockFi’s FTX deal, Scaramucci’s SkyBridge, Voyager suit, 3AC going to jail?

David Gerard and I posted our latest episode of “Everything is going to hell in a handbasket.” This one is on David’s blog! [David Gerard]

In this update:

  • Celsius strikes back — Mashinsky is countersuing Jason Stone and KeyFi. This is what happens when two crypto firms do business on a handshake. (They don’t need a lawyer until they need lots of lawyers!)
  • How FTX saved BlockFi from being as utterly screwed as everyone else.
  • SkyBridge Capital — you can’t withdraw your money, but that’s okay because Anthony Scaramucci is coming out with a new fund!
  • Voyager pays the boys a little less than planned. Its KERP goes through but with smaller bonuses.
  • 3AC accuses Teneo of misleading the High Court of Singapore as to its corporate structure.
  • A bunch of crypto exchanges are treading water and/or closing their doors.
  • The crypto crash is a slow-motion train wreck. We keep writing about it, but what happens next? 
Posted on by Amy Castor 0

Crypto collapse: 3AC yacht ‘Much Wow’ back on the market, Celsius maybe-Ponzi, Voyager pays off the boys, Hodlnaut

“Crypto sceptics are a bit like the boy who cried wolf, except a villager gets eaten every damn time and the rest of them are still going ‘why did you cry wolf, FUDster?'”

— GunterWatanabe

Toot toot, I’m a boat

Everyone trusted Zhu Su and Kyle Davies at Three Arrows Capital (3AC). They knew what they were doing, right?

Only now, the pair have disappeared — and their fabulous yacht is back on the market. “The unclaimed yacht looms as a slightly ridiculous avatar of the hubris, greed, and recklessness of the firm’s 35-year-old co-founders.” [Intelligencer] 

Here’s the 3AC yacht in all its glory: the Much Wow. Yes, Zhu was into Dogecoin too. [Much Wow; Boat International, archive]

3AC talked like competent hedge fund guys — which straight away made them look a zillion times smarter than the rest of the crypto bros. But they weren’t good at this at all. They had no clue on how to hedge their bets. The 2021 crypto bubble saved 3AC’s backside — they could keep looking like geniuses a little longer.

3AC used a “spray and pay” strategy: invest in a whole pile of trashy minor altcoins, and hope for a return.

On May 26, 2022 — by which time 3AC had likely already abandoned their Singapore office and skipped the country — Davies tweeted that “it doesn’t matter specifically what a VC invests in, more fiat in the system is good for the industry.” This is correct, if you view crypto as a single unified scam casino. [Twitter]

Articles about the wider crypto collapse talk about 3AC a lot. This gives the impression that 3AC is fundamentally to blame.

3AC deserves a lot of the blame because they were greedy and stupid. But everyone else was also greedy and stupid. 

Terraform’s Anchor protocol paid 20% interest rates — the highest available. 3AC offered the next-highest interest rates available, by putting the money into UST/luna and skimming some off the top.

So everyone else put their money into Anchor and 3AC. Many of these were feeder funds, who skimmed a bit off the top themselves.

You can picture the crypto investment market as an inverted pyramid, where the point is UST/luna — a Ponzi box full of hot air. 3AC was the box above that. Everyone else is in a funnel down to those two. The bottom two Ponzi boxes collapsed, and the whole inverted pyramid came tumbling down with them.

Terraform was running the load-bearing Ponzi box; we put most of the blame on Do Kwon. But we also blame Terraform’s enablers — the rest of the crypto investment firms.

There’s a lot to blame 3AC for — the way that Zhu and Davies just kept going “this is fine” even as they knew it was going to hell. They were greedy fools.

But anyone who put their money into 3AC was also a greedy fool.

Voyage to the bottom of the sea

Voyager Digital’s official unsecured creditors’ committee (UCC) held a town hall on August 11. The meeting was led by UCC counsel Darren Azman and Chuck Gibbs at McDermott Will & Emery. Amy wrote up some notes. [YouTube; presentation]

Azman says: if you want to buy Voyager, hurry! The deadline to submit bids is August 26. Sam Bankman-Fried’s FTX has already submitted a bid. It may have been a low-ball bid, but SBF’s Alameda Research is a borrower from, lender to, and shareholder of Voyager. We expect FTX will want Voyager the most — if anyone really wants it at all. 

Azman and Gibbs say that Voyager is aiming to file a restructuring plan in October — and that creditors might get their money back as soon as November! What money there is, anyway.

