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Boy, those ETFs were the juice bitcoin really needed, eh?
The SEC approved 11 bitcoin spot ETFs on Wednesday, January 10, with media widely reporting what a boon this would be for the coiners. Surely this would lure piles of fresh dollars into bitcoin!
Not quite. The bitcoin price held around $46,000 — but just for long enough for the whales to start cashing out.
What the crypto world needs to understand is that bitcoin ETFs are not bitcoins. They’re a traditional finance product with bitcoin flavoring.
Except for the risk — that bit is completely bitcoin.
Number go down
The first big post-ETF price drop came on Friday, January 12. Bitcoin slipped from $46,000 to $43,500 in two hours — only one hour after the day’s printing of a billion tethers was released. A few hours after that, another dump took the price from $43,500 to $41,000.
The bitcoin market is fake and in tethers. The retail securities market is real and in actual dollars. You can’t pump bitcoin ETFs with tethers.
After years of being severely discounted from the price of the bitcoins in the fund, Grayscale GBTC finally reached net asset value. This turned out to be not so great — it looks like long-frustrated GBTC holders are finally dumping now that they can. [CoinDesk; Bloomberg, archive]
Coinbase (Nasdaq: COIN) stock went down as well. It was up as high as $186 at the end of December. It dropped to $130.78 on January 12.
ETFs have put bitcoin on steroids! Asthmatic and with shrunken balls.
Bitcoins: not so great
Bitcoins are still an awful investment for ordinary people who aren’t true believers in Satoshi and just want to grow their dollars.
The ETF S-1 filings go into considerable detail on the risks — none of which should be news to anyone here.
The main risk the ETF trusts see is that the base asset is still a completely terrible investment. Crypto is insanely volatile. A pile of crypto companies went broke from being run by crooks — the filings go into some detail on this. Everyone hates bitcoin miners. The regulators, from the White House down, increasingly just despise everything about crypto. And very few people like bitcoin anyway.
Securities broker Vanguard thinks the bitcoin ETFs are such trash that they’re not only not offering these spot bitcoin ETFs — they’re withdrawing the crypto futures ETFs they presently offer. [Axios]
What happens if the ETF bitcoins are stolen?
Unlike a bitcoin futures ETF, a spot ETF is based on actual bitcoins — and these have to be stored somewhere.
Most of it, including $29 billion face value of GBTC bitcoin, is stored by Coinbase Custody. VanEck is storing their ETF coins at Gemini. Fidelity is storing their ETF coins at their own custody subsidiary.
So what happens if a hacker gets into the digital fortress and takes all the bitcoins?
In short: too bad. Sorry, your money is gone!
Coinbase Custody advised BlackRock that it has insurance covering up to $320 million losses of custodied crypto — but that’s for all its customers’ $144 billion (face value) of cryptos in custody. That’s a whole 0.2% coverage. [SEC]
The ETF trusts themselves do not have FDIC or Securities Investor Protection Corporation (SIPC) insurance.
The ETF trusts specifically disclaim liability for lost backing assets. Valkyrie, for example, says: “Shareholders’ recourse against the Trust, Trustee, Custodian and Sponsor under New York law governing their custody operations is limited.” [SEC]
Investors would likely sue anyway. BlackRock and Fidelity could cover such a loss, though it would sting. Grayscale would be utterly unable to cover it.
If Coinbase were to go bankrupt, it’s not clear legally if crypto stored in Coinbase Custody would belong to the individual customers or would be thrown into the bankruptcy estate!
The custodian just losing all the bitcoins is not a trivial risk — two crypto custodians, Prime Trust and Fortress, went bankrupt in 2023 just from losing customer coins.
We spoke to Frank Paiano, who teaches finance and investing at Southwestern Community College, about what would happen if a bitcoin ETF’s backing assets vanished. [Frank Paiano]
He thinks that customers “will be fooled into thinking” that the ETF assets are protected, even though they absolutely are not. “That is mostly why Fidelity has set up their own trustee. I would guess that companies such as BlackRock would do the same.” (BlackRock is so far just using Coinbase.)
Loss of ETF-backing assets happens quite a lot, said Paiano. “A simple Internet search for ‘gold investments stolen’ yields several examples. Then there are the age-old anecdotes of people being duped into buying lead painted or plated with gold.”
Paiano thinks bitcoin ETFs are profoundly unwise investments: “prudent, long-term oriented investors should stay far away from these abominations”— but they’ll find customers.
