News: LEO getting pumped, Cryptopia scrambles to save its data, Poloniex says it’s stopped ignoring customers

This newsletter is reader supported. If you appreciate my work enough to buy me a beer or cup of coffee once a month, that’s all it costs to become a patron. I’m trying to pick up freelance gigs when I can, but one of the joys of writing for my own blog is I can write whatever I want, when I want. On to the news…

Bitfinex and LEO

Screen Shot 2019-05-29 at 5.43.17 PMUNIS SED LEO, the full name of Bitfinex’s shiny new utility token, is in its second week of trading. The price started at around $1, but it’s already climbed to a high of $1.52, according to CoinGecko. I’m sure the price increase is totally organic—not.

There are 1 billion LEO in circulation—660 million issued on Ethereum and 340 million issued on the EOS blockchain. 

Crypto Rank warns that 99.95% of LEO coins are owned by the top 100 holders. Also, Bitfinex still has not disclosed information about the investors. “We consider that the token can be manipulative,” Crypto Rank tweeted.

Given its $850 million shortfall, Bitfinex needs to pull in more money. It recently entered the initial exchange offering (IEO) business. IEOs are similar to initial coin offerings (ICOs), except that instead of handing you money directly to the token project, you give it to the exchange, which acts as a middleman and handles all of the due diligence.

Tethers

As the price of bitcoin goes up—at this moment, it is around $8,730—the number of tethers in circulation is going up, too. There are now more than $3 billion worth of tethers sloshing around in the crypto markets, pushing up the price of bitcoin.

Whale Alert says $25 million worth of tethers were taken out of the supply and put into the Tether Treasury. Kara Haas tells me, don’t worry, $150 million Ethereum-based tethers were just issued, and they more than make up for the difference.

Omni tethers, Ethereum tethers, Tron tethers. Tethers appear to be constantly coming and going, bouncing from one chain to another. It gets confusing. But maybe that is the point—to keep us confused. And to add to the jumble, tethers are now executing on EOS.

In the next couple of weeks, Tether is also planning to issue tethers on Blockstream’s federated sidechain Liquid. And later this year, the Lightning Network.

I updated my recent tether story to note that if you want to redeem your tethers via Tether, there is a minimum redemption of $100,000 worth—small detail. Also, I still haven’t found anyone who has actually redeemed their tethers.

Cryptopia’s data—held to ransom?

Cryptopia filed for liquidation on May 14. Liquidator Grant Thornton New Zealand is now scrambling to save the exchange’s data, held on servers hosted by PhoenixNAP in Arizona. The tech services wants $1.9 million to hand over the data.

Grant Thornton is worried Phoenix will erase the SQL database containing critical details of who owned what on the exchange. It filed for Chapter 15 and provisional relief in the Bankruptcy Court of the Southern District of New York. (Here is the motion.)

According to the motion, Cryptopia paid Phoenix for services through April. But when it offered to pay for May, Phoenix ended the service contract and “sought to extract” $1.9 million from the exchange. Grant Thornton says only $137,000 was due for the month of May. Phoenix also denied the liquidators access to the data.

On May 24, the court granted motion. (Here is the order.) Phoenix has to preserve the data for now, but Cryptopia has to pay $274,408 for May and June as security in the temporary restraining order. 

Meanwhile, Cryptopia liquidators’ first report is out. The New Zealand exchange owes 69 unsecured creditors $1.37 million (these are just the ones who have put in claims thus far) and secured creditors over $912,000, with an expected deficit of $1.63 million.

Turns out January 14, the day Cryptopia suffered its fatal hack was the exact same day Quadriga announced the death of its CEO Gerald Cotten, who, uh, had been dead since December 9. The two defunct exchanges had a few other things in common, which I outline in my first story for Decrypt.

Poloniex 

Living in Cambridge, I found it strange that nobody in the local blockchain community knew anyone who worked at Poloniex, based in Somerville, the next town over. I was told Polo staff kept a low profile for security reasons. But I also wonder if they were trying to avoid pissed off customers, whose inquiries they ignored for months.

When Circle acquired Polo in February 2018, it inherited 140,000 support tickets. Now, more than a year later, Circle says it’s all caught up. Polo’s customer support has been “completely transformed” and 95% of inquiries are now handled within 12 hours.

