Tag: SEC

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

  • By Amy Castor and David Gerard

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

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

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

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

The SEC rap sheet

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

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

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

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

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

The Fed and DFPI rap sheet

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

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

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

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

What happens in the SEN stays in the SEN

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

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

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

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

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

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

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

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

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

Silvergate and FTX

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

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

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

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

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

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

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

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

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

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

All of these claims were false too.

Whoops, liquidity!

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

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

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

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

Borrowing to cover debts

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

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

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

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

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

What does this mean?

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

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

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

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

Posted on by Amy Castor 1

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

  • By Amy Castor and David Gerard

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

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

Coinbase gets out the conspiracy board

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

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

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

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

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

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

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

Bill’s beautiful launderette

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

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

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

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

Paolo’s beautiful launderette

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

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

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

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

FTX: Salame sliced

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

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

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

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

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

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

The war on Terra

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

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

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

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

Regulatory clarity

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

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

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

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

Still good news for bitcoin

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

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

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

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

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

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

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

Posted on by Amy Castor 3

Coinbase Q1 2024 earnings: number go up, with a bit of juicing

  • By Amy Castor and David Gerard
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Coinbase, the largest crypto exchange that deals in actual US dollars, has published its earnings for the first quarter of 2024 — when the bitcoin price reached its previous peak again. [Shareholder letter, PDF; Earnings call webcast; Earnings call transcript, PDF; Analyst call transcript, PDF; 10-Q]

The numbers look great! “We generated $1.6 billion of total revenue and $1.2 billion of net income. Adjusted EBITDA was $1.0 billion – more than we generated in all of 2023,” said CEO Brian Armstrong in the earnings call on May 2.

But those numbers are considerably juiced in important ways.

Numbers go up! When you change how you count them

Coinbase reported $1.6 billion in total revenue and $1.2 billion in net income in Q1 2024.

Those numbers are better than Q4 2023 — the first quarter Coinbase reported a profit in eight quarters. In that quarter, Coinbase reported $954 million in total revenue and $273 million net income.  

But this quarter’s numbers are up because Coinbase holds crypto as an investment — and when the bitcoin price went from $42,000 to $71,000 in the first three months of the year, Coinbase claimed considerable one-time paper gains. 

This is because GAAP accounting for crypto changed. Previously, you could only list the value of crypto you held at what you paid for it or less. You couldn’t account for the number going up as profits. But starting December 13, 2023, you suddenly could, under new FASB rule ASU 2023-08. [FASB, 2023; ASU 2023-08, PDF]

This did wonders for Coinbase’s next quarter!

Coinbase lists $737 million in mark-to-market crypto gains in Q1 — imaginary dollar gains on way more bitcoins than they could ever sell in those quantities — of which $86 million came from gains on digital assets held for operations and $650 million from unrealized investment gains. All this is only listable because of ASU 2023-08.

The crypto gains are listed on the balance sheet as cash coming in. But these aren’t real dollars until Coinbase sells the bitcoins and pays taxes on the capital gains.

“When a company counts bitcoin as revenue — that’s not cash. You can’t pay people with it, you can’t keep the lights on with it. It’s what we call an ‘accounting treatment’ but it is not cash,” Ted Gavin, managing partner and founder of corporate restructuring firm Gavin/Solmonese, told us in a recent phone conversation.  

Trading volume up — a bit

Trading is the lifeblood of any crypto exchange. It’s where Coinbase has traditionally made their money — on trading fees.

Coinbase was profitable in Q4 2021 when they did $547 billion in trading volume. After that, the company was unprofitable for eight straight quarters and trading volume plummeted.

Retail trade volume is three times what it was last quarter! But it’s still a fraction of what it was in the last bull run. Retail volume was $56 billion in Q1 2024 — compared to $177 billion in Q4 2021.

Retail trading is particularly important — it’s where the scarce actually-existing dollars (not just accounting fictions) find their way into the crypto ecosystem.

Institutional trading was the bulk of Coinbase trading — $256 billion volume in Q1 2024 compared to $371 billion in Q4 2021, the last bull run. That’s not terrible — but institutional fees are lower. 

What does this tell us? It means that when number went up, some retail investors came back to try their luck — but many more remain leery of crypto after the collapses of Terra-Luna and then FTX.

Custody — spot ETFs

The SEC approved 11 bitcoin spot ETFs in January — and eight of those, including the largest, Grayscale’s GBTC, use Coinbase as a custodian. 

Coinbase had hoped to make more money as a custodian to supplement its ailing trading business — but the bitcoin ETFs have not pumped up their revenue. 

Despite nearly $11 billion in ETF inflows in the first quarter, Coinbase custodial fees were only $32 million — or 0.2% of their total revenue — up from $19.7 million in Q4 2023. 

Interest

Coinbase makes money on the reserves backing the USDC stablecoin.

It turns out there’s a lot of money in dollar liabilities that you pay zero interest on but which give you 5% interest on the backing reserves. So Coinbase’s income from USDC interest was $197 million in Q1 2024.

There was also $66.7 million from lending out USDC and crypto for trading.

Long-term debt

Coinbase has $4.2 billion in debt. In the first quarter, they added $1.1 billion in long-term debt in convertible senior notes. The money was to pay off existing debt and for general corporate purposes. The notes mature in 2030. [Axios]

Convertible notes are a popular way for startups to raise capital. The primary purpose is that they convert into equity at some point. The notes are usually senior to common stock — if Coinbase went belly up, the holders of senior convertible notes would have priority over common shareholders

While Coinbase purports to have a lot of cash on hand, they also have a lot of debt. They are still spending a lot of money. 

The searing light of regulatory clarity

“We’re driving regulatory clarity,” said Armstrong in the earnings call.

In practice, regulatory clarity is driving Coinbase. One of the biggest challenges that Coinbase faces is a regulatory crackdown on crypto exchanges.

The SEC and 10 states sued Coinbase in June 2023 for operating an unregistered exchange and selling unregistered securities to retail. If the SEC prevails, there goes Coinbase’s entire business model.

EBITDA, the bodybuilding supplement for your numbers

Coinbase really likes its EBITDA numbers. They even started the earnings and analyst calls directly stating they’d hammer on these non-GAAP numbers. “We generated more Adjusted EBITDA than we did all of last year!” Armstrong proudly announced.

EBITDA (earnings before interest, taxes, depreciation, and amortization) is a measure of profitability that many companies put into their quarterly filings.

EBITDA will often look much better than those tawdry old-fashioned standardized GAAP numbers — because it sweeps the real costs of doing business under the rug.

Berkshire Hathaway’s Charlie Munger famously said that every time you see EBITDA, you should substitute “bullsh-t earnings.” [YouTube]

EBITDA isn’t even calculated consistently across different companies. And then there’s “Adjusted EBITDA,” which is a BS number of a BS number. Coinbase is even fonder of this one.

Coinbase’s “adjusted EBITDA” excludes stock-based compensation, because the numbers look way better if you leave out the bit where you have to pay your employees.

“While Coinbase may be reporting $1.2 billion in adjusted EBITDA, that is not what would be left for creditors. It is going to be some number grossly smaller than that,” Ted Gavin told us.

Coinbase’s 10-Q has a whole section excusing their use of these BS numbers. Don’t spend too much time on EBITDA — treat it as a distraction.

What all this means

The bitcoin price recovered — but the market didn’t really recover. The price going up was mostly driven by trading in dubiously-backed stablecoins on unregulated exchanges — not by people liking bitcoins more.

The price rise did seem to get a bit of volume going this quarter. But bitcoin spot ETFs turned out not to be Coinbase’s or the crypto market’s savior. In the last few weeks, we’ve even been seeing more net outflow from the ETFs.

The COIN stock price is up 42% in the year to date — but that’s mainly because the price of bitcoin has gone up this year. 

Coinbase’s numbers in  Q1 2024 are heavily juiced by unrealized gains on the face value of their crypto holdings. The company is not at all out of the woods. ETFs weren’t the magic trick — they’ll need some new Hail Mary.

Posted on by Amy Castor 0

Bitcoin goes up, so it must come down. What goes into the price of BTC?

  • By Amy Castor and David Gerard

Bitcoin has set yet another new all-time high — $73,835 on Coinbase BTC-USD on March 14. This means bitcoin is good now! All our past objections are resolved. Going forward, we only deal in Finances U Desire.

Sound and fury, signifying nothing

What’s interesting is that while the price is back up, the bitcoin trading market has not recovered. If anyone says “the market is back!” that’s an incorrect claim.

Market volume is one-eighth of what it was in November 2021, the last time the price was this high.

We get that number from Coinbase retail trading fee income, which is 2% of the volume. Coinbase is the largest actual-dollar exchange and it’s not allowed to lie in SEC filings — so for once in crypto, we have numbers we can trust a bit.

The retail trade volume against actual dollars on Coinbase went down in seven of the past eight quarters. Here’s a table from Q4 2021 to Q3 2023. Q4 2023 didn’t show any improvement.

Even as the price went up through 2023, every day people wanted bitcoins less and less. Coinbase gives us the numbers showing this.

Flash boys

Without trading volume, the bitcoin markets are painfully thin. It doesn’t help that market liquidity is horribly fragmented.

(This is why we prefer to just quote the Coinbase price — the skew between exchanges can be hundreds of dollars when anything interesting is happening.)

BTC-USDT on BitMEX flash-crashed from $66,000 to just $8,900 on Monday, March 18. Starting at around 22:40 UTC, someone dumped 1,000 BTC as fast as possible at whatever the market would pay for it. [CoinDesk; Twitter, archive]

By the time the flash crash flowed through to Coinbase, it was a mere $2,000 drop.

BitMEX has much less bitcoin liquidity than Coinbase BTC-USD or Binance BTC-USDT — so we suspect this was a very urgent seller who felt that FinCEN didn’t need his details.

Remember that after Binance got hit with the compliance hammer, traders’ details are no longer safe from US anti-money-laundering agencies.

We’re not sure why our trader didn’t use OKX, HTX (formerly Huobi), or Bitfinex, which would have had more liquidity and thus less price slippage — hence our impression that they were really in a hurry. And now they have to put all that USDT somewhere.

ETFs will save bitcoin!

BlackRock says its spot bitcoin ETF has reached $10 billion in assets. But Grayscale’s GBTC has seen over $11 billion in outflows because nobody wants to pay their 1.5% fee. (Everyone else is around 0.3%.)

Bitcoin ETFs aren’t hitting the institutions they were hoping for — pension funds and so on. (Thankfully.) For all of BlackRock’s helpful ETF marketing advice, financial advisors are being very careful about recommending these things. [WSJ, archive]  

The money flowing into the ETFs seems to be from individual investors. It’s not clear whether these are new investors or just existing holders dumping their bitcoin for ETFs because they’re tired of being their own bank.

This Financial Times article starts with BlackRock talking up its bitcoin ETF and the fabulous future of the blockchain … then details every way in which crypto is utterly incompatible with sane finance and doesn’t work. [FT, archive]  

The hot air crypto bubble

Meanwhile, Tether has printed 11 billion tethers just since the start of 2024. It’s at 103 billion tethers and counting. 

We very much doubt that most of these billions of tethers are being bought with real US dollars. Why would you send real dollars to an unregulated offshore wildcat bank to buy bitcoins when you could just put them into a US-regulated bitcoin ETF?

We suspect the tethers are being printed out of thin air and accounted as loans — the fresh USDT is “backed” by the loan itself.

This supports our theory that the present pump is not real money flooding into bitcoin. It’s stablecoins on Binance — tethers and FDUSD. The volume on Binance completely swamps the volumes on Coinbase or ETF trading.