This time frame would be welcome, but isn’t plausible — Mt. Gox (2014) and QuadrigaCX (2019) creditors are still waiting for their money years later.

Meanwhile, the boys gotta get paid. Voyager wants $1.9 million to pay bonuses to 38 employees as part of a “Key Employee Retention Plan.” (KERP). In a bankruptcy, KERP is a way to incentivize upper management to keep working throughout the bankruptcy — and not flee the sinking ship.

Voyager is also seeking to file under seal all pertinent information about KERP participants — their names, job titles, supervisors, salary, and proposed bonus. These folks are definitely not insiders, and Voyager can’t give you their names — but trust them.

When your ship is sinking, the last thing you want is people leaving with all your deep, dark secrets. Keep them happy — and quiet. 

The US Trustee objects to the sealing: “The payment of bonuses, let alone bonuses in such a significant sum to such a limited number of individuals under the circumstances that brought Voyager to this Court, should not be countenanced.” 

The UCC also objects — of Voyager’s 350 employees filed, only 12 have resigned so far. Nobody’s leaving. In fact, nobody’s been asked to leave.

Creditors are pissed that Voyager hasn’t bothered to reduce employee headcount at all, given the platform has been frozen since July 1. What are the employees doing, other than collecting paychecks? [motion, PDF; objection, PDF; objection, PDF; Coindesk]

Just days before Bernie Madoff was formally charged by the SEC, he wanted to distribute hundreds of millions of dollars in early bonuses to employees. We’re sure he was just being nice to them too. [National Post, 2008]

Celsius: When you’re in a hole, keep mining

Celsius submitted their Budget and Coin Report, reflecting the funds they were holding as of July 29. (They filed for bankruptcy on July 13.) The company plans to file similar reporting on a monthly basis throughout their bankruptcy. [Notice of filing and coin report, PDF] 

The report shows just how much money Celsius wants to set on fire. Over a three-month period from August through October, Celsius is allocating $14 million to payroll, $57.3 million to mining, and $33 million to restructuring costs. By the end of October, they’ll be operating hugely in the red.

Those negative numbers were the elephant in the room during Celsius’ second-day hearing on August 16. Amy summarized this hearing previously. Here’s the slide deck that Celsius lawyers from Kirkland & Ellis presented. [presentation, PDF]

Celsius has this mad idea that they can crypto-mine their way out of bankruptcy. First, they plowed customers’ money into stunningly risky investments. [Twitter thread] Now they want to feed the remaining customer funds into their money-gobbling bitcoin mining operation.

Celsius sought approval from the court to sell their mined bitcoin — so they could use the proceeds to fund Capex for their Texas mining operation. 

The US Trustee’s attorney, Shara Cornell, objected on the grounds that Celsius wasn’t being transparent about what bitcoin it planned to sell, or how much the mining business was expected to generate.

Despite those objections, Judge Martin Glenn approved the motion — though he had reservations: “At bottom, this is a business judgment decision that may turn out to be very wrong, but we will see.”

We think he should have had stronger reservations. Celsius says its mining will be profitable in January, but the numbers don’t add up. 

Celsius expects to generate 10,118 BTC this year and 15,000 BTC next year. Last year, they only mined 3,114 BTC, according to filings. The company has paid for 120,000 rigs, of which 49,000 are in operation.

Even if Celsius mines and sells 1,000 BTC per month, that’s only $2 million when their hosting costs are $19 million per month, with only half the rigs operational. This business simply isn’t viable. It’s just an attempt by Celsius CEO Alex Mashinsky to postpone his company’s liquidation.

Well, that was a huge arithmetic error. Sorry about that. We blame the intern. (i.e.,ourselves.)

A question of trust

Celsius also wanted to sell some de minimis assets. These turned out to be notes/bonds and equity in other crypto companies — but Celsius hadn’t bothered to mention that bit.

Cornell from the US Trustee said, “The motion makes it sound like the debtor is selling office furniture.” Judge Glenn said he had “no inkling the debtor was proposing to sell millions of dollars of equity or notes/investments in other crypto businesses.” He did not approve the motion.

US Trustee William Harrington has had enough of Mashinsky messing around. Days after the hearing, Harrington filed a motion requesting the court appoint an examiner to investigate what’s really going on inside Celsius and present their findings to the court. [motion, PDF] 

As grounds for hiring an examiner, the Trustee lists allegations of incompetence or gross mismanagement — including the offering of unregistered securities — significant transparency issues, and widespread mistrust in the debtors. 