Coinbase

Yet another executive has left Coinbase, president and COO Asiff Hirji. This is the third C-level executive to leave the San Francisco crypto exchange this year.

Recently, Coinbase said it was offering a crypto debit card in the UK—a Visa with a direct link to your Coinbase wallet that lets you spend crypto anywhere Visa is accepted. Financial Time’s Izabella Kaminska thinks that could open a back door for dirty money.

Coinbase plans to add margin trading. Leveraged trading lets you supersize your trading power, because you are borrowing from the exchange, but it also supersizes your risk.

It is easy to understand why Coinbase would want to get a piece of the margin trading business. BitMEX has been reeling in the profits with its bitcoin derivative products. The company’s co-founder is now a billionaire who has so much money, he is giving it away.

Binance is also talking about putting margin trading on the menu.  

Elsewhere in cryptoland 

Kik, the messaging app that raised $100 million selling its kin token in 2017, thinks decades old securities laws need revamping. It wants to create a new Howey test.

The Canadian startup launched DefendCrypto.org, a crowdfunding effort to fight the SEC. It’s contributed $5 million in crypto, including its own kin token, toward the effort.

Ted Livingston, Kik’s CEO says there was no promise kin would go up in value, like a stock. But that is not what at all what he implied during a presale pitch.

Craig Wright, the self-proclaimed inventor of bitcoin, created a hoopla when he filed registrations for the bitcoin code and Satoshi white paper. Disagreements over the significance of the registration have spilled out into his Wikipedia page. Drive-by editors even tried to change Wright’s name to “Craig Steven Fart face.”

Taotao, a new crypto exchange is launching in Japan. It is fully licensed by the Financial Services Agency, the country’s financial watchdog, and it is 40% owned by Yahoo Japan.

As long as the price of bitcoin keeps going up, that is all that matters to bitcoiners. David Gerard delves into the origin of the phrase “Number go up.”

Geoff Goldberg, well-known for his battles against the relentless XRP armies, has been mass reported for calling out the bots that run rampant on twitter. No good deed goes unpunished, apparently. Twitter has effectively silenced him for seven days.

Finally, the Associated Press has a new entry on crypto—sorry, cryptocurrency.

# # #

Related stories:
Social media startup Kik is kicking back—at the SEC
Turns out, you can make money on horse manure, and tethers are worth just that
“QuadrigaCX traders lost money on Cryptopia on the same day in January”—my first story for Decrypt

 

 

News: $250 million longs wiped out by bitcoin whale, Binance reopens withdrawals, Bitfinex set to trade LEO

Screen Shot 2019-05-18 at 5.17.10 PMThe price of bitcoin (BTC) is organically decided by traders—big ones, and only a few of them.

In the morning of May 17, the price of bitcoin did a nosedive, dropping from around $7,726 to $6,777 in about 20 minutes. The plunge was due to the actions of a single large trader (a “whale”) putting up 5,000 BTC (worth about $40 million) on crypto exchange Bitstamp.

The massive liquidation wiped out $250 million worth of long positions on BitMEX, a bitcoin derivatives exchange based in Hong Kong. (The BTC price it used bottomed at $6,469.15.) This, in turn, caused bitcoin’s price to plummet on other exchanges.

It’s hard not to view this as intentional price manipulation. 

BitMEX relies on two exchanges—Bitstamp and Coinbase Pro—equally weighted, for its Bitcoin-US dollar price index. Bitstamp and Coinbase both have low trading volumes, which makes them particularly vulnerable to price manipulations. It is like rolling a bowling ball down an alley and there are only two pins. You just have to aim for one.

Dovey Wan, partner at crypto asset investment fund Primitive Ventures, was the first to spot the dump on Bitstamp. She tweeted“As NO ONE will simply keep 5000 BTC on exchange, this is deliberately planned dump scheme, aka manipulation imo.” 

Despite the hit, the price of bitcoin magically recovered. As of this moment, it is trading at around $7,300. Bitstamp has launched an investigation into the large trade.

Delay, delay, delay

In the wake of such blatant price manipulation, it is tough to imagine that the SEC will ever approve a bitcoin exchange-traded fund (EFT).

On May 14, the US regulator again delayed a decision to approve the Bitwise ETF proposal. The deadline for the SEC’s ruling on the VanEck bitcoin ETF is May 21, but I’m betting that will get pushed out again, too.  