The bitcoin price chart looks very like someone’s trying to pump the price. You’ll see the price slowly getting walked up, as if someone’s wash-trading it up … then it hits a round number of dollars, someone tries to cash out, and the price drops several thousand.

Fake dollars going up, real dollars going down.

So we’re not in a bubble. We’re in a balloon, one being pumped full of hot air. It’s fun going up — but the trip down can be very quick.  

What do I do with my holdings?

Back in November 2022, when exchanges were suffering urgent unplanned maintenance left, right, and center, we went so far as to say that if you insisted on investing in bitcoins, you should not risk storing your coins on an exchange. Holding private keys is ridiculously fraught and the tech is still unusable trash — but it’s still not as bad as trusting bitcoin exchanges.

If you must hold bitcoins in the hope of getting dollars for them one day, the least-worst option is to buy into an ETF. That way you’re in a regulated market and your only risk is Coinbase Custody getting hacked.

If you’ve bought into crypto, please at least cash out your principal — the cash basis that you paid to buy in. Then everything you make from then on is pure profit. When the price crashes, you won’t have lost anything.

Our real recommendation, of course, is not to touch this garbage.

Back in the snake pit

Bitcoin suffered a year of its media coverage being “Sam Bankman-Fried is a crook.” Crypto pumpers tried to make out that FTX, the second-largest exchange, being a massive fraud was a mere aberration on the part of Bankman-Fried, and everyone else in crypto was a good guy.

Then the first-largest exchange, Binance, got busted too. So price discovery for bitcoin — what determines where the number goes — happens on an exchange that literally admitted a few months ago to being a criminal conspiracy. Binance’s founder and former CEO, Changpeng “CZ” Zhao, is in the US awaiting sentencing. 

We find, over and over, that normal people keep assuming that crypto isn’t just a completely criminal snake pit. Because US dollars are able to touch it in any way, so surely it’s regulated. Right?

Finance and finance journalism seem to have collectively forgotten what a hellhole unregulated markets always were.

The way crypto works is:

  1. Actual dollars flow from retail suckers to a few rich guys;
  2. There’s lots of fancy bafflegab to obscure the very simple flow of actual dollars.

Crypto is an unregulated mob casino and the regulated exchanges are just the cashier’s desk.

You can absolutely make money in crypto — we would never say that you can’t. But you have to be a better shark than all the other sharks who built the shark pool.

Trade carefully.

Media stardom

Billy Bambrough wrote about the bitcoin price for the Sunday Times and spoke to David. In a rare moment for journalistic coverage of the number, Tether was mentioned! [Sunday Times, archive]

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Posted on by Amy Castor 1

Crypto collapse: SEC takes on Terraform and Coinbase, ETF fallout continues, Tether is for crime

Our latest roundup of everything that’s falling over is on David’s site. [David Gerard]

In this edition:

  • SEC wins a lot of their claims against Terraform
  • Coinbase motion to dismiss hearing, with yet more Beanie Babies. (“funding my new startup by selling Stock Babies which are an asset  just like a parcel of land, the value of which may reasonably  fluctuate.” — Andrew Molitor)
  • ETF nonsense: Collateralized Rugpull Obligations
  • Tether is for crime
Posted on by Amy Castor 0

SEC approves bitcoin spot ETFs — what this means for crypto

As predicted, the SEC today approved several spot bitcoin ETFs — Grayscale GBTC, Bitwise, Hashdex, BlackRock iShares, Valkyrie, ARK 21Shares, Invesco Galaxy, VanEck, WisdomTree, Fidelity Wise Origin, and Franklin.

Fees are cut throat, some less than a quarter of a percent. These companies can run the ETFs as loss leaders for a while, but eventually they’ll have to raise the fees or quit.

Today’s post is over on David’s blog. [David Gerard]

Image: Scrooge McDuck’s money bin

Posted on by Amy Castor 0

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

  • By Amy Castor and David Gerard

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

— Jacob Silverman

Tightening Tether’s tethers

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

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

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

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

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

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

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

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

SEC answers Coinbase’s prayers: “No.”

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

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

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

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

4 (continued)

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

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

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

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

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

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

FTX: The IRS wants its money

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

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

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

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

Three Arrows Capital

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

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

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

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

Crypto media in the new Ice Age

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

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

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

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

Regulatory clarity

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

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

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

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

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

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

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

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

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

Santa Tibanne

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

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

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

Trouble down t’ pit

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

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

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

More good news for bitcoin

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

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

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

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

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

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

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

Posted on by Amy Castor 1

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

  • By Amy Castor and David Gerard

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

— Allistair Hutton

Regulatory clarity for Kraken

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

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

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

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

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

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

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

SEC trashes Celsius bankruptcy plan 

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

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

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

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

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

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

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

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

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

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

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

My beautiful launderette

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

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

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

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

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

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

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

Now that’s effective altruism

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

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

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

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

Stablecoins for the UK

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

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

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

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

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

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

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

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

Submit comments by January 22, 2024.

Bitfinex suffers hardly any data leakage to speak of

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

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

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

More good news for bitcoin

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

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

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

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

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

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

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

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

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

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

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

Posted on by Amy Castor 2

Coinbase Q3 earnings: Regulatory clarity is all we need. And a miracle or two 

  • By Amy Castor and David Gerard
  • Send us money! Here’s Amy’s Patreon, and here’s David’s. Sign up today!
  • If you like this article, please forward it to just one other person. Thank you!

Coinbase is the biggest crypto exchange that deals in actual dollars, and it’s the first choice for new crypto users. The company went public (NASDAQ: COIN) in April 2021 and enjoyed a few good quarters in the crypto bubble.

But the bubble burst in May 2022 — and the customers just got up and left.

Last week, Coinbase posted its third-quarter earnings. It’s been nearly two years since the company turned a profit. Things have only worsened since the previous quarter. [shareholder letter, PDF; earnings call transcript; earnings call questions; 10-Q]  

Number go down

CEO Brian Armstrong said on the earnings call: “The American people are embracing crypto as more Americans grow unhappy with the traditional financial system.” Armstrong and COO Emilie Choi also harped on how “52 million Americans own crypto.”

Unfortunately, this isn’t sufficiently good news for bitcoin. Per the company’s shareholder letter: “Trading volume has been shifting away from the U.S., where our business is concentrated.” Or, from the 10-Q: “A significant amount of the Trading Volume on our platform is derived from a relatively small number of customers.”

Trading volume is the lifeblood of a crypto exchange — and Coinbase’s is through the floor. The exchange saw $76 billion in total trading volume in Q3, down from $92 billion in Q2. (They did $547 billion in trading volume in Q4 2021, their last profitable quarter.) 

That’s not good for trading fees. Here’s how the numbers have gone starting from Q4 2021:

  • Q4 2021: $2,185.8 million from retail traders; $90.8 million institutional;
  • Q1 2022: $965.8 million from retail traders; $47.2 million institutional;
  • Q2 2022: $616.2 million from retail traders, $39.0 million institutional;
  • Q3 2022: $346.1 million from retail traders, $19.8 million institutional;
  • Q4 2022: $308.8 million from retail traders, $13.4 million institutional;
  • Q1 2023: $352.4 million from retail traders, $22.3 million institutional;
  • Q2 2023: $310.0 million from retail traders, $17.1 million institutional;
  • Q3 2023: $274.5 million from retail traders, $14.1 million institutional.

Coinbase’s net loss for the third quarter was only $2.3 million — the closest the company’s come to making a profit in seven quarters. Total revenue was $674 million, up 14% on Q2. Total operating expenses were $1.1 billion, down 38% on Q2.

The bleeding was stemmed by a $82 million debt repurchase and a $50 million gain in “strategic investments,” said CFO Alesia Haas. In Q3 2022, the company posted a loss of $545 million on total sales of $590 million — just before FTX blew up.

Coinbase ended Q3 with $5.6 billion in cash and a pile of illiquid crypto assets that it accounted for as $483 million.

In the year to date, COIN stock is up 155% and currently trading at $85 — but that’s still a long way from its high of $342 back in the bubble days.

Analysts predicted even worse numbers for Coinbase than it achieved this quarter — so it mostly beat analyst estimates, just! [NASDAQ]

Banking the unbankable

What is going up is interest income. Holders put actual dollars into the USDC stablecoin and get zero interest on it — Coinbase and its partner Circle get all the interest on the USDC reserve.

USDC interest earned Coinbase $172 million in Q3 — up from $151 million in Q2. USDC reserves are mostly in short-term US government debt, and rising interest rates mean more income.

Interest on USDC is cheap revenue for Coinbase. Circle assumes all of the infrastructure-related costs, while Coinbase simply handles marketing.

The main worry is that USDC issuance is way down. The current market cap is 24 billion, down from 55 billion in mid-2022.

Regulatory clarity

The 10-Q and earnings call harped on “regulatory clarity.” What this means is that Coinbase wants special permission to do things that are presently just plain illegal.

We don’t like their chances. What Coinbase calls “The 2022 Events” have brought the regulatory heat — big time. Stated risk factors in the 10-Q include “adverse legal proceedings or regulatory enforcement actions, judgments, or settlements impacting cryptoeconomy participants.”  

As of June, Coinbase is also getting sued by the SEC for selling unregistered securities and running an exchange, a broker-dealer, and a clearinghouse as part of the same operation — and without registering any of these.

Armstrong’s plan is to put pressure on lawmakers and make them see the light. He hopes to get those “52 million” crypto holders in the US to spam Washington D.C. about the case and get them “to come out in force in this 2024 election, make their voice heard.”

We note that those “52 million” are not trading on Coinbase — we’re pretty sure they’re the bagholders stuck with altcoins and apes they can’t sell and may not be so keen to cheer on Coinbase.

If the SEC wins, Coinbase may have to stop trading in any cryptos other than CFTC-regulated commodity coins such as bitcoin. There isn’t enough volume in those for Coinbase to live on.

This is why Coinbase is so insistent on trading blatant unregistered securities  — it’s all they have left for a business model. 

If Coinbase can’t trade unregistered securities in the US — a very real possibility — it will have to rely on custody services and interest income from its stablecoin business. Since Circle runs the infrastructure, Coinbase’s only cost from USDC is marketing. Total marketing was $78 million for the quarter, though half of that was compensation.

The other ongoing legal issue is that multiple states have issued Coinbase show-cause orders, cease-and-desist letters, and fines over their staking products. In July 2023, Coinbase settled with California, New Jersey, South Carolina, and Wisconsin, and shut down staking there. In October 2023, they did the same in Maryland. But the 10-Q states: “The Company and Coinbase, Inc. dispute the claims of the state securities regulators and intend to vigorously defend against them.” OK.

Buddy, can you spare a satoshi

Coinbase needs to figure out new income streams. The company desperately needs to show that it’s profitable at an operating level and not just a black hole.

The earnings call hammered on Coinbase’s hopes that the SEC will finally approve a spot Bitcoin ETF, so Coinbase can charge custody fees. To date, the SEC has shot down every application for a spot bitcoin ETF put before it since 2017. But you can’t prove it won’t happen!

If ETFs do happen, they may hurt Coinbase’s transaction fee income — fees are way lower on ETFs than on Coinbase. Two analysts asked about this on the earnings call and Choi said Coinbase had no plans in place at all — except that ETFs would be super positive for crypto!

Coinbase is also spinning up offshore perpetual futures trading in the Bahamas. Offshore crypto futures could be a huge market if Coinbase can tap into what Binance is doing now and what FTX used to do. In between all the sanctions violations and criming, we mean.

Innovation!

Coinbase’s new tagline is “onchain is the new online.” Coinbase says it stands at the “forefront of this technology.”