Under US bankruptcy laws, an examiner can be appointed in any bankruptcy case if someone requests it and the court finds the company’s debts exceed $5 million. We have no doubt Judge Glenn will approve the request.

The language in the motion suggests that Mashinsky can’t be trusted. (We concur.) Among other things, it points out that Celsius owes $20 million in back taxes. Unpaid taxes are senior debt. The IRS gets first dibs on the remaining assets before the unsecured creditors.

The Celsius UCC is “concerned” about the Trustee hiring an examiner because “It will run up millions in costs.” [Twitter] 

We know for sure that it’ll be costly — the examiner in Lehman Brothers’ 2008 bankruptcy cost $100 million, up from a projected cost of only $23 million. The examiner for Enron was $90 million. So our guess is the examiner will probably cost creditors $25 million, if not more. 

The seven-member UCC feels it can conduct its own investigation and doesn’t need an examiner. The problem there is that the UCC is selected from a list of the largest Celsius creditors. These people represent companies that have a vested interest in the crypto space succeeding. They are not in any way neutral.

The P-word

A “341 meeting” was held on August 19 — a creditors’ meeting, named after section 341 of the Bankruptcy Code, where the debtor answers questions about their financial status under oath.[LII]

At the 341 meeting, Celsius CFO Chris Ferraro admitted that Celsius was paying old investors rather more money in rewards than they were actually getting in yield.

“In hindsight, we did not generate enough yield to support the return,” says Ferraro. He confirms Celsius was paying “over 100%” at times — 120% to 130% of the actual yield. There’s no transcript, but Kadhim Shubber from the Financial Times and Thomas Braziel from 507 Capital live-tweeted the call. [Twitter; Twitter]

If Celsius was paying this excess yield from incoming investor money … then that’s literally a Ponzi scheme. (A lawsuit filed against Celsius on July 7, also claimed Celsius was operated as a Ponzi.)

Ferraro said, “I don’t think it was that connected” — but he didn’t answer where else the money could have been coming from. It was just “hyper-growth mode,” see. [Twitter; Twitter]

A question of competence

Mashinsky is a good salesman — but he’s not so great at any other part of the job. In January, Mashinsky ordered Celsius’ in-house investment team to sell bitcoin worth hundreds of millions of dollars. A day later, Celsius had to repurchase it all at a loss. “He was ordering the traders to massively trade the book off of bad information,” said one of the traders. “He was slugging around huge chunks of bitcoin.” [FT, archive] 

Mashinsky is selling his $2.5 million home in Austin, Texas. He bought it only a year ago. [Twitter]

Canadian pension fund CDPQ has written off its CA $200 million investment in Celsius. “We arrived too soon in a sector which was in transition.” Whoever authorized the investment definitely wasn’t a foolish and greedy investor in a bubble, who didn’t look into the already-insolvent company at all. [La Presse, in French]

Elsewhere amongst the wreckage 

Last week, we talked about Coinbase’s horrific $1.2 billion Q2 loss. Frances Coppola took a deeper dive into the company’s 10-Q. She explains why Coinbase’s balance sheet has massively inflated. [Coppola Comment]

Genesis Trading CEO Michael Moro has quit, effective immediately — definitely a thing that happens all the time in healthy companies where things are going well. Moro “will continue to advise the company through the transition.” Genesis is also laying off 20% of its staff. The company had lent $2.36 billion to 3AC, and Genesis’ parent company DCG has made a claim against 3AC for $1.2 billion. [press release; The Block]

BlueBenx, a Brazilian crypto lending platform, has bitten the dust following a $32 million hack — or, its users think, a “hack.” Withdrawals have been halted, and employees have been laid off. [CoinTelegraph]

Hodlnaut has applied for creditor protection in Singapore. This is the equivalent of Chapter 11 in the US. They’re insolvent. [Hodlnaut announcement, archive; CoinDesk] 

In court filings, Hodlnaut formally admitted that they had lost money in the Terra-Luna crash via their Hong Kong entity. Hodlnaut had previously told customers they had no Anchor exposure. We knew they had, and wrote about it in our previous update. [Twitter; CryptoBriefing]

All deposits are part of the bankruptcy estate. If Hodlnaut is liquidated, even stablecoin depositors will only get a fraction of what they had on account at the company.

Hodlnaut is now facing a probe from the Attorney-General’s Chambers and the Singapore Police Force — “pending proceedings,” though they didn’t give any other details. About 40 out of the 50 employees the company had have been laid off. [Straits Times] 

Posted on by Amy Castor 2