Bitfinex

The New York Supreme Court has ordered Bitfinex to stop accessing Tether’s reserves for 90 days, except for normal business activities. The judge modified the New York Attorney General’s original order to ensure it does not restrict Tether’s “ordinary business activities.” Bitfinex played up the event as a “Victory! Yay, we won!” sort of thing, but the NYAG’s investigation is ongoing, and the companies still have to hand over documents.  

Traders clearly don’t have much confidence in Bitfinex at the moment. Amidst the regulatory drama swirling around Bitfinex and Tether, they are moving a “scary” amount of bitcoin off the exchange. 

Meanwhile, Bitfinex is pinning its hopes on its new LEO token. Paolo Ardoino, the company’s CTO, tweeted that Bitfinex raised $1 billion worth of tethers—not actual dollars, mind you, but tethers—in a private sale of its new token LEO. Bitfinex has yet to disclose who actually bought the tokens, but I’m sure they are totally real people. 

Bitfinex announced that on Monday, May 20, it will begin trading LEO in pairs with BTC, USD, USDT, EOS, and ETH. It will be interesting to see if traders actually buy the token. US citizens are not allowed to trade LEO. 

Binance

After freezing deposits and withdrawals for a week following its hack, Binance opened up withdrawals again on May 15. Traders are now free to move their funds off the exchange. 

Binance is looking to create utility around its BNB token. The exchange burned all of its Ethereum-based BNB tokens and replaced them with BEP2 tokens—the native token of Binance Chain. The cold wallet address is here.

Cryptopia, Poloniex, Coinbase

New Zealand crypto exchange Cryptopia is undergoing a liquidation after it experienced two security breaches in January, where is lost 9.4% of all its assets. Its customers are understandably pissed and outraged.

After the breach, the exchange was closed from January until March 4, when it relaunched in a read-only format. Ten days later, traders woke up to a message on the exchange’s website that read, “Don’t Panic! We are currently in maintenance. Thank you for your patience, and we apologize for the inconvenience.” Cryptopia closed permanently on May 15. Grant Thornton NZ, the company handling the liquidation, expects the process will take months.

In the US, regulatory uncertainty continues to plague exchanges. Boston-based Poloniex, which Circle acquired last year, says it will disable US markets for nine tokens (ARDR, BCN, DCR, GAME, GAS, LSK, NXT, OMNI, and REP). “It is not possible to be certain whether US regulators will consider these assets to be securities,” the exchange says. 

Meanwhile, Coinbase is using the $300 million it raised in October to gobble up other companies. The San Francisco-based exchange is in talks to buy Hong Kong-based Xapo for $50 million. Xapo’s coveted product is a network of underground bitcoin cold storage vaults. The firm is rumored to have $5.5 billion worth of bitcoin tucked away in bunkers across five continents. 

Elsewhere in Cryptoland 

John McAfee has disappeared. “He was last seen leaving a prominent crypto person’s home via boat. He is separated from his wife at the moment. Sources are claiming that he is in federal custody,” says The Block founder Mike Dudas.

McAfee’s twitter account is now being operated by staff, who later denied he was in custody, posting pics of McAfee with his wife in their “new” backyard. 

Decrypt’s Ben Munster wrote a hysterical piece on Dudas, who has a habit of apologizing post tweet. “He tweets like Elmer Fudd shoots his shotgun; from the hip, and nearly always in the foot.” The story describes Dudas as a real person with human foibles.  

Bakkt says it’s moving forward with plans to launch a physically settled bitcoin futures product in July. The company does not have CFTC approval yet—instead, it plans to self-certify, after which time, the CFTC will have 10 days to yea or nay the offering.

Both CME and CBoe self-certified their bitcoin futures products as well. The difference is this: they offer cash equivalents to bitcoin upon a contract’s expiration. Bakkt wants to deliver actual bitcoin, which may give the CFTC pause.

The SEC has fined Alex Tapscott, co-author of the book “Blockchain Revolution,” and his investment firm NextBlock, $25,000 over securities violations. (Here is the order.) And the Ontario Securities Commission fined him $1 million.