Armstrong has the same vision he’s had for the past two quarters — “digital assets, broader access to financial services.” The miracle of onchain “even changes how we think about identity, governance, artwork, and non-financial services.” That is, all the stuff that crypto failed hard at for the past decade. But maybe this quarter it’ll work?

Coinbase’s current bet is Base, an in-house Layer 2 “payments solution” for Ethereum — that is, a completely centralized Ethereum sidechain to run Ethereum applications without Ethereum fees. So far, that means NFTs and scamcoins.

Armstrong also touted plans to put Coinbase itself onto Base — “one of our next major efforts is going to be how to integrate that into all of our products.” It’s not clear how any of that would work, but it should be a hoot.

Coinbase’s risks list in its 10-Q happens to mention that Base “has been in the past, and may in the future, be a target for scam tokens or other illegal activity. For example, in August 2023, a number of fraudulent tokens were identified and traded on Base blockchain.” It’s a pity that’s the use case.

What this means

Coinbase are screwed and they know it. There’s no hope for the greater glory of crypto any time soon. They need the stock price not to completely crater. Not being sued for number going down would probably be nice. And there’s insider stock sales to schedule. This 10-Q is a prayer for a miracle.

Posted on by Amy Castor 0

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

  • By Amy Castor and David Gerard

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

— crossestman

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Tether: Yes! We have no Chinese commercial paper

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

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

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

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

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

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

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

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

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

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

FTX versus the venture capitalists to the stars

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

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

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

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

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

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

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

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

SBF wrote that he was:

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

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

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

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

More news from Chapter 11

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

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

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

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

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

Three Arrows Capital: What Su and Kyle did next

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

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

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

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

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

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

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

Regulatory clarity

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

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

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

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

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

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

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

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

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

The ETF trick will surely work this time

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

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

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

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

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

The good news for bitcoin continues its monotonous patter

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

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

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

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

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

Posted on by Amy Castor 0

SEC sues Binance, part 1: the complaint, Binance US asset freeze, Tai Chi plan, sock puppet CEOs, weird cash flows

  • By Amy Castor and David Gerard

“Every single one of these news updates from the slow motion implosion of the great fake tech money pyramid scheme is like reading headlines that say: ‘Man confused as to why his clothing caught fire after dousing self with kerosene.’ Every one.”

— A Shiny Blue Thing

CZ: “4”
SEC: “Fore!”

A day before the SEC sued Coinbase, the agency also filed a suit against Binance, the world’s largest offshore crypto casino, and its affiliate Binance.US. Binance founder Changpeng Zhao, better known as “CZ,” was also named in the suit. 

CZ tweeted “4,” which means he is dismissing the complaint as “FUD, fake news, attacks, etc.” If you have a single-digit shorthand for this sort of thing, you may already be in trouble. [Twitter, archive; Twitter, archive]

The 136-page complaint, filed in the District of Columbia on June 5, outlines 13 charges. Unlike the Coinbase suit, this one alleges fraud. The complaint comes with nearly 100 exhibits, some of which are incendiary. [Press release, Complaint, PDF; Docket]

CZ has his hands full these days. The US Department of Justice is currently investigating Binance over money laundering. In March, the CFTC filed its own enforcement action against Binance and CZ — which Binance has until July 27 to respond to. [CFTC docket]

The SEC complaint covers some of what’s in the CFTC complaint. But there’s a pile of new stuff. This is a huge amount to cover, so we’ll be doing it over a few posts.

The SEC complaint

The lawsuit is against Binance Holdings Limited, BAM Trading Services Inc., BAM Management US Holdings Inc., and Changpeng Zhao. (BAM Trading runs Binance.US; BAM Management is a holding company that owns BAM Trading.) Summons were served to listed company addresses and to an address for CZ in Malta. [defendant list, PDF]

The SEC comes out of the gate loud:

This case arises from Defendants’ blatant disregard of the federal securities laws and the investor and market protections these laws provide.

Among the accusations:

  • Binance and BAM Trading both operated as unregistered securities exchanges, broker-dealers, and clearing agencies, while raking in $11.6 billion in revenue. 
  • Binance’s own BNB and BUSD tokens are securities, as are 10 other tokens listed for trading on Binance.US.
  • Binance lending products (Simple Earn and BNB Vault) and Binance.US staking products are also securities.
  • CZ claimed BAM operated separately from its offshore parent and had its own leadership. In practice, he firmly controlled BAM and the US platform’s customer assets.
  • Binance secretly enabled US-based high-value “VIP” customers to trade on its non-US platform. 
  • BAM defrauded company investors of $200 million by lying to them about non-existent controls against abusive trading on the platform.
  • CZ funneled customer funds to Sigma Chain, a trading entity that he owned.
  • Sigma Chain inflated the trading volume on the US site through wash trading — because the Binance trading engine let anyone trade with themselves.
  • Binance and CZ commingled billions in customer funds on Binance.US and sent them to market maker Merit Peak, also owned by CZ.

The SEC wants Binance and BAM permanently enjoined from doing any of this ever again, disgorgement of ill-gotten gains with interest, civil money penalties, and equitable relief.

The SEC has also sought to freeze customer assets on Binance.US — specifically to protect US customers from CZ and Binance.com. 

Tai Chi: A plan to evade regulation

CZ launched Binance in July 2017 to rapid popularity. He evaded accountability from the start, moving his headquarters from China to Japan to Malta.

Per the complaint, CZ denies that Binance has an office at all: “Wherever I sit is the Binance office. Wherever I meet somebody is going to be the Binance office.”

A month after launching in China, Binance revealed that the US and China together made up nearly half of its customer base. [Binance, archive]

But how to keep the ball rolling? Crypto trading was banned in China in 2019. It continued online through foreign exchanges until September 2021, when China declared all cryptocurrency transactions illegal.

CZ needed US customers — especially “VIP” ones — but not US regulation. So, starting in 2018, he worked on how to surreptitiously evade US securities laws. As his chief compliance officer Samuel Lim admitted: “we do not want [Binance].com to be regulated ever.” [Doc 17-5, PDF]

The trouble was, as Lim put it to fellow Binance employee Alvin Bro: “we are operating as a fking unlicensed securities exchange in the USA bro.”

Lim was keenly aware of the hazards of US law enforcement:

there is no fking way in hell i am signing off as the cco for the ofac shit

theres a certain point where money is totally useless, and that is making a declaration to the USA that you are clean

when shanghai is totally cowboy

there is no fking way we are clean

i have zero visibility on our VIP clients

ZERO

the strategy of bnb is to survive for 2 years and f off

and in this 2 yrs try ur bestest to not land in jail

An unnamed “consultant” who ran “a crypto asset trading firm in the United States” suggested options to CZ and his team. One option was low-risk: settle the regulators’ concerns in an orderly manner. But if they went that route, they might be shut out of the US market entirely for months or years. The second option was risker, but more profitable: create a separate US entity that would head off the regulators.

The consultant suggested engaging with the SEC on how to comply but “with no expectation of success and solely to pause potential enforcement actions.” The new entity would “become the target of all built-up enforcement tensions” and “reveal, retard, and resolve built-up enforcement tensions.”

The new entity would also give Binance better access to US dollars without Binance.com needing its own banking relationships.

Binance would still need to insulate the new entity from US enforcement: “Key Binance personnel continue to operate from non-US locations to avoid enforcement risk” and “Cryptocurrency wallets and key servers continue to be hosted at non-US locations to avoid asset forfeiture.”

This was the “Tai Chi plan,” first reported in Forbes in October 2020. Binance filed a defamation suit against Forbes for this report, though they withdrew it a few months later. Binance then tried to buy equity in Forbes in a SPAC deal that later fell through — though this didn’t hold Forbes back from going in hard against Binance. The SEC complaint includes the original Tai Chi documents. [Forbes, 2020; Doc 17-2, PDF; Doc 17-3, PDF]

CZ opted to go ahead with the Tai Chi plan. Binance.US launched in July 2019, run by a separate entity, BAM Trading. Binance announced it would begin restricting US customers from transacting on Binance.com and they should use the US site instead.

CZ’s sockpuppets

Binance.US was a supposedly independent US affiliate of Binance.com, run by BAM Trading, incorporated in Delaware. In practice, CZ reportedly ran BAM himself with an iron hand.

Catherine Coley and Brian Books — “BAM CEO A” and “BAM CEO B” in the complaint — sang like birds to the SEC. Brooks detailed to the SEC how CZ was not merely the chairman of BAM, but exercised CEO-level close control.

Even BAM’s accountants cautioned their client that the lack of information around money movements “makes it very difficult to ensure the Company is fully collateralized at specific points in time.”

Only two people — CZ and another person, Guangying Chen, who nobody seems to admit much about — controlled all of the flows of cash and cryptos.

Coley and her team were extremely unhappy after reading the Forbes article on the Tai Chi plan:

As BAM CEO A [Coley] explained to the Binance CFO shortly after the article was released, BAM Trading employees “lost a lot of trust with the article” and “the entire team feels like they’ve been duped into being a puppet.”

The SEC wants to freeze Binance.US funds

The SEC was very concerned about the status of Binance.US customer funds all through early 2023 and couldn’t get straight answers out of BAM or Binance.com as to where the funds were held and who controlled the purse strings.

On June 6, the SEC filed a motion seeking an emergency temporary restraining order and preliminary injunction against Binance and BAM. Customer assets at Binance.US are largely controlled by non-US entities, and Binance has allegedly siphoned a pile of cash out of BAM. Motions like this are what the SEC does when it suspects huge fraud.

The SEC specifically wants to let Binance.US customers withdraw their funds, but not allow Binance to transfer money outside the US. [SEC press release; Doc 4, PDF; Memorandum of law, PDF]

A hearing on the matter is set for Tuesday, June 13 at 2:00pm. It’s expected that Judge Amy Berman will rule on the day as to whether to put the TRO into place.

Where’s the US money?

The SEC’s investigation into Binance and Binance.US started on August 17, 2020 — before Forbes told the world about the Tai Chi plan. [Doc 12, PDF]

The first SEC contact with BAM was a December 17, 2020, subpoena for documentation of BAM’s control of Binance.US crypto assets.

The SEC requested more information in September 2022. BAM finally answered in February 2023, but “its answers were not reassuring.”

BAM had a “wallet custody agreement” such that Binance would custody Binance.US crypto — the part of the Tai Chi plan where the crypto would be held outside the US. BAM told the SEC that the wallet custody agreement “was never operationalized.”

The SEC sent Binance Holdings Limited (Binance.com) a Wells notice, indicating that an enforcement action was imminent, on February 21. BHL responded on March 15 that “BHL does not, and has not, served as the custodian of the digital assets on Binance.US.” [Doc 19-13, PDF]

But the SEC already knew this was not true — based on information it had gotten from Signature Bank, conversations with former BHL and BAM employees, and reports to BAM from BAM’s auditor Armanino. 

In the two weeks leading up to filing the June 5 complaint, the SEC was still trying to resolve the custody issue — with “numerous written and oral exchanges concerning custody of Binance.US Platform customers’ assets and, more importantly, who is in ultimate control of those assets.” [Doc 19-15, PDF; Doc 19-16, PDF]

BAM now “disputes its own auditor’s conclusion of past Binance custody over customer assets” (emphasis SEC’s) and “admits that Zhao and Binance continue to possess substantial control over at least some of BAM Trading’s crypto assets.”

BHL and CZ have not been helpful:

Zhao’s attorneys have continued to maintain that Zhao is not subject to the jurisdiction of the United States — despite setting up a crypto trading platform in the United States that has made hundreds of millions from trading with U.S. customers, and despite his beneficial ownership of accounts held at banks in the United States through which billions of dollars flowed to some of his foreign domiciled companies like Merit Peak and Sigma Chain.