“If there are foolish, greedy individuals willing to part with their hard-earned money, there will be scoundrels happy to oblige them.”
Other bitcoin ETF fallout
The day before the SEC announced its approval of 11 spot bitcoin ETFs, the official @SECGov Twitter posted a fake notice saying a bitcoin ETF was approved. SEC Chair Gary Gensler issued a statement on the fake tweet, saying that an unauthorized party got hold of the phone number connected to the account but didn’t get access to any SEC internal systems. [SEC]
What happens next?
The new narrative we’ve seen is that the real bitcoin pump is in 90 days when financial advisors are finally ready to push bitcoin ETFs on their customers, for some reason. Probably the halvening, or sunspots maybe.
We don’t expect the number to go up just from bitcoin ETFs existing — anyone who wanted bitcoins could already buy them, and “anyone” numbers one-eighth of what it did in the recent bubble.
We do expect downward pressure on the bitcoin price to continue from the GBTC holders who can finally cash out near par.
Tether pumps only work if nobody tries to cash out into the pumped-up price. Unfortunately, that only works as long as nobody wants real dollars. It turns out they do.
With these ETFs, bitcoin is the dog that caught the parked car.
Media stardom
David was quoted by Cointelegraph on bitcoin ETFs. A bitcoin ETF is a terrible idea, but we don’t think the threat model includes the issuers stealing the bitcoins. [Cointelegraph; Cointelegraph; Cointelegraph]
David spoke to Davar about bitcoin ETFs and our friends at Tether. (“Basket fund” is the local term for “ETF.”) [Davar, in Hebrew, Google translate]
David went on Logan Moody’s podcast The Contrarian just before the ETFs were approved to talk about the state of crypto as of early 2024. [YouTube]
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“i cant wait until we get julain assange out of jail using Crypto. itll make all the pedophile money laundering worth it”
Sam Bankman-Fried’s bail has been revoked for witness tampering — specifically, that he shared ex-girlfriend Caroline Ellison’s private diary with a New York Times reporter. This was the last straw for Judge Lewis Kaplan, who said the documents were “something that someone who has been in a relationship would be unlikely to share with anyone except to hurt and frighten the subject.”
Previously, Sam tried to get in touch via Signal with another witness, former FTX US lawyer Ryne Miller, about getting their stories straight — which nearly saw Sam’s bail revoked that time.
Our hero is currently at MDC Brooklyn — notoriously one of the worst jails in the federal system — but the government has asked that he be remanded at Putnam, where he’ll be allowed more computer access to prepare for his upcoming trial on October 2.
Inner City Press live-tweeted the entire hearing. Sam’s lawyer Mark Cohen immediately filed an appeal. [Twitter, archive; Doc 198, PDF; Notice of Appeal, PDF; Order; PDF]
Prosecutors filed a superseding indictment against Sam on August 14. The new indictment contains seven of the thirteen original charges, removing anything that wasn’t explicitly in the Bahamas extradition agreement. Sam’s $100 million of political contributions are now listed as just another way he misspent customer money. The government also filed its motions in limine — pretrial motions on what evidence is admissible and so on. [Indictment, PDF; in limine, PDF; Doc 165, PDF]
Mathew Russell Lee of Inner City Press has been the man on the scene at the SDNY courthouse for Sam’s hearings. As well as live-tweeting hearings, he collects his writeups as Kindle books. His collection on Sam is just out, recounting the saga as he saw it happen from December 2022 to last week. [Amazon UK;Amazon US]
SEC appeals Ripple
The SEC has asked SDNY District Judge Analisa Torres to pause their case against Ripple so they can appeal her questionable decision on XRP sales to the 2nd US Circuit Court of Appeals. The SEC’s grounds for appeal is that there’s now a genuine intra-district judicial dispute over the issue. [Doc 887, PDF]
On July 13, Torres ruled that XRP is a security when it’s sold to sophisticated investors, but it’s not a security when sold to retail investors on exchanges – which is precisely backward from the past ninety years of US securities jurisprudence.
In the same courthouse, District Judge Jed Rakoff, who is overseeing the SEC lawsuit against Terraform Labs and its cofounder Do Kwon, flatly rejected Torres’ decision and ruled that Terraform’s LUNA and MIR coins may have been securities when sold to retail investors.