In 2017, NextBlock raised $20 million to invest in blockchain and crypto companies. In raising the money, Tapscott falsely touted four blockchain bigwigs as advisors in slide decks. After being called out by then-Forbes writer Laura Shin, the company returned investors’ money. But the damage was done, and the SEC went after them anyway.

Tim Swanson pointed out that the the Stellar network went down for about two hours, and only those who run validator nodes noticed. Apparently, nobody actually cares about or uses the Stellar network.  

According to a report by blockchain analysis startup Chainalysis, 376 Individuals own one third of all ether (ETH). Based on a breakdown of the Ethereum initial coin offering, which I wrote for The Block earlier this year, this comes as no surprise.  

Robert-Jan den Haan, who has been researching Bitfinex and Tether since way back when, did a podcast interview with The Block on “What the heck is happening with Bitfinex.” If you are Bitfinex-obsessed like I am, it is worth listening to.   

Apparently, kicking back at regulators is super costly and something you may want to consider before you launch a token that doesn’t have an actual use case. SEC negotiations have cost Kik $5 million, as the media startup tries to defend its KIN token.

# # #

News: QuadrigaCX has gone bust, Kik is fighting back, and Tether rose to 4th place, briefly

QuadrigaCX customers’ worst fears have come to pass. The Canadian exchange is officially insolvent, and all the crypto is gone—well, most of it anyway.

On January 31, after filing for creditor protection, Jennifer Robertson, the widow of the exchange’s now-deceased CEO Gerald Cotten, filed an affidavit with the Supreme Court of Nova Scotia. As it turns out, Cotten was the only person who held the keys to the exchange’s cold wallets—encrypted wallets where cryptocurrency is kept offline. When he died in December, all that crypto became inaccessible.

According to the affidavit, QuadrigaCX owes 115,000 customers some $250 million CAD ($190 million USD) in both crypto and fiat. Roughly $192 million CAD ($147 million USD) were in crypto assets, most of it in the cold wallets.

In addition to the lost crypto, $30 million CAD is currently held by payment processor Billerfy. Three other third-party payment processors are holding a combined $565,000 CAD. And another $9.2 million USD is stuck inside WB21—a money transfer service that, surprise, surprise, is being sued by the U.S. Securities and Exchange Commission (SEC) for fraud.

But here is where things get strange. Two weeks before he died, Cotten signed a will leaving $100,000 CAD for his two dogs, according to the Globe and Mail (archive.)

I’m not insinuating any foul play here, but let’s go over what we have: Cotten and Robertson supposedly got married two months before his death. Cotten writes up a will to make sure his dogs are taken care of and Robertson takes ownership of 43% of the shares of Quadriga Fintech Solutions, the parent company of QuadrigaCX, should anything awful happen to him. Once that’s all said and done, something awful happens. Cotten goes off to India to help needy children (so nice of him) and dies.

Screen Shot 2019-02-03 at 7.47.19 AM

A month later, Robertson posts an announcement on the exchange’s website telling everyone the company’s CEO is dead. He was a kind, honest, upstanding, guy…after all, he sponsored an orphanage. And then later: Oh, and by the way, all the money is gone, because only Gerald knows where he put it.

[Update: A new twist to this plot may be developing. One Reddit user claims to have found the QuadrigaCX litecoin cold wallet addresses—and the funds appear to be on the move.] 

Elsewhere in the news, Canadian social media startup Kik plans to fight an expected SEC enforcement action over an initial coin offering (ICO). (Read my coverage here.) Kik raised $100 million in 2017 by selling its kin token. In a response to a Wells notice from the SEC, Kik argues that its token is a currency, therefore, it cannot be a security, and besides, the company never marketed kin as an investment anyway.

You could almost go along with that, as long as you completely ignored this 2017 Youtube video of Kik’s CEO Ted Livingston telling everyone how rich they could become if they owned kin. “We’re gonna put [kin] inside Kik and it will become super valuable on day one, we think.” Oops! (Read the full coverage in The Block.)

Two “professional hacking groups” are behind the majority of publicly reported hacks of crypto exchanges and other cryptocurrency organizations, according to a crypto crime report published by blockchain data analytics firm Chainalysis. The two nefarious groups so far have raked in $1 billion of hacking revenues for themselves. Of course, even thieves don’t keep their holdings in bitcoin. They converted everything to fiat.