As recently as June 4, BHL was begging the SEC not to freeze BAM assets. [Doc 19-14, PDF]

The Binance money funnel

Binance is a network of shell companies. These entities hypothetically have different roles, but in practice, money flows between them in vast amounts — mostly via transfers between the entities’ accounts at Silvergate Bank, and some at Signature. We know this because Silvergate, Signature, and FedWire told the SEC all about it. [Doc 21, PDF]

How much money are we talking about? Sachin Verma, an SEC forensic accountant, says:

At times the amounts being credited and debited during a single month amounts to movement of more than a billion dollars.

… On January 1, 2023, eight Binance/Zhao-owned companies had $58.7 million on deposit. During that same time frame, $840 million was deposited into, and $899 million was withdrawn, from those accounts

Binance could and did transfer funds without BAM’s knowledge. At one point, while she was CEO, Coley had to ask where $1.5 billion in daily transfers was coming from — neither she nor her team had the access needed to verify them. 

Coley also had to ask why on earth $17 million in BUSD was moving from Merit Peak (Binance) to Sigma Chain (Binance) via BAM, and where Merit Peak got the money from. [Doc 19-2, PDF]

The billions of dollars flowed in from Binance.US customers, through the various Binance companies’ checking accounts, into a Merit Peak account, to Paxos Singapore (for $21.6 billion of BUSD between 2019 and 2021), and out to … somewhere:

Binance Holdings Limited and Binance Capital Management show large deposits and withdrawals from and to Signature accounts for some Zhao-owned companies, and hundreds of millions of dollars have been transferred.

Per the SEC’s request to freeze Binance.US assets:

During 2022, a U.S. bank account for Swipewallet (beneficially owned by Zhao) sent $1.5 billion offshore in foreign exchange, or “FX,” wires … Between January and March 2023, multiple Binance accounts wired more than $162 million offshore for further credit of a foreign account belonging to the company beneficially owned by the Binance Back Office Manager.

That manager was Guangying Chen.

CZ ran billions of dollars through Silvergate every month. None of it ever stayed in one place for long — all the accounts were just checking accounts where money sat for a moment before being shuffled under another shell.

Unlike Sam Bankman-Fried, CZ seems from all this to have had the good sense to stash away billions of dollars in actual money. He also purchased a home in Dubai in 2021 — a coincidentally non-extradition jurisdiction. 

Where did the money end up? Where’s CZ keeping the dollars? Following the money trail is confusing — which appears to be the point.

It’s not clear whether Silvergate filed suspicious activity reports on all these dubious transfers. They certainly should have.

__________________

Also read:

SEC sues Binance, part 2

SEC sues Binance, part 3

Posted on by Amy Castor 0

The SEC sues Coinbase. It’s on.

Coinbase’s entire business model has been built around avoiding regulation and lobbying Congress for special rules. Well, those days are over. After a year of warning them repeatedly, the SEC has finally taken action against the largest crypto exchange in the US.

It’s David’s turn, so this one is over on his blog.

Image: Brian Armstrong and Paul Grewal on YouTube awkwardly responding to the SEC’s warning in late March that an enforcement action was in the works.

Posted on by Amy Castor 0

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

  • By Amy Castor and David Gerard

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

– Ariong

The Treasury brings good news for DeFi

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

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

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

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

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

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

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

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

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

The SEC brings good news for Coinbase and DeFi

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

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

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

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

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

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

A regulatory framework for casino chips

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

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

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

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

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

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

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

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

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

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

FTX’s first interim report reads like Quadriga

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

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

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

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

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

Terraform Labs did nothing* wrong

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

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

Crypto mining: the free lunch is over

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

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

More good news for exchanges

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

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

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

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

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

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

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

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

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

Good news for bitcoin

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

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

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

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

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

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

Media stardom

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

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

Posted on by Amy Castor 0

SEC sues Genesis and Gemini, Genesis owes $3 billion to creditors

  • By Amy Castor and David Gerard

Kids, kids, you’re both ugly

There’s a huge conflict between the Gemini crypto exchange and the Genesis crypto investment firm over the Gemini Earn product — and what happened to the money.

Fortunately, the SEC has stepped in to clear things up — they’re suing both of them! [Press release; Complaint, PDF; Docket]

The charge is that the Gemini Earn program, which offered retail investors up to 8% return on crypto they lent to Genesis, was an unregistered securities offering. This is because it was really obviously an unregistered securities offering.

Genesis had hitherto only dealt with accredited and institutional investors, which is fine. But starting in February 2021, Gemini Earn gave Genesis access to money from ordinary retail investors. Somehow, this didn’t set off the “Howey test” alarms for anyone at either company.

(Coincidentally, February 2021 is when the GBTC premium dried up. Did someone need money quickly?)

The SEC says: “Both Defendants were integral to the operation and success of the Gemini Earn program.”

Retail customers suffered hugely — they are out $900 million — as Gemini froze withdrawals without warning in November, after Three Arrows Capital (3AC) collapsed in July, then FTX collapsed in November. The SEC has actual harm it can point at.

Gemini terminated the Earn program on January 8, when it pulled the plug on its Master Loan Agreement between Genesis and Gemini.

The SEC is getting out there and just busting unregistered crypto securities now that the government and public are onside.

Here’s Gary Gensler, explaining in a video what the SEC just did in very small words. [Twitter, video] 

The SEC complaint

The SEC’s complaint outlines how Gemini Earn worked.

Genesis was founded in 2018. It marketed its services to institutional and accredited investors — and that was more or less fine.

With Gemini Earn, however, Genesis got into soliciting retail investors, via Gemini — and selling to retail requires companies to file paperwork with the SEC and make important financial disclosures, so the public can make an informed decision about what they are investing in. Of course, neither company bothered with that part.

Earn investors agreed they were sending their cryptos to Genesis. Gemini acted as the agent in the offer. In the first three months of 2022, Gemini received about $2.7 million in agent fees from the Gemini Earn program, according to the complaint.

Gemini Earn took in billions of dollars worth of cryptos — mostly from US retail investors. Both companies widely marketed Gemini Earn by promoting its high interest rates.

By November 16, 2022, when Genesis froze withdrawals, it was holding $900 million in Gemini Earn investors’ cryptos, from 340,000 customers, mostly in the US.

The SEC holds that Gemini Earn is an investment contract, per the Howey Test:

  1. Gemini Earn involved the investment of money;
  2. in a common enterprise;
  3. and investors reasonably expected to profit from the efforts of the defendants.

If you want to sell such an offering to retail investors, you have to file the paperwork. Or the SEC can bust you.

Prayer for relief

The SEC asks that the defendants don’t offer unregistered securities ever again, that they be enjoined from offering Gemini Earn and any similar offering in the future, and they disgorge all ill-gotten gains — that includes interest and all profits associated with Earn — and pay civil penalties.

Most SEC suits never go to trial, they just end in a settlement. There is no settlement as yet.

By the way, investors will likely be able to claim the right of rescission — if you buy something that’s found to be an unregistered security, you can just demand all your money back. Section 12(a)(1) of the Securities Act says “Any person who — (1) offers or sells a security in violation of section 5, … shall be liable, subject to subsection (b), to the person purchasing such security from him”

If the SEC prevails, investors will be able to demand their money back from Gemini as well as from Genesis — the SEC considers both companies were offering Gemini Earn, even as their internal agreement said Gemini was just acting as Genesis’ agent. After all, one of these two companies appears to be solvent.

Former SEC chief of Internet Enforcement John Reed Stark tells us:

An SEC victory would take disgorgement and penalties and perhaps deposit it all in a FAIR fund for investors. The sole priority of the SEC staff filing the action will be to give those investors their money back who hold the $900M of Earn that is now worth nothing. Any remedial steps would typically entail hiring a law firm to create and manage a distribution plan, working feverishly towards that goal of helping investors who incurred losses.

That the SEC seeks disgorgement of profits and penalties to make investors whole is good news for Gemini’s Earn investors. Given that Gemini has the assets to satisfy a judgment, there is cause for some optimism, as opposed to other situations involving bankrupt entities where angry customers are more likely stuck last in line as unsecured creditors.

It’s an outrage!

Tyler Winklevoss of Gemini has responded to the SEC’s action: [Twitter]

It’s disappointing that the @SECGov chose to file an action today as @Gemini and other creditors are working hard together to recover funds. This action does nothing to further our efforts and help Earn users get their assets back. Their behavior is totally counterproductive.

Fortunately, there’s a remedy: the suit demands that Gemini and Genesis give everyone’s money back — $900 million — out of their own pockets, which the Winklevosses are entirely capable of doing because they still sit atop a mountain of bitcoins.

Tyler further pleads that “the Earn program was regulated by the NYDFS and we’ve been in discussions with the SEC about the Earn program for more than 17 months.”

That’s great! Were the SEC discussions along the lines of “you really need to register this stuff before we shut you down”? Perhaps Tyler could clarify.

Also, the SEC complaint notes specifically that New York didn’t regulate anything about how Gemini Earn operated. One of the points of the SEC complaint is that there was no other regulator.

The Daily Beast spoke to former Gemini employees about the Earn program. They had boggled at the terms and conditions — deposits were uninsured and crypto was lent out on an unsecured basis, meaning Genesis wasn’t putting up any collateral. “We were like, ‘Holy sh-t, are you f-ing kidding me?’” [Daily Beast]

The SEC had previously gone after BlockFi for failing to register its crypto-lending program, and they stopped Coinbase from launching its crypto-lending program, so they are getting serious about ending this sort of nonsense.

Current unconfirmed rumor: Gemini will get only this SEC charge and will settle with a fine — and disgorgement. But the Department of Justice and the US Attorney’s Office for the Eastern District of New York are coming quickly for Genesis and its parent company Digital Currency Group (DCG). [Twitter, archive]

Genesis is in hock for $3 billion

Genesis owes more than $3 billion to creditors, according to sources who spoke to the Financial Times. DCG is looking for silverware to sell to plug the gap. DCG has a huge venture portfolio it’s looking at dipping into. [FT, archive]

DCG had been trying to raise capital — about $1 billion — after 3AC blew up Genesis’ books. But it couldn’t get any takers. So now DCG’s only option is to try to sell what it’s got. 

DCG’s portfolio includes 200 crypto companies — and most of them are illiquid because crypto is a losing business right now.  

Some direct customers of Genesis — not Gemini Earn customers, but Genesis’ accredited and institutional customers — are claiming that Genesis lied to them to get them to reinvest after they pulled out: [Protos]

He says he was lured back in by reassuring emails from Genesis salespeople and the delivery of monthly balance sheets that seemed to show in late summer and early fall that the firm’s financial position was stable. The creditor now says those financial documents were inaccurate and hid the firm’s growing financial problems.

Media stardom

David went on Blind Spot Markets Live on Friday morning. The transcript is up now. Izabella Kaminska talked to David about FTX, Nexo, Genesis vs. Gemini, and US banking for crypto companies. This episode was sponsored by Big Nocoin, the Federal Reserve, and the Pentagon. [The Blind Spot]

Image: They fired 10% of their staff and went on tour. Instagram.

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

The SEC busts Kim Kardashian over EthereumMax, pour encourager les autres

  • By Amy Castor and David Gerard, for their sins
  • Our work is funded by our Patreons — here’s Amy’s, and here’s David’s. Your monthly contributions help us greatly in steeling ourselves to dive into this jaw dropping foolishness!

Reality show queen Kim Kardashian is not stupid. She’s a billionaire businesswoman. She clearly has basic competence.