John Reed Stark notes: “For SEC lawyers like myself, Judge Jed Rakoff is arguably considered the most respected and experienced securities law jurist not only in the SDNY but perhaps in the entire U.S. federal court system.” [Twitter, archive]
The SEC proposes to file its opening brief on August 18. Ripple would have until September 1 to respond, and the SEC’s reply would be due a week later on September 8. This is quite soon, but Coinbase and Binance are both using the Ripple decision to support their defenses against their own SEC suits.
Prime Trust goes Chapter 11. You had one job!
Crypto custodian Prime Trust filed for bankruptcy protection in Delaware on August 14. Prime halted withdrawals in late June after Nevada regulators put the company into receivership as insolvent.
How did Prime fall insolvent? They lost the keys to a pile of the crypto they were supposed to be keeping safe. This happened in December 2021. You had one job, guys!
From December 2021 until March 2022, Nevada says that Prime used customer funds to buy additional crypto. But for a year and a half, Prime just lied and told everyone they still had their crypto.
Prime has between 25,000 and 50,000 creditors and liabilities of up to $500 million. The firm’s top fifty creditors have claims of $145 million — including the largest claim of $55 million. [Business Wire; Stretto]
Knives out at TrueUSD
Archblock, formerly TrustLabs trading as TrustToken, created TUSD, a supposedly asset-backed $3 billion stablecoin. It then sold TrueUSD to Justin Sun’s Tron in late 2020 — but the connection to Tron has always been a bit murky, and TrustLabs has never been upfront about who the coin’s actual owner was.
TrustLabs said the new owner was Techteryx, “an Asia-based consortium” — though TrustLabs/Archblock still managed TUSD until July 2023. [Medium, 2020, archive; Twitter, archive]
Alameda Research was the largest redeemer of TUSD. FTX listed TUSD when they knew that TrustLabs was misrepresenting who owned it.
TrueUSD’s main custodian was Prime Trust — and Prime was also its main fiat on-and-off ramp for the US banking system. Prime Trust was thus Justin Sun’s main link to US banking. At least until Signature, Prime’s main banking partner, collapsed in March.
We wrote previously about how the TUSD coin seems pretty clearly unbacked and was being used by someone in the vicinity of Binance to pump the price of bitcoin earlier this year.
Archblock is now doing a merger to move the company’s domicile from the US to Switzerland, for unclear reasons. [Blockhead]
Daniel Jaiyong (“Jai”) An, co-founder of TrustLabs/Archblock, is not happy with this merger and move. An is suing Archblock and its executives: Rafael Cosman, co-founder and board member; Alex De Lorraine, COO and former board member; and Tom Shields, former chairman of the board.
The complaint was filed pro se on July 14 in Delaware, meaning An did not hire an attorney. He wrote the 58-page complaint himself — and it shows. [DLNews; complaint, PDF]
An was in the midst of negotiating the sale of TrueUSD to Techteryx, whose contact was Justin Sun of Tron. In fact, An describes the sale as being to Tron.
So, yes — TrueUSD is run by Justin Sun, if you ever doubted it.
TrustLabs got $32 million from investors in a 2018 accredited investor ICO under SEC Regulation D for a token called TRU. Investors included Andreessen Horowitz, BlockTower Capital, Danhua Capital, Jump Capital,* ZhenFund, Distributed Global, Slow Ventures, GGV Capital, and Stanford-StartX.
*Update: Although An mentions Jump Capital in his complaint, Jump Crypto wrote us to say it wasn’t Jump Capital, but Jump Crypto, a division of Jump Trading Group, who made the investment.
An says that by January 2020, it was clear that the plan in the TRU white paper would never pass SEC muster. He wanted to pay the investors back, as the SEC would surely require – but he says that his cofounder Cosman blocked this. The other shareholders voted An out in July 2020.
TrustLabs finally issued the TRU token in November 2020, repurposed as the native token of their TrueFi lending protocol. An alleges the other executives enriched themselves with TRU tokens — but not him.
An says the company threatened him with legal action if he informed investors what the company was doing. An then filed as a whistleblower with the SEC. He claims the company has retaliated against him for doing so.
Several paragraphs claim past criminal actions by Cosman.
An remains a shareholder in Archblock. He wants the merger blocked and $94.32 million in damages.