If you thought SingularDTV was a dreadful name, the blockchain entertainment company has come up with something even more bad. SingularDTV has changed its name to Breaker. The company has a new logo, too—a circle comprised of small lines swirling inward meant to represent the “the hive mind,” a type of groupthink that decentralized projects like to associate themselves with.

Breaker owns Breaker Magazine, which changed its name to BreakerMag to avoid confusion. To go along with the new branding, Breaker (we’re talking about SinglarDTV now) also released a cringe-worthy video that starts with a man gyrating his hips and saying, “It’s like this,” and then devolves into a woman ripping a pink beauty mask off her face. As if the name change wasn’t awkward enough.

Nicholas Weaver, a researcher at International Computer Science Institute, gave a talk at Enigma, a USENIX conference, called “Cryptocurrency: Burn it with Fire!,” where he argued the entire cryptocurrency and blockchain space is effectively one big fraud. Here are the slides to the presentation. The video is not up yet, but Weaver gave a similar talk in April 2018. (It’s funny, watch it.)

For a brief period, tether (USDT), the stablecoin associated with the crypto exchange Bitfinex, rose to become the fourth largest crypto by market cap at $2 billion. It has dropped back down to sixth place now, but who knows, maybe it will rise up again. (Read my tether timeline to learn why tether is so important to crypto markets.)

Banking giant JP Morgan says bitcoin is now worth less than the cost to mine it. “The drop in Bitcoin prices from around $6,500 throughout much of October to below $4,000 now has increasingly pushed margins further and further negative for just about every region except low-cost Chinese miners,” the bank’s analysts said. (Bloomberg)

Despite all the hype, decentralized exchanges (DEX) are not attracting much interest. According to a report in Diar, DEX volume is at an all-time low—something that’s unlikely to change, mainly due to poor usability issues. Another reason to avoid DEXs:  anyone can list any token they like—even if it’s not a legitimate one.

Binance has come up with yet another harebrained business scheme. The Malta-based crypto exchange now allows customers to buy crypto using their credit cards. I can’t see this working out too well. Banks generally distance themselves from all things crypto, and many won’t allow you to put crypto on credit cards. And even if they do, weird things happen. US-based crypto exchange Coinbase no longer accepts credit cards, but when it did, Visa actually overcharged buyers—though, it did eventually issue refunds.

An Italian bankruptcy court found Francisco Firano (aka “Francisco the Bomber”) personally liable for $170 million in losses related to the BitGrail hack in April 2018. (Last year, I wrote a story about the hack for Bitcoin Magazine.) The BitGrail Victims Group posted scans of the court documents along with an explanation of the court’s decision on Medium.

In a big win for nocoiners, David Gerard, author of “Attack of the 50-foot Blockchain,” wrote a op-ed for The Block titled “The Buttcoin Standard: the problem with Bitcoin,” where he basically takes apart bitcoin and criticizes the horrendous energy waste of proof of work. Gerard’s article was solid. But just as you might expect, bitcoiners objected en masse, and even attacked The Block cofounder Mike Dudas.

Most of the criticisms were attempts to discredit the author and consisted of vague comments, such as “[Gerard’s] thought process is fundamentally broken at the protocol level,” “I was hoping for a more astute criticism,” and “terrible journalism!

Apple cofounder Steve Wozniak, who used to go around comparing bitcoin to digital gold, admits he sold all his bitcoin at its peak. “When it shot up high, I said I don’t want to be one of those people who watches and watches it and cares about the number. I don’t want that kind of care in my life,” he said at the Nordic Business Forum. “Part of my happiness is not to have worries, so I sold it all and just got rid of it.” (Satoshi Times)

And finally, the police department in Lawrence, Kansas has been getting reports of bad actors calling people up at random to demand bitcoin.

Social media startup Kik is kicking back—at the SEC

screen shot 2019-01-29 at 12.23.59 amKik is ready to go to battle. The Canadian social media startup has decided to take on the U.S. Securities and Exchange Commission (SEC). At issue is whether Kik’s digital token kin is a security.

Kik raised $47.5 million in September 2017 by selling kin in an initial coin offering, or ICO — though, Kik prefers to call it a token distribution event. That was after Kik pre-sold $50 million worth of kin to a group of 50 wealthy investors, mainly blockchain hedge funds. The presale was a simple agreement for future tokens, or SAFT, which is basically, a Reg D exemption, where the investors would get the tokens at some point in the future after things were up and running.