Kardashian is even studying law. She passed the first-year “baby bar” exam in December 2021, on her fourth attempt. (This isn’t unusual — the pass rate is around 21%.) [The Guardian; Elle]

But that doesn’t mean she understands securities laws — or that putting “#ad” on the end of an Instagram post promoting a security does not, in fact, leave you in the clear.

Section 17(b) of the Securities Act specifically states that you need to spell out how much you’re being compensated for a promotion — and Kardashian neglected that bit when she posted about EthereumMax (EMAX) to her 225 million Instagram followers on June 16, 2021.

How could Kardashian have known EthereumMax was a security? Paragraphs 6 to 9 of the SEC order against her detail how blatant EMAX was. Kardashian’s post even promoted a token burn that was supposedly “giving back” to the “community” — implying financial benefit. [SEC press release; Order, PDF]

The SEC came down hard on Kardashian. She has agreed to a $1 million fine, and disgorgement of the $250,000 she was paid plus $10,415.35 in prejudgment interest. Kardashian must not promote a “crypto asset security” in the next three years. She will also “continue to cooperate with the Commission’s investigation in this matter.”

We’re pretty sure Kardashian knows what a security is now.

Kardashian is currently launching a private equity firm, SKYY Partners. So she’d better be on top of this stuff. [Fortune]

What’s EthereumMax?

EthereumMax is an ERC-20 token on the Ethereum blockchain. The promotion for EMAX promised all sorts of amazing visionary aspirations — but it’s just another worthless altcoin that doesn’t do anything. [CoinDesk; EthereumMax white paper, archive, PDF] 

EMAX was launched in May 2021, only a month before the June 2021 celebrity push. Kardashian, boxer Floyd Mayweather, and former NBA player Paul Pierce hawked EMAX to their massive social media followings — though this didn’t halt the token’s ongoing price collapse. 

Paid to pump

In September 2021, a few months after Kardashian’s EMAX post, Charles Randall, the head of the UK’s Financial Conduct Authority, gave a speech that called on online platforms to crack down on financial scams. He specifically noted Kardashian’s post: [FCA speech]

“Which brings me on to Kim Kardashian. When she was recently paid to ask her 250 million Instagram followers to speculate on crypto tokens by ’joining the Ethereum Max Community,’ it may have been the financial promotion with the single biggest audience reach in history.

The problem is much wider than Kardashian. Celebrity endorsements for financial toxic waste are an ongoing problem. Actor Ben McKenzie speaks up about it from time to time — including on the case of Kardashian — and suggests celebs stick to promoting non-trash: [Slate]

“To criticize celebrities shilling crypto isn’t to impugn them as people or to say that I’m above accepting an easy payday. (Call my agent, legit companies with not-scammy products!)”

Citing quotes from a “crypto marketing agency” executive, the Financial Times wrote this on celeb crypto promotions: [FT, archive]

“It’s considered easy money,” said an executive at a crypto marketing agency, who asked not to be named, adding that the endorsements are often pushed by talent agents who will offer deals that include posts by several of their high-profile clients, with price tags ranging from tens of thousands to millions of dollars. “You ain’t seen nothing yet.”

Fundamentally, Kardashian’s people failed to realize that the EthereumMax sponsorship would blow up on her. We expect a deeply displeased Kardashian sent more than a few heated texts to her minions along the lines of “what on earth?” — or however you phrase that in Kardashian.

We don’t know of any evidence that Kardashian cared about EthereumMax or knew anything about crypto in general. The only past involvement she had with crypto is that she apparently used some chips with bitcoin logos on them in a charity poker game in 2018. We doubt she cared about crypto then either. [Cointelegraph]  

How about those NFT shills?

Celebrities have been hawking NFTs at top volume for the past year — such as Jimmy Fallon and Paris Hilton pumping bored apes on late-night television, and Madonna tweeting that she finally got her “very own ape” in March. (Madonna’s talent manager Guy Oseary represents Yuga Labs, the company behind the BAYC project. He is also an investor though his fund Sound Ventures.) [Mashable; Twitter]

Almost no celebs would understand the many NFT deals we saw them taking through 2021. Likely, their people would have just told them: “It’s a sponsorship for internet art, free money!” and they’d go “Sounds good, tell me when you need me to nod and smile.”

So far, NFTs are not securities. Mostly. Probably. But they’re still stupid investments best left entirely to the crypto speculators.

Celebrity NFT promotion would be under Federal Trade Commission rules — where disclosing that your promotion is an “#ad” is probably sufficient. Though almost no celebrity Bored Apes promoters did so, for instance.

Some of this stuff flies a bit close to the sun. When celebrities go on TV promoting Bored Apes NFTs, they’re not just promoting Bored Apes, but the entire ecosystem that Yuga Labs has created — including Apecoin, which is an obvious and blatant security offering. 

It’s so unfair!

The SEC moved quicker on Kardashian than on many previous crypto-related violations. It only took a little over a year to charge Kardashian. The SEC hasn’t charged EthereumMax directly for not registering its offering. 

Anyone who calls this “regulation by enforcement” is a clown. This is just enforcement. There’s absolutely no reasonable question of the facts or laws here. The SEC has been warning about this nonsense since 2017. [SEC, 2017] 

Floyd Mayweather in particular already settled with the SEC in November 2018 for failing to disclose payment for promoting ICO tokens. That settlement barred Mayweather from accepting payment for promoting securities — and his EthereumMax promotion in June 2021 would have been within that period. We wonder if there’s an order coming his way too. [SEC press release, 2018; order, PDF, 2018] 

Action against unregistered securities isn’t restricted to the SEC — private citizens can bring actions against unregistered offerings, and against their promoters. In January, a class action was brought against EthereumMax founders Steve Gentile, Giovanni Perone, and Justin French, and promoters Kardashian, Mayweather and Pierce, claiming investor losses on this alleged unregistered security. [Complaint, PDF; The Block]

Kardashian didn’t just fly too high — she set a course directly for the sun, and she got burnt. EMAX was blatantly an offering of securities, the SEC had given clear warning over the previous several years, and there are clear laws governing disclosures when you promote a security. 

Why did she so blatantly just not follow the law? Because she was likely ill-advised, and crypto seemed like easy money.

But it is incredibly irresponsible — and that’s why it’s so reprehensible. You’re encouraging people to engage in risky investments, where they invariably lose money. 

Kardashian is a billionaire — $1.26 million is a trivial fine for her. But this is excellent enforcement by the SEC, pour encourager les autres.

SEC chair Gary Gensler even made a nice video about celebrity endorsements! Securities TikTok awaits. [YouTube]

Posted on by Amy Castor 4

GBTC investors are spamming the SEC 

The Securities and Exchange Commission is being inundated by thousands of comments solicited by Grayscale to support the conversion of their Grayscale Bitcoin Trust (GBTC) into a spot bitcoin ETF. [Comments on NYSE Arca Rulemaking]

As part of the filing, the SEC provides a comment period of 240 days. NYSE Arca filed the application on October 19, 2021, so the last day for comments is June 16. 

Bitcoin skeptics refer to GBTC as the Bitcoin Roach Motel or Hotel California, a place you can check in but never leave because once bitcoin goes into the trust, it has no obvious way of getting out. I covered the details of how the trust works in an earlier blog post. [Amy Castor]

GBTC is currently trading at 25% below the price of bitcoin. Grayscale argues that converting it to a spot bitcoin ETF will allow GBTC to trade in line with its underlying asset. 

In truth, Grayscale can redeem shares and return investors their money, but it stands to make hundreds of millions of dollars more with an ETF, so you should definitely spam the SEC instead!

Grayscale has encouraged spamming the commission through a massive ad campaign at Amtrak stations. Grayscale CEO Michael Sonnenshein is going around giving press interviews, pointing out how mean and evil the SEC is for never having approved a spot bitcoin ETF in the past. 

On its website, Grayscale offers a link that opens up directly to a ready-made email, making it mindlessly easy to spam the SEC in a few simple clicks. 

Jorge Stolfi, a computer scientist in Brazil, has been reading through the SEC comments one by one and posting his thoughts on Twitter.  

Nearly 4,000 comments have been submitted so far, and 98% of them are positive in that they support converting GBTC to a bitcoin ETF. Some of the names look suspiciously made up.

Thousands of the comments are copies of the same Grayscale spam message, and many don’t even bother to edit the “[YOUR NAME HERE]” placeholders.

Many of the comments parrot Sonnenshein’s remarks to the press about how the SEC has approved a bitcoin futures ETF; therefore, it should also approve a spot. (This is nonsense. The former is an actual bet on dollars. Nobody touches BTC at any point in the process.)

Hopefully, the SEC will read the spam comments and understand them for what they are: clear evidence that thousands of GBTC investors do not understand the nature of bitcoin, and that GBTC should not be converted to an ETF for the sake of those same investors.

In reading through the comments something else becomes alarmingly clear — many retail investors are stuck with GBTC in their retirement accounts. Thanks to a television ad campaign that Grayscale ran in 2020, many falsely believed that bitcoin was a hedge against inflation, rather than an incredible risky and volatile asset.  

Amongst the positive comments, Coinbase submitted a ridiculously long (27 pages) letter trying to demonstrate that the bitcoin market cannot be manipulated. They somehow forgot to mention the 83 billion tethers currently sloshing around in the crypto markets. [SEC Comment]  

Last year, Coinbase settled charges with the CFTC that one of its own employees was wash trading the vast majority of a certain coin’s volume on their own exchange, and they apparently weren’t aware of it until much later. I’m sure they have a lot of credibility on this subject!

Voices against the GBTC conversion

There are a few powerful letters to the SEC against the conversion. These are definitely worth a read for anyone who wants to get a better understanding of how GBTC works.  

Writing on behalf of a client, Ropes & Gray Attorney David Hennes does a fantastic job underscoring how Grayscale is royally screwing over GBTC holders. [SEC Comment] 

As Hennes points out, Grayscale bought $700 million worth of its own GBTC shares at a discount and is authorized to buy back $1.2 billion. 

If GBTC converts to an ETF, Grayscale would then be authorized to sell the corresponding bitcoins at the market price, thus making some $200 million to $350 million in profit at the expense of those who sold them the shares at discount. 

Since Grayscale is no longer issuing shares of GBTC, it can redeem GBTC at net asset value without running afoul of Regulation M, as it had in the past. However, it chooses not to because it is collecting a 2% management fee on $25 billion in BTC assets held in the trust.  

“The SEC should thus deny the conversion of GBTC into an ETF unless and until Grayscale first (a) initiates a redemption program for GBTC that complies with Regulation M; and (b) agrees to distribute to GBTC’s other shareholders on a pro-rata basis any and all gains resulting from any Grayscale purchases of GBTC shares at a discount and corresponding sales of GBTC shares on an undiscounted basis,” wrote Hennes.

Computer scientist David Rosenthal, who gave a popular lecture at Stanford warning about the hazards of crypto, says all of the reasons the SEC had for rejecting previous bitcoin spot ETFs — and there have been close to a dozen of them — are still valid. 

“The constant pressure to approve a spot Bitcoin ETF exists because Bitcoin is a negative-sum game. Bitcoin whales need to increase the flow of dollars in so as to have dollars to withdraw. The SEC should not pander to them.” [SEC Comment] 

Rosenthal also comments on my Grayscale story in his blog. [DSHR blog]

Along that same vein, David Golumbia, author of “The Politics of Bitcoin,” warns “manipulators in the crypto space need a constant inflow of real dollars to prop up their manipulation so that they can continue to dump their tokens into the hands of ever more unsuspecting consumers. That they are obviously engaged in selling their own tokens for a profit while bullying others into buying at the same time is only one of many tactics they use that are illegal in well-ordered markets.” [SEC Comment]

In his own submission, Stolfi states that bitcoin is a tool of crime. It allows dark markets to exist and flourish. It has taken the place of the now-defunct criminal bank Liberty Reserve. And it functions as a natural Ponzi. [SEC comment]

“Bitcoin does not provide any benefits for society; on the contrary, it has caused enormous damage; and this balance cannot ever improve, because the technology is inherently wasteful, impractical, illegal, and insecure.”  