Data Finnovation notes that if An’s allegations are true, then FTX knew since 2020 that TrueUSD was owned by Tron — because Tron’s lawyer Can Sun was working on the deal and Can Sun later ended up working for FTX under Daniel Friedberg. Remember that FTX minted nearly all the tethers on Tron in the same time period. [Twitter, archive; Medium, 2022]
Worldcoin wants your eyeballs
Sam Altman is the founder and CEO of OpenAI, the company behind ChatGPT. Worldcoin is Altman’s proof-of-eyeball cryptocurrency.
Altman promotes Worldcoin as a way to end poverty — and not just a way for him to collect huge amounts of biometric data. In exchange for giving up your iris scan, you’ll get 25 free Worldcoins (WLD). [CoinDesk]
Worldcoin operators use “orbs” to scan eyeballs. The operators get paid in tethers. [MIT Technology Review, 2022]
Since the Worldcoin project launched on July 24, throngs of people in Kenya have been queuing up to get their eyeballs scanned — lured by free Worldcoin tokens.
The problem is converting WLD into actual spendable money. The Worldcoin app has no direct withdrawal option — so the Kenyan users have to trade their WLD for USDT on Binance or put their trust in random over-the-counter buyers. So Worldcoin has become a honeypot for scammers: [Rest of World]
“There’s no regulation in the space, and the people receiving the free tokens don’t have enough information. What do you expect?” Evrard Otieno, a Nairobi-based crypto trader and software developer, told Rest of World. “It’s just another opportunity for traders to make some money in the market.”
Days after the Worldcoin launch, the Communications Authority of Kenya and the Office of the Data Protection Commission ordered Worldcoin to suspend operations while they reviewed the project’s privacy protections. [Twitter, archive]
Kenyan police then raided the Worldcoin Nairobi warehouse on August 5 and seized the orbs. [KahawaTungu].
Data watchdogs in Britain, France, and Germany are also investigating Worldcoin for similar reasons. [ICO; Reuters]
The WLD token launched at $3.58 but had crashed to a low of $1.76 by August 14. WLD trades only against USDT and mostly on Binance. [CoinDesk; CoinGecko]
Worldcoin’s investors, who have collectively put in $125 million, include the usual suspects — Andreessen Horowitz, Coinbase Ventures, Digital Currency Group, Sam Bankman-Fried, and Reid Hoffman, the co-founder of LinkedIn. [Crunchbase]
Hex enduction hour
Hex is an ERC-20 token that doesn’t do anything. Hex was promoted widely, even internationally on billboards, by a fellow called Richard Heart (or Richard Schueler to the tax man).
Hex promised stupendous yield rates. You bought Hex with ETH, then you staked the Hex, then you got paid interest in Hex. The website called Hex the “first high-interest blockchain certificate of deposit” that “was built to be the highest appreciating asset that has ever existed in the history of man.”
To “stake” your Hex, you would send it to … the Ethereum genesis address, 0x0. That is, you would throw your Hex into a black hole from which it could never be recovered. The Hex smart contract would then pay you Hex tokens in the future, apparently.
The SEC has finally sued Heart over Hex, PulseChain (a fork of Ethereum), and PulseX (a fork of UniSwap). They allege that Heart raised over $1 billion from these three unregistered securities offerings beginning in 2019. [SEC press release; Complaint, PDF]
The SEC says that Heart misappropriated investor funds to buy luxury sports cars, Rolex watches, and a 555-carat diamond, known as “The Enigma,” which he purchased in February 2022 in a Sotheby’s auction. Sotheby’s accepted ETH for the purchase. Heart was famous for promoting Hex with photos of himself showing off his wealth.
Heart has an unfortunate past of selling email spam software in the 2000s. He even called himself the Spam King. Bennett Haselton of peacefire.org successfully sued Heart in 2002 under Washington anti-spam laws for sending junk emails with deceptive headers. [ZDNet, 2002, archive; Panama Guide, 2007, archive]
David went on Richard Heart’s livestream in early 2020. David talked about books a bit, then Richard went into his sales pitch for Hex. Richard is a very charming and likable fellow, but in that particular way that cautions you not to let a penny of your cash within a mile of him. [YouTube, 2020]
This bank failure is fine, nothing to see here
A fourth US bank fell over this year — Heartland Tri-State Bank of Elkhart in Kansas, a small bank with just $139 million in assets. David Herndon, the Kansas banking commissioner, closed Heartland on July 28 after it became insolvent because it was “apparently the victim of a huge scam.”
Herndon said he didn’t know what the scam was — but he said other banks in the state were not affected. Our psychic powers tell us he has an extremely good idea what happened. The FBI is on the case.