What is kin?

On its website, Kik describes kin as a “digital currency” that you can use to “earn points for watching video ads, then use points for stickers and custom emojis.” Kin is different from other in-house loyalty points, because it “can be bought and sold for real money.” In other words, you could use Kin as a utility token in the Kik app and also trade it on crypto exchanges for other coins, like bitcoin and ether.

Kik initially announced its token sale in May 2017, four months ahead of its ICO. At the time, the company banned Canadians from taking part in its public sale, because the Ontario Securities Commission (OSC) had already deemed its token to be a security. But that didn’t stop Kik from opening its sale up to U.S. citizens.

Although Kik consulted with lawyers before its public ICO, as far as what I’m reading, they never actually reached out to the SEC for guidance. And it’s not like they weren’t given fair warning that this might pose a problem. 

Fair warning

By mid-2017, the SEC had already begun its crackdown on ICOs. Two months prior to Kik’s ICO, the regulator issued an investigative report concluding that tokens sold by the DAO (a decentralized investment fund that ran on Ethereum) were securities. That report was a cautionary tale to any other project thinking about raising money in an ICO. In a public statement at the time, the SEC said:

“We encourage market participants who are employing new technologies to form investment vehicles or distribute investment opportunities to consult with securities counsel to aid in their analysis of these issues and to contact our staff, as needed, for assistance in analyzing the application of the federal securities laws.” [Emphasis mine.]

But instead of proactively reaching out to the SEC, Kik sat back and waited to hear from them—not a great strategy. 

The SEC first contacted Kik two days after Kik’s token offering began. “It was a friendly contact for information, which we happily responded to,” Kik CEO Ted Livingston wrote in a blog post. But from there the conversations “ramped up,” and on November 16, 2018, the SEC sent Kik and the Kin Foundation a Wells notice—essentially, a letter stating that the regulator was about to bring an enforcement action against them. On December 7, Kik sent back a 31-page response.

As far as the SEC sees it, Kik is in violation of section 5 of the Securities Act of 1933, which states that it is illegal to sell securities unless you register with the SEC or else apply for an exemption, such a private placement, which limits a sale to accredited investors—i.e., wealthy people who can survive the loss, if things go wrong. 

As mentioned, Kik’s private token sale was a Reg D exemption. (Here is the SEC filing from September 2017.) According to SEC rule 506 of Regulation D, purchasers receive “restricted securities,” meaning that the securities cannot be sold for at least six months to a year. Also, Reg D does not pre-empt something from being a security.  

The problem with SAFTs

In general, the problem with SAFTs is that, for various legal reasons (see SEC rule 144), even after the holding period, you can probably only sell your coins to other accredited investors. In other words, you cannot freely trade those coins on the secondary market. Obviously, that limits kin’s usability. It also makes kin not a very good currency, because you can’t actually buy and sell it for real money—at least not that easily.

The basic rule for determining wether something is a security is the “Howey test,” which states that a security is “an investment of money in a common enterprise with a reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others.” In its response letter, Kik claims kin is not a security according to the Howey test, because Kik never marketed its ICO as an investment.

“Simply put, Kik did not offer or promote Kin as a passive investment opportunity. Doing so would have doomed the project, which could only succeed if Kin purchasers used Kin as a medium of exchange (rather than simply holding it as a passive investment). Accordingly, Kik marketed Kin, not as an investment opportunity, but rather as a way to participate in a fundamentally new way for consumers to access digital products and services, and for innovative developers, and their users, to be compensated for the value they provide.”

But Kik’s main rebuttal is that kin is a currency—so securities laws don’t apply.

Let’s take a look at Page 11 of the 1934 Securities Exchange Act. It says:

“The term ‘‘security’’ means any note, stock, treasury stock, security future, security-based swap, bond, debenture, certificate of interest or participation in any profit-sharing agreement… but shall not include currency or any note, draft, bill of exchange, or banker’s acceptance which has a maturity at the time of issuance.”

Lawyers will have to debate how to define kin. But just as the SEC’s Munchee order in December 2017 made it clear that calling a token a “utility token” does not unmake it a security, calling a token a “cryptocurrency” may prove equally as futile—especially, if the token doesn’t actually work as a currency.