Someone going by “Concerned Citizen of the Word” noted that “It’s just a matter of time before the Bitcoin bubble pops due to any of many reasons, and a lot of people, especially Americans, are going to lose massively.” [SEC comment]

If you are similarly disturbed by Grayscale’s campaign of misinformation, I encourage you to write to the SEC and make your own voice heard — with original commentary, which I’m sure they would appreciate. You can submit your comments here.  

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News: Jennifer Robertson speaks (QuadrigaCX), BTC tumbles, Crypto.com hacked, SEC shoots down another Bitcoin ETF

“Bitcoin Widow” went on sale this week. Jennifer Robertson was busy giving interviews to promote her book. It’s the first time we’ve gotten to see her live and hear her voice.   

Robertson was married to Gerald Cotten, who ran QuadrigaCX like a Ponzi. He mysteriously died in India just before things fell apart. Robertson was clever enough to go to college and start a business, but somehow remained completely clueless when it came to her partner’s shenanigans. The lavish vacations, the houses, and private plane trips were nice, though. 

Globe and Mail interviewed Robertson. Actually, they interviewed the journalists who interviewed her. You still get to hear a little of Jen’s voice. The interview is pretty dry. No tough questions. (Globe and Mail) 

The National, CBC’s flagship current affairs program, was a lot tougher. As politely as possible, they asked why she wouldn’t simply allow Cotten’s body to be exhumed and checked to make sure it’s really him. I make an appearance on the show. (YouTube)

Matt Galloway on The Current spoke with Robertson at length. (The Current)

Galloway: “Did you ever ask why hundred dollar bills were scattered around your house?” 

Robertson:  “It was kind of a Gerry thing.”

As a follow-up to Galloway’s interview, CBC On The Coast interviewed me about QuadrigaCX and asked me what I thought about the book. Worth a listen! (CBC, My review of the book) 

BTC keeps falling

Bitcoin is down to $35,000 from its November record of nearly $70,000. The sell-off has outpaced that of the U.S. stock market. David Gerard opines his thoughts on what is driving down the price. (blog post)

He notes the crypto miners are holding on to their bitcoin. If they sell, they know they will crash the markets, so they’ve got to sit tight on their piles of BTC.

There are still $78 billion tethers out there. Tether hasn’t minted any new tethers in 2022, for some reason. And the Tether transparency page has a new look and feel. 

The Grayscale Bitcoin Trust is now trading at 28% below NAV, its lowest ever. (YCharts)

MicroStrategy stock is dropping in tandem with the price of BTC. MSTR tumbled nearly 18% this week. (And the SEC doesn’t care much for the company’s crypto accounting methods, either.) (CNBC)

Another exchange hack

Fortune favors the brave, or does it? Maybe not.

Crypto.com, the fourth largest crypto exchange, was hacked on Jan. 17 in a 2FA compromise. All told, the thieves got away with $34 million in crypto — 4,836 ETH, 443 BTC, and about $66,000 in another crypto. All funds are SAFU.

The hack was confirmed by Crypto.com CEO Kris Marszalek, but otherwise, the company has been murky on the details, noting “suspicious activities,” and referring to the event as an “incident.” (Crypto.com announcement, Techcrunch)

Crypto derivatives trading platform BitMEX aspires to become a “regulated crypto powerhouse” in Europe. Its European arm BXM Operations AG wants to purchase Bankhaus von der Heydt, a bank in Munich. BaFin, Germany’s financial watchdog, has yet to approve the transaction. The purchase price is undisclosed. (Bitmex blog, Decrypt)

Last summer, BitMEX agreed to a $100 million settlement with FinCEN and the CFTC. Regulators accused the Seychelles-based exchange of failing to maintain a compliant AML program.  

In an effort to clean up its image, BitMEX has hired former Coinbase managing director ​​Marcus Hughes as its chief risk officer. (Bitmex blog, WSJ)

Everybody still despises Binance.

Armed with fake credentials, journalist Hary Clynch went undercover to interview for a top position at Binance. Naturally, he was offered the job. Part two of his three-part story is up. (Disruption Banking)

In her latest blog post, Carol Alexander, professor of finance at Sussex, provides visual proof that price manipulation bots on Binance caused massive liquidations on July 25-26, 2021. (blog post) 

In public, Binance CEO CZ welcomes regulatory oversight and boasts about his sparkly AML program. Behind the scenes, he withholds information about finances and corporate structure from regulators, according to a report in Reuters.

Everything is “FUD,” says CZ. (Twitter)

Regulations

The SEC shot down a spot market Bitcoin ETF from First Trust Advisors and SkyBridge. The ETF didn’t meet “the requirement that the rules of a national securities exchange be ‘designed to prevent fraudulent and manipulative acts and practices’ and ‘to protect investors and the public interest,’” the regulator said.

In other words, all the things that the SEC previously objected to—wash trading, whale manipulation, mining manipulation, manipulative activity involving Tether, fraud and manipulation on exchanges, and so on—were never addressed in the proposal. (SEC, p. 15; Decrypt)

Meanwhile, in Europe, regulators are clamping down on crypto advertising.

Spain’s market regulator issued a mandate that ads for crypto assets must carry a warning that investors risk losing all their money. (Bloomberg)

In Singapore, the city-state is getting rid of bitcoin ATMs as it moves to dramatically limit consumer marketing of crypto. (Bloomberg)

In Italy, Consob, the country’s financial services regulator, has warned of risks linked to an increasing number of financially illiterate Italians investing in crypto. (FT)

And in the UK, the Treasury wants to bring advertising for the crypto industry under the same standards as other types of financial products. (Official statement, FT)  

Bitcoin miners running out of places to go

The bitcoin network consumes vast amounts of energy, mainly fossil fuels. As countries in Eastern Europe struggle to rein in electricity use in the coldest months of winter, they want the miners out. 

The Bank of Russia is doing all it can to pull the plug on crypto and make bitcoin mining and crypto trading illegal. (Bloomberg)

In Kosovo, where the government has temporarily banned bitcoin mining, miners are now rushing to get out of the business, selling their mining equipment at bargain-basement prices. (Guardian) 

And in the Ukraine, authorities bust another crypto mining farm illegally stealing power from the grid. (SSU)

NFTs and more NFTs

Every celebrity and big business wants to get into the NFT market, it seems.

Gamers won’t have it. They don’t like NFTs because they’re already familiar with broadly similar exploitative paid weapons, skins, loot, etc. When their favorite online games announce plans to incorporate NFTs, gamers push back. (NYT)

If only consumers would push back on this nonsense with a similar passion as gamers.

Dan Davies, author of “Lying for Money,” says gamers are more aware than most of AML compliance issues. He pointed out that Tencent shut down its online version of Call of Duty, after discovering the platform was being widely abused by criminals. (Twitter)

Scammers set up a new server at the URL previously used by Ozzy Osbourne’s NFT project, stealing over a hundred thousand dollars in ETH. (The Verge)

Flyfish Club is an exclusive NFT restaurant in New York City. When it opens in 2023, you can only enter if you buy an NFT. You still have to pay for your food in dirt fiat, because they won’t accept crypto in the establishment. Parent company Crypto VC Group has raised $14 million selling Flyfish tokens, which are being flipped on OpenSea. (Fortune) 

What would you expect from an NFT restaurant? Stephen Colbert investigates. (YouTube)

I see a new trend developing, and the SEC is not going to like it. BrewDAO just announced it wants to start a brewery. (Twitter)

Coinbase is teaming with Mastercard, so you can purchase NFTs with your credit card on its soon-to-launch NFT marketplace. (Coinbase blog, CNBC)

Walmart is considering creating its own crypto and selling NFTs. Of course, it is. (Bloomberg)

Meta wants to profit on NFTs as well. Facebook and Instagram are prepping a feature that will allow users to display their NFTs on their profiles. Meta is also working on a prototype for minting NFTs. (FT)

After spending $3 million on a rare Dune book, SpiceDAO is still looking for a way to justify the expense. It failed to negotiate IP rights. Now it wants to develop an entirely independent animated series. (Twitter)

RatDAO, which wants to accumulate blue-chip art, says it’s bought an unsigned Banksy print. Most DAOs I’ve looked at tend to focus on NFTs. (Twitter)

Cryptoland’s plans to buy a $12 million Fijian island have fallen through. The real estate agent selling Nananu-i-cake said the contract to sell it to Cryptoland’s backers fell through and the island is back on the market. Here is the listing, in case you’re interested. (Guardian)

One Jan. 18, Cryptoland founders Max Olivier and Helena López did an AMA. Molly White uploaded it to YouTube. It’s hysterical if you can stand to listen. If not, Molly has threaded the highlights.

Wikipedia editors have voted not to classify NFTs as art, sparking outrage in the crypto community. Beeple and Pak will not be included on its list of the most expensive art sales by living artists. (Artnet)

A women-led NFT project, Famed Lady Squad, is actually being led by guys, the same guys who are behind a bunch of failed NFT projects. (Input magazine) 

Other interesting bits

President Nayib Bukele, thinking Moody’s had downgraded El Salvador’s credit rating, said he “DGAF.” It turns out, Moody’s had not downgraded his country’s credit rating. Moody’s has rated El Salvador Caa1, a very high credit risk, since a downgrade in July. (Bloomberg)

Crypto media outlet CoinDesk is offering employees an equivalent of stock in its parent company DCG, which has its hands in hundreds of crypto companies. David Gerard notes that DCG has a history of pressuring CoinDesk employees to pump company interests. (Blog post) 

VC firm A16z wants more money for crypto investments. It’s seeking another $4.5 billion—more than double than what it raised less than a year ago. VCs are fueling the boom in everything crypto. (FT) 

MetaMask founder Dan Finlay acknowledges they’ve failed to remedy an IP address leak vulnerability that’s been “widely known for a long time.” (Twitter)

A flood of crypto rich are moving to Puerto Rico for the tax breaks, driving up real estate prices and making the natives unhappy (CNBC)

Ethereum founder Vitalik Buterin and Elon Musk exchange tweets about synthetic wombs. (Twitter)

Dan Olsen posted a two-hour YouTube video explaining NFTs and the problems with blockchain in general. The video is going viral. (YouTube)

Martin Walker explains Web 3.0 in a 20-minute interview. (YouTube)

Crypto promoters often tell us it’s still “early days.” Molly White says the nauseating phrase sounds like it’s coming from people with too much money sunk into a pyramid scheme. (blog post)

Stephen Diehl has a great take on Web3, if you haven’t read it yet. (blog post)

Cryptocurrency is a giant Ponzi scheme. (Jacobin) 

Fais Khan illustrates that Coinbase Ventures-backed coins tend to underperform bitcoin after an initial pop on crypto exchange Coinbase—when the VCs cash out. (blog post)

Laura Shin’s book “Cryptopians” is coming out next month. It’s nearly 500 pages long. Public Affairs is the publisher. If you don’t have the time to read it, Patrick McGinty, who teaches in the English Department at Slippery Rock University, wrote up a great review. (Baffler)

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Poloniex gets busted by SEC for $10M, and Circle pays — again

Sometimes you make a bad business decision, and you keep paying for it. And for Circle — the company behind the USDC stablecoin — that bad decision was Poloniex, the crypto exchange it bought in February 2018 for $400 million.  