The FDIC had to pay $54 million out of its deposit insurance fund – more than Heartland’s entire $48 million loan portfolio. [FT, free with login]
An employee of the bank said all workers at the bank are still employed, but Shan Hanes, the president and CEO, is no longer there. The bank was handed over to Dream First Bank as a growing concern.
Everyone has been careful to note that the bank fell due to a “huge scam” and definitely not the sort of thing that took out Silvergate Bank, Silicon Valley Bank, and Signature Bank. The “scam” was first mentioned in an August 4 story in American Banker. [Kansas Reflector; FDIC; American Banker]
Still only good news for bitcoin
The SEC is suing Binance. BAM (Binance US) wants to block further discovery and depositions, because they’ve given the SEC so much information toward the consent order they had to be beaten into. BAM demands only four depositions of BAM employees, no depositions of BAM’s CEO or CFO, and no matters outside the consent order. We suspect that Binance doesn’t have some of the perfectly reasonable stuff the SEC has asked for, such as non-existent financial accounts — so Binance is resorting to the Tether defense. John Reed Stark thinks the SEC will largely prevail. [Doc 95, PDF; Twitter, archive]
The SEC sued Bittrex in April for listing securities without registering as an exchange. Bittrex has now settled with the SEC. They will pay $14.4 million disgorgement, $4 million prejudgment interest, and a $5.6 million civil penalty. [Press release]
CoinDesk is laying off 20 people from editorial — 45% of the editorial staff, or 16% of all staff – to prepare for its sale to the Peter Vessenes and Matt Roszak consortium. We’re pretty sure everyone at CoinDesk is furiously updating their resumes right now. [The Block; TechCrunch]
Wyoming Senator Cynthia Lummis, several lobbyists and academics, and venture capital firms a16z and Paradigm have filed amicus briefs urging the SEC to drop its lawsuit against Coinbase. These mostly repeat Coinbase’s arguments. [Doc 48, PDF; Doc 50, PDF; Doc 53, PDF; Doc 55, PDF; Doc 59, PDF; Doc 60, PDF; Doc 62, PDF]
Kai Lentit of “Programmers Are Also Human” on YouTube goes to Web3 Berlin. “Where people without jobs ask people without companies for jobs.” [YouTube]
Send us money! Our work is funded via our Patreons — here’s Amy’s, and here’s David’s. Your monthly contributions help greatly!
The Celsius Network bankruptcy held two hearings on Monday, December 5. The first was to establish ownership of Earn accounts and see if Celsius can sell $18 million in stablecoins. The second was an omnibus hearing, dealing with multiple motions. Amy sat through six tedious hours of this, so you wouldn’t have to. [Agenda, PDF; Agenda, PDF]
A Chapter 11 bankruptcy generally has two outcomes: a bankruptcy sale (known as a “363 sale”) and the confirmation of a plan of reorganization. Celsius wants to find a buyer for this ransacked corpse. But first, they have to decide who owns what. They can only sell what’s theirs to sell. The morning hearing was bitter arguments about the spare change in the stiff’s pockets.
Celsius is burning cash at a furious rate. They have no idea how to even coherently propose an ongoing business. So they need to keep finding new ways to keep up the farce and pay tens of millions in advisor and professional fees per month.
The word “liquidation” came up a few times in the first hearing. This ice cube is melting fast.
Whose are the stablecoins?
Celsius wants permission to sell $18 million in stablecoins to pay for ongoing business operations. The stablecoins are held in Earn accounts — Celsius’ main product. You would deposit cryptos and be paid interest on them.
But do the stablecoins belong to the bankruptcy estate or do they belong to the individual Earn account holders? This is what Judge Martin Glenn needs to decide.
Celsius will be out of cash to pay ongoing bills — payroll, vendors, and expensive professionals for the bankruptcy — by late February or early March. The burn rate for Chapter 11 legal costs and professional fees is $15 million to $20 million per month. Celsius needs a cash injection by January or March 2023 the latest. [Doc 1328, PDF]
Interim CEO Chris Ferraro says that right now, the bitcoin mining business is cash positive (which surprises us) — but that too will need a cash infusion by March 2023.
Celsius (the debtors) and the Unsecured Creditors’ Committee (UCC) think the stablecoins belong to the bankruptcy estate, which would give them the right to sell the coins for cash. But the account holders want their personal money back.