The Securities and Exchange Commission announced in a press release on Monday that Poloniex agreed to pay $10 million to settle charges that it operated an unregistered securities exchange. Poloniex neither admits or denies the claims by agreeing to the settlement. 

Circle, which plans to go public via a special-purpose acquisition company merger, will cover the cost of the settlement, adding to the $156.8 million it already lost when it sold Poloniex in October 2019 — only 18 months after buying the troubled exchange. 

According to the SEC, Poloniex allowed users to trade digital assets that were unregistered securities from July 2017 through November 2019, though it didn’t specify exactly which tokens were securities. 

Exchanges that sell securities have to register with the SEC or apply for an exemption, according to Section 5 of the Security and Exchange Act of 1934. 

Although Circle had plans to turn Poloniex into a regulated exchange, those plans never materialized. Instead, Circle ended up paying for Poloniex’s mistakes.

History of Polo

Poloniex launched in January 2014. In its early days, it operated out of Somerville, Massachusetts, not far from Circle headquarters in Boston. 

The exchange started off allowing users to trade bitcoin for a number of “promising” altcoins — such as Namecoin, Memorycoin, Klondikecoin, Earthcoin, and the like — as you can see from this 2014 web archive. 

In March 2014, Poloniex lost 12.3% of its bitcoin supply (97 BTC), worth around $48,000 at the time, when it was hacked, leaving the company insolvent.  

“I take full responsibility; I will be donating some of my own money, and I will not be taking profit before the debt is paid,” Poloniex then-owner Tristan D’Agosta said on BitcoinTalk, writing under the username Busoni.

By July 2014, D’Agosta said he had paid back the debt, thanks to the popularity of Monero, a privacy coin known for its use in money laundering, darknet markets, ransomware, and cryptojacking. 

Later, the exchange allowed users to trade altcoins against Ether and increasingly Tether — a stablecoin with dubious backing. 

Since Poloniex was never able to get proper banking, it remained a crypto-to-crypto exchange. If you wanted to exit into fiat, you had to move your BTC or ETH to a banked crypto exchange, such as Kraken or Coinbase.

All through the initial coin offering craze and bitcoin bull market of 2017, Poloniex cashed in, listing a slew of ICO tokens in the same manner that it had previously listed all those altcoins. 

Circle knew the SEC was breathing down Polo’s neck when it opted to purchase the exchange.

According to Circle’s consolidated December 31, 2020, and 2019, financial statements, which were part of its SPAC filing, the SEC had filed a complaint against Poloniex in December 2017 related to “the trading of cryptocurrencies that may be characterized as securities.” Circle set aside $10.4 million to pay for the settlement. 

In July 2017, the SEC released its infamous DAO Report, effectively saying that most ICOs were investment contracts. The report also warned crypto exchanges that they needed to register with the SEC as a national exchange or apply for an exemption — if they were going to list these tokens. 

At that time, Poloniex should have delisted every single one of its ICO tokens. Instead, the exchange put profits ahead of common sense. 

“Poloniex chose increased profits over compliance with the federal securities laws by including digital asset securities on its unregistered exchange,” Kristina Littman, chief of the SEC enforcement cyber unit, said in a statement.  

Big plans

Circle purchased Polo with pie-in-the-sky plans. A few months after the purchase, Circle would get $110 million in funding led by Bitmain, a Chinese crypto mining company, to launch USDC. Eventually, the stablecoin business would become more attractive. 

Jeremy Allaire and Sean Neville, Circle’s co-founders, described turning Poloniex into a marketplace for “tokens which represent everything of value,” including physical goods, real estate and even creative productions. 

The timing of the purchase was terrible. In February 2018, Bitcoin had lost half of its value since reaching nearly $20,000 in December 2017. Retailers were selling their bitcoin and getting out of the crypto markets. And Poloniex was left with a backlog of 140,000 open customer tickets to deal with.

Circle figured that if it could transform Poloniex into a respectable alternative trading system — a type of exchange that would qualify for an exemption — the SEC would not push charges. 

According to a leaked slide from a Circle presentation, the SEC told Circle that it would “not pursue any enforcement action for prior activity” at Poloniex as long as Circle turns it into a regulated exchange. 

Only the ATS never happened. Instead, Circle moved most of Poloniex’s international operations offshore to Bermuda in July 2019, so that it could sidestep US regulations. 

Around the same time, Poloniex announced a partnership with payment processor Simplex in mid-2019 that allowed users in 80 countries to fund their accounts with cash and have their money automatically “tokenized” into USDC.  

Meanwhile, throughout 2019, Poloniex’s problems kept adding up.

Circle received subpoenas from the US Treasury Department’s Office of Foreign Assets Control (OFAC) and an Iranian government agency looking into Poloniex registered accounts and transactions that may have violated sanctions. According to its SPAC filings, Circle estimated the penalty would be between $1.1 million to $2.8 million.

Several Poloniex investors lost money in May 2019 when CLAM token suffered a flash crash, causing substantial numbers of margin loans to default. The exchange had to socialize $14 million in losses, opening itself up to class-action lawsuits. 

Circle estimated it would have to pay $1.3 million for two settlements, according to its filings. The company says “the remaining prospective claims are not probable of being successful at the current time and will continue to monitor developments around these claims and other claims made by affected lenders.”

Enough is enough

In October 2019, Circle decided to spin off Poloniex to a new entity — Seychelles-based Polo Digital Assets Ltd — backed by an Asian investment group. Tron CEO Justin Sun led the consortium with plans to invest $100 million into the exchange. 

Why did Circle sell Polo? It is likely the crypto downturn of 2018 made operating the exchange too costly. And I’m guessing it was a lot more work to turn Polo into a regulated exchange than Circle anticipated, given all Polo’s previous mishaps. 

Neville stepped down from Circle after the sale. He didn’t give an explicit reason why, but he told Coindesk that the company’s recent sale of Polo was one of several factors that made “the time appropriate for me to transition.” 

After that, Circle decided to put all of its energy into its USDC stablecoin, of which there are now 26.7 billion in circulation. 

Posted on by Amy Castor 0

Tesla spent $1.5B in clean car credits on bitcoin, the filthiest asset imaginable

Tesla bought $1.5 billion worth of bitcoin, the company said in a regulatory filing on Monday, effectively putting nearly all of the money it earned on clean car credits towards the world’s filthiest asset.

Where to begin? Let’s start with the firm’s SEC filing. As of January 2021, the Silicon Valley-based company updated its investment policy to allow it more flexibility in diversifying its returns on cash. Those changes allow Tesla to buy bitcoin and other cryptocurrencies, which it immediately did.

“Thereafter, we invested an aggregate $1.50 billion in bitcoin under this policy and may acquire and hold digital assets from time to time or long-term. Moreover, we expect to begin accepting bitcoin as a form of payment for our products in the near future, subject to applicable laws and initially on a limited basis, which we may or may not liquidate upon receipt.”

The filing does not say how Tesla bought the bitcoin or how they are custodying it. It also does not tell us how many bitcoin it purchased or for what average price. We only know Tesla bought bitcoin sometime between Jan. 1 and early February, when the price was between $30,000 to $41,000. 

Tesla says its customers will be able to buy its vehicles with bitcoin. However, “liquidate upon receipt” means that if you purchase a Tesla with bitcoins, the company is likely to sell those bitcoins for cash immediately, something that is usually done by sending the funds through a payment processor first.

This is what most large merchants do when they say they are accepting bitcoin. They convert it to cash, so they don’t have to deal with bitcoin’s wild volatility. So if you buy a Tesla with bitcoin in the future, it will likely be the same as selling your bitcoin for fiat and then handing the cash over to Tesla.

Clean car credits for bitcoin

Tesla earns tradable credits under various regulations related to zero-emission vehicles, greenhouse gas, fuel economy, renewable energy, and clean fuel. It then turns around and sells those credits to other automakers when they can’t comply with auto emissions and fuel economy standards.

In 2020, Tesla reported making $1.58 billion in selling these tradable credits it received. And here is the important bit: without those tradeable credits, the company would not have been profitable. Tesla would have lost money. So what does it do with that money? It turns around and buys bitcoin.

Bitcoin is an environmental disaster. The bitcoin network currently burns around 116.87 terawatt-hours (TWh) per year, according to the University of Cambridge’s Centre for Alternative Finance. To give you an idea of how devastating that is to our climate, that is as much energy as a small country or seven nuclear power plants.

Keep in mind, bitcoin’s energy consumption increases right alongside the price of bitcoin. As bitcoin goes up in price, more people want to mine the virtual currency for profit, leading to greater energy consumption as they pile more money into power-hungry ASIC rigs.

Bitcoin is not only filthy for its energy waste but also because it is the currency of choice in underground economies. Ransomware would probably not exist if it were not for bitcoin.

And bitcoin fits the very definition of a Ponzi scheme. It has no intrinsic value—any money new investors put into the system immediately goes out via bitcoin miners selling their 900 newly minted bitcoin per day. Tesla’s massive influx of cash will fund the bitcoin miners for about a month and a half, at most.

Elon Musk shilling crypto

Two years ago, Musk and Tesla paid a combined $40 million penalty to the SEC after Musk’s cryptic tweets about taking Tesla private led to stock fluctuations. The regulator charged him with securities fraud. As part of the settlement, Musk agreed to step down as chairman of the company, although he continued to hold the title of CEO.

Apparently, Musk has learned nothing from that experience. Last month, presumably around the time Tesla was buying up hoards of bitcoin unbeknownst to the general public, Musk caused the price of bitcoin to go up 20% when he changed his Twitter bio to include the word “bitcoin.”

Soon after changing the bio, Musk said in a tweet: “In retrospect, it was inevitable.” In retrospect, that tweet looks like an early hint that Tesla was funneling money into the digital asset.

Will Musk get into trouble for his bitcoin tweets?

It is unlikely, Columbia University Law Professor John Coffee, Jr., told the Wall Street Journal, especially given that a federal judge rebuked the SEC when it sought to hold Musk in contempt in 2019. “I don’t think the commission would dare push it that far,” he said.

The latest Tesla news caused bitcoin to spike 18% this morning, sending the price to over $44,000, and setting a new all-time high.

Updates Feb. 8: Bitcoin topped $44,000 on Monday, even higher than the $43,000 I mentioned earlier. I added that in the SEC settlement Musk agreed to step down as chairman of Tesla. And I added the Coffee quote from WSJ.

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Posted on by Amy Castor 0

News: Tether surpasses $26B, Elon Musk pumps BTC, Gregory Pepin’s magic trick

It’s been three years since the last bitcoin bubble. And as I write this newsletter, I can’t help but feel this is getting so tiring. Where are the regulators? Why did they not step in long ago to put an end to so much nonsense in the crypto space? Things just seem to keep getting crazier.

Tether has now surpassed 26 billion tethers—after minting 1.3 billion last week alone. How does an outfit get away with creating $1.3 billion worth of a stablecoin without being subjected to an audit? Without a cease and desist? It’s been more than two years since the NY attorney general started investigating them.

Bitcoin slipped below $30,000 on Wednesday, but then climbed to $37,800 on Friday after Elon Musk added #bitcoin to his Twitter bio, apparently just for the lulz. The move sparked $387 million worth of short liquidations on Binance, Bitfinex, BitMEX, ByBit, Deribit, FTX, HuobiDM and OKEx.

Today Bitcoin is back down to $32,800.

In general, it’s been a week of madness in the markets. Reddit group WallStreetBets has been pushing up lousy stocks like GME and AMC to squeeze the shorts and wreak havoc on certain hedge funds. And to take the joke even further, they even pushed up the price of dogecoin 800% in a 24-hour period. Unsurprisingly, the DOGE pump was fueled mainly by tethers.