The stablecoins that Celsius wants to sell add up to $18,111,551. That’s 16,549,259 USDT, 1,119,089 NCDAI, 360,743 BUSD, and some shrapnel. Alvarez & Marsal’s Robert Campagna, Celsius’ restructuring advisor, admitted that the stablecoins buy them just a month of continued operations.
“If we sell $18 million now and have access to cash, we can always buy stablecoins again later,” said Campagna. LOL, like Celsius is going to have cash later. But anyway.
If Celsius is allowed to sell the stablecoins, the funds will not be used to cover the bitcoin mining operations. [Doc 1325, PDF]
So what happens after they burn through their stablecoins? Other sources of money include the settlement with Prime Trust, worth around $17 million — but Prime Trust will refund in crypto, not cash. Celsius also hopes for $44 million from the potential sale of Celsius’ custody solution GK8 to Galaxy Digital. GK8 is an Israeli firm that Celsius bought in November 2021 for $115 million. So they’ll take a 60% loss.
Other options to keep the business afloat include intercompany loans and debtor-in-possession financing — but those carry their own risks, Ferraro said. “They require us to post collateral and risk that coins would not be returned if the coins drop in value.”
What company is going to lend money to Celsius? What collateral? What bank? What?
What did I just sign?
The terms of service for the Earn product changed a lot — in ways that contradicted what Celsius founder Alex Mashinsky had told customers.
Celsius updated its terms eight times between 2018 and September 2022, asking customers to accept changes each time by clicking a box. If they didn’t click on the box, they couldn’t access their coins.
Later versions of the terms, such as version six, more clearly asserted that Celsius owned the deposited cryptos — as is normal with any bank or investment firm, who then have a liability to the depositors. Even as Mashinsky said things that sounded like the investors owned their deposits.
Many small creditors objected that they weren’t aware of the important changes, or that they didn’t even agree to the changed terms.
More than 90% of Earn account holders signed off on version six of the terms of service, per court filings. These customers held the majority of the coins in the Earn program.
Oren Blonstein, Celsius’ chief compliance officer, was called to the stand. Here are his original and supplementary declaration. [Doc 1327, PDF; Doc 1584, PDF]
Blonstein spent his time at Celsius administering the company’s compliance with the Bank Secrecy Act — money laundering law.
The state attorneys — Layla Milligan for Texas and Karen Cordry for multiple other states — went in hard on Blonstein.
Blonstein told Milligan that they tracked customer activity including acceptance of the terms of use.
This is an amazing interchange between Milligan and Blonstein (as quickly noted by Amy, please excuse errors):
Milligan: To your knowledge, was the business ever in compliance with money transmission laws?
Blonstein: My understanding is based on a discussion with money transmission laws.
Milligan: But you are not aware if the company was in compliance with state or federal securities laws?
Blonstein: Yes, correct.
Cordry closely questioned Blonstein on how they flagged the change of terms — if the changes were ever called out to the customers. Judge Glenn asked Blonstein if the change of ownership in particular was brought to the customers’ attention.
Blonstein admits they didn’t flag the changes, but the customers had to tick the box and agree before they could proceed. Nor was the prior version of the terms available for a customer to compare them.
But Blonstein didn’t think any of this was a substantive issue: “I viewed the wording on the Earn program as you are giving coins to the company to use.”
The stablecoins will likely go to the estate
Despite the arguments over ownership of the stablecoins, Judge Glenn was leaning toward putting them into the bankruptcy estate — because that’s what the terms said, and that’s what you’d expect of an investment product.
Judge Glenn seemed skeptical of the terms meaning anything other than that Celsius owned the coins and had a liability to the depositor. “It was a lending platform, so they had to deploy the assets. There wasn’t a commitment to pay back specific assets.”
It wasn’t like Celsius would use the money to gamble in a “slot machine in Monte Carlo” — they’d use it to pay the bills, noted the judge.
He was also more comfortable if the stablecoins were converted to actual dollars anyway, given how crazy crypto is right now: “The dollars will frankly be safer than crypto.”
Shara Cornell for the US Trustee and Layla Milligan for Texas were not happy. Celsius had not complied with state regulations. The terms of service may have been an illegal contract, and thus void, Milligan argued.
Judge Glenn responded that ownership of Earn cryptos had been a “gating issue” (an obstacle to recovery) ever since Celsius filed for bankruptcy in July 2022. “They didn’t only just spring this on anyone.”
Celsius had failed hard at compliance, but any buyer would have to comply with regulations — and if Celsius had broken securities laws, “you’ll get your pound of flesh against them,” he told Milligan.
Judge Glenn said that he wouldn’t rule on the stablecoins this week. But we think he’s going to let Celsius sell the coins. Matt Levine at Bloomberg concurred — because not having the money to pay back a liability is what “bankruptcy” means. [Bloomberg]
KERP motion
Celsius employees have been running away screaming. In early 2022, the company had over 900 employees. They are now down to 167 employees. Attrition is a real problem.
In the afternoon omnibus hearing, Judge Glenn approved Celsius’ Key Employee Retention Plan (KERP) to give out up to $2.8 million in bonuses to 59 key employees, so they don’t quit. Previously, he had denied the motion because Celsius and their lawyers had blacked everything pertinent out. [Doc 1426, PDF; Bloomberg]
You can’t really say no to a KERP if a company is trying to stay a going concern. We know very well that Celsius is a shambling zombie — but while it’s in Chapter 11, the judge probably has to treat it otherwise.
Celsius lawyers also need to look into who transferred crypto within 90 days of the bankruptcy filing. Those employees will not get bonuses.
Most of the KERP payments will be no more than $75,000. Salaries for the KERP employees range from $25,000 to $425,000.
Celsius will totally come up with a plan, honest
Next, Judge Glenn agreed to grant Celsius’ motion to extend exclusivity — the exclusive right to come up with a new business plan — until February 15.
After a Chapter 11 filing, you normally have 120 days to come up with a bankruptcy plan. Celsius still doesn’t have a plan. Judge Glenn said that this is not unusual for large companies. The court can extend the period of exclusivity, though the total period with extensions cannot exceed 18 months.
Once that exclusivity period is up, any party in the bankruptcy can introduce their own reorganization plan. There are already some plans being floated by Celsius creditors. More court time — and bankruptcy estate money — will then be spent discussing all the plans.
Kirkland’s Patrick Nash, appearing for Celsius, wanted to avoid such a free-for-all. Celsius is working to sell the GK8 custody business, and they are working with the UCC on a reorganization they can both agree on. The US Trustee also agreed on extending exclusivity.
Judge Glenn concurred that lifting exclusivity now would lead to a free-for-all. He worried that a pile of new plans would be “a crushing load on my chambers.” Remember, he has to actually read all these hundreds of pages of legal filings.
The judge can see that Celsius is a melting ice cube and it’s just consuming money. But Celsius has to come up with something. He granted the motion.
For Celsius, this is just a game that they have to play to keep shambling forward and paying themselves from creditor funds.
Celsius v. Stone et al.
Jason Stone of KeyFi was Celsius’ DeFi trading guy. Stone is suing Celsius for non-payment. Celsius has countersued, calling Stone incompetent and a thief.
Later in the hearing, Judge Glenn denied a motion by KeyFi and Stone to dismiss Celsius’ counterclaims. [Doc 17, PDF].
Stone is being represented by Kyle Roche, formerly of Roche Freedman. He is now in his own practice. Roche is not an eloquent courtroom speaker. He rambles interminably, and Judge Glenn was getting noticeably annoyed at him.
Roche said that Celsius’s claim should be dismissed because the issue is a contractual dispute, and Stone was authorized to transfer the assets in dispute to KeyFi under an asset purchase agreement. Celsius argued that Stone was not a party to the cited APA.
Judge Glenn said he would be denying the motion for now. He told the parties to complete discovery before a scheduled January hearing on Celsius’ motion for a preliminary injunction in the dispute — and he didn’t want them dragging their feet.
Roche said he had collected 150,000 documents as part of discovery. Glenn asked when Roche would produce the documents. Roche said that he had been busy because his grandmother died.
Prime Trust
Judge Glenn approved the settlement with Prime Trust, returning $17 million in cryptos to Celsius that Prime had been holding since the two stopped doing business in June 2021. [Doc 20; PDF]
Celsius gets cryptos, not the actual dollars it needs to pay the bankruptcy professionals — hence why they want to sell the stablecoins to pay the bills.
Next time
We’ll be writing up the December 7 hearing on who owns the Custody and Withhold accounts and the December 8 hearing on the GK8 sale. Send Amy money for eardrops! [Agenda, PDF; Agenda, PDF]
Amy Castor 