Still sore about that Bit Short story?

Are tethers backed? Nobody will give you a straight answer and certainly not Stuart Hoegner, Tether’s general counsel, who spends all day retweeting tweets and trying to convince folks that tethers are worth real money.

He is apparently still upset about the anonymous “Bit Short” article, which I mentioned in my previous newsletter. He keeps saying it’s all FUD, and now claims it’s not only hurting Tether, but all of bitcoin. Of course, the reason the story is gaining popularity is because it is largely true.

“But beyond its false claims about @Tether_to, this post really amounts to an attack on the entire cryptocurrency ecosystem. Bitcoin has a market cap of above US$600B, and the growing number of major institutions investing in bitcoin is a tribute,” he said in a Twitter thread.

Hoegner keeps complaining. (Also, we already know market cap is nonsense when it comes to bitcoin and the reason institutions have been jumping in is mainly because they see an attractive arb opportunity via GBTC.) But the one thing Tether won’t do is come clean and audit its reserves, which would put the whole matter to bed once and for all. Do those reserves consist of cash that Tether got from real clients? Or is Tether simply buying bitcoin with tethers and selling them for USD on OTC desks and banked exchanges?

Instead of giving out real answers, Stuart and Paolo and their friends at Deltec keep trying to obfuscate, distort, and push the blame on “disbelievers” and “salty nocoiners.”

Gregory Pepin’s disappearing act

Tether is a perpetual PR disaster machine. After delivering a disastrous interview with Laura Shin, where he tries to convince listeners Tether is legitimate, but comes off sounding like a used car salesperson, Gregory Pepin, the deputy chief executive officer at Deltec (where Tether does its off-shore banking), suddenly disappeared from Deltec’s website. But after Twitter noticed and started making jokes, he suddenly reappeared again.

Clearly, Deltec was monitoring Twitter and thought, well, maybe removing Pepin from the website wasn’t such a good idea after all? So they put him back. But his brief disappearance brought up questions: Were Pepin’s colleagues upset with him? Did he even consult with his colleagues before he went on the podcast? Surely they would have worked out a plan for what he would say and all come to an agreement on it. Did he forget to follow the plan? 

For the last time, Tether is NOT regulated

Tether keeps telling everyone that it’s regulated. Well, it’s not. No government agency is overseeing Tether and making sure they behave properly, which is why Tether and its sister company Bitfinex have been for years doing whatever they want. They make up the rules of the game as they go along, and put forth whatever nonsense narrative they feel like, simply because they can.

JP Kroning wrote a piece in Coindesk, where he points out that Tether is not regulated. Tether has made numerous claims that it is regulated because it is registered with FinCEN. But “registered” and “regulated” are two different things. “Tether isn’t regulated by FinCEN,” Kroning writes. A registration is not a seal of regulatory approval, and it shouldn’t be advertised as such. “Yet, this is what Deltec and Tether executives seem to be doing on Twitter and in podcasts.”

Ripple responds to SEC; the XRP pump

As I wrote in a recent post, Ripple responded to SEC charges that XRP is a security. They are using the same lame defense that Kik used to try and convince the SEC that kin wasn’t a security. It’s a strategy that is likely to fail miserably, and Ripple will most likely end up settling. It’s just a matter of when.

In the meantime, a group on Telegram called Buy and Hold XRP pumped the price of XRP to its highest number since December. The group’s membership hit Telegram’s 200,000 limit within hours, forcing everyone to head over to a new channel with a similar title. The granddaddy pump is scheduled to start on Feb. 1 at 8:30 EST. (Update: The organized pump turned out to be a miserable failure.)

Is XRP a security? All cryptocurrencies are investment contracts because they pass the Howey test. You can’t buy anything with XRP, BTC, ETH, or any of them. There is virtually no merchant adoption for crypto. For most people, a cryptocurrency is an investment of money in a common enterprise with an expectation of profit to be derived from the efforts of others. But the SEC has accepted the claim of bitcoin fanatics and cultists that Bitcoin is not a security, therefore, putting BTC outside of its jurisdiction.  

Coinbase going public via direct listing

Coinbase says it plans to go public via a direct listing. The U.S. crypto exchange confidentially filed its registration with the SEC in December. Now we know for sure they are not going the traditional IPO route.

In an IPO, a block of new shares are created and sold to institutional investors at a set price. The advantage of an IPO is it gives companies a way to both go public and bring in fresh capital at the same time. If a company doesn’t need fast cash, it can go with a direct listing, in which only existing shares are sold.

Direct listings have become popular of late because it gives companies a way to go public without the bank’s help. Palantir, Asana, Slack, and Spotify all went public without a traditional IPO. (Coinbase blog, Techcrunch)

The big question: What will Coinbase stock be worth once Tether is shut down and the price of BTC collapses?

If you like my work, please support my writing by subscribing to my Patreon account for as little as $5 a month. 

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Ripple shoots back at SEC claims, takes the Kik route

Crypto firm Ripple has filed its response to U.S. Security and Exchange Commission charges claiming that Ripple and two execs conducted a $1.3 billion illegal security offering. Ripple made the filing public on Friday. And its general counsel was tweeting about it. 

San Francisco-based Ripple, which launched its XRP token in 2012, looks to be taking the ineffective Kik route in effectively arguing, “Hey, people use our token like real money; therefore XRP doesn’t satisfy the Howey test for being a security. And also, we are decentralized, so…”

Canadian messenger app Kik initially said it would fight the SEC tooth and nail after the regulator claimed its kin token was a security. But after a lot of bluff and bluster, Kik ended up settling for $5 million in October.

Stephen Palley, a lawyer in the cryptocurrency space, calls Ripple’s response to the SEC “delusional.”

Ripple’s 93-page letter does sound like the long-winded rant of someone with a loose grip on reality. But keep in mind, you need a certain level of hubris to pull something like Ripple off. According to the SEC, Ripple’s Brad Garlinghouse and Chris Larson personally pocketed $600 million off the sale of XRP.

And it’s not like they didn’t know they might run into problems down the road. Lawyers warned Ripple early on that there was some risk XRP would be considered an investment contract, the SEC said.

‘Ill-conceived legal theory’

Ripple calls the SEC complaint “unprecedented and ill-conceived legal theory.” It goes on to state that XRP functions as a “medium of exchange,” therefore, the SEC has no authority to regulate it as a security.

Similar to Kik, Ripple will likely have a tough time convincing anyone its token works like money. What can you buy with it? XRP is mainly bought by traders in the hopes “number go up.”

Sometimes it goes up, and sometimes it goes down. In 2017, XRP hit an all-time high of $2.7. It currently trades at $0.27, down from $0.68 in November after several regulated exchanges, including Coinbase, suspended trading of XRP after the SEC filed charges in December.

Ripple also argues that in the eight years that XRP has existed, no securities regulator anywhere has claimed XRP is a security. So what?

That is not an effective defense, said Edmund Schuster, a professor of corporate law at the London School of Economics. He wrote on Twitter: “Regulators operate under resource constraints, so they tend to start paying attention once people lose enough money. In new areas, they take time to pick strong cases and then sequence [enforcement] action strategically.”

What about Ethereum?

Ripple also points to the case of Ethereum, which held an initial coin offering for its ether (ETH) token in 2015. ETH is the second most popular cryptocurrency next to Bitcoin. For a long time, XRP held third place, but recently it slipped to number five.

In its current form, ETH has not been deemed a security. In 2018, SEC official Bill Hinman famously stated that although ETH started out as a security, it is now “sufficiently decentralized,” like Bitcoin so that it no longer is one. (Hinman stepped down from the SEC last year.)

Ripple, on the other hand, started off completely centralized. When it initially created its 100 billion fixed supply of XRP, 80 billion went straight to Ripple and the other 20 billion to Ripple execs. To this day, Ripple still holds a vast quantity of XRP.

But Ripple apparently feels that any rule that applies to Ethereum should also apply to Ripple—and that XRP could also be deemed “sufficiently decentralized.” 

Along with the court filing, the company has submitted a Freedom of Information Act request with the SEC asking how the regulator determined ETH evolved from a-security to not-a-security. The FOIA is a law that requires the disclosure of previously unreleased information controlled by the U.S. government upon request.

“We’re simply asking for the rules to be 1. stated clearly 2. applied consistently,” Ripple general counsel Stuart Alderoty said in a Twitter thread.

Assuming they’re sure that the SEC won’t go after Ethereum, this isn’t that unusual, Schuster said. “Lawyers often say ‘but then X is also A’ when they know X≠A to bring the other side to distinguish and thereby narrow down the attack surface. Unlikely to be of value here IMO, but [I] may be wrong.”

You’ll hurt all our users

Ripple also argues in its letter that calling XRP a security will harm everyone who uses the token. (Probably most especially, Garlinghouse and Larson.)

“To require XRP’s registration as a security is to impair its main utility. That utility depends on XRP’s near-instantaneous and seamless settlement in low-cost transactions. Treating XRP as a security, by contrast, would subject thousands of exchanges, market-makers, and other actors in the gigantic virtual currency market to lengthy, complex and costly regulatory requirements never intended to govern virtual currencies.”

Lawyers for Ripple also claim that XRP is a “store of value,” not a share of Ripple’s profits. The “store of value” narrative stems from Bitcoin. In reality, you can’t call anything a store of value if it loses 60% of its value in two months.

At one point in its letter, Ripple asserts that holding massive amounts of XRP does not, in and of itself, qualify the token as a security.

“Many entities own large amounts of commodities and participate heavily in the commodities markets—Exxon holds large quantities of oil, De Beers owns large quantities of diamonds, Bitmain and other Chinese miners own a large percentage of outstanding bitcoin. Such large commodity owners inevitably have interests aligned with some purchasers of the underlying asset. But there is no credible argument that substantial holdings convert those commodities or currencies into securities, nor has any case so held.”

It’s important to point out that Exxon did not create oil out of thin air, nor did De Beers create diamonds out of thin air. XRP, on the other hand, is a number in a database, and Ripple made up 100 billion of them.

The rest of Ripple’s response consists of going through every one of the 400 paragraphs of the SEC’s complaint and offering a denial or some sort of rebuttal to every claim.

I don’t see how Ripple is going to get anywhere fighting the SEC. The case for XRP being a security is a strong one. And as the saying goes, if it walks like a duck, quacks like a duck, looks like a duck, it likely is one.

The best Ripple can do at this point is buy time. But ultimately, it will probably wind up settling with the SEC to avoid going to trial, and for a lot more than Kik’s $5 million.   

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News: Ripple paid Moneygram $11M, weird stuff going on with e-Payments, fraudster tries to buy Perth Glory, another bitcoin ETF bites the dust

As you know, I left my most recent full-time gig, so I’m solo again. I’m going to keep on writing, but I need to figure out how to make ends meet. I’ll be writing more for my blog, possibly writing some e-books, and relying on support from patrons. If this newsletter is worth buying me a latte every four weeks, consider becoming a monthly supporter.

Now, on to the news. Since I didn’t write a newsletter last week, a few of these items stretch beyond the last seven days.

Filming for Quadriga documentary

Screen Shot 2020-02-26 at 5.27.45 PM
Filming at a coffee shop in Vancouver Monday.

If you’ve been following me on Twitter, you know I was in Vancouver all weekend filming for an upcoming Quadriga documentary for Canadian public broadcast station CBC. It was a whirlwind adventure, loads of fun, and I got to meet my idol and fellow nocoiner David Gerard for the first time. He is 6’4″, which helps explain why he is not easily intimidated by anyone. (My blog, David’s blog with more pics.)

On our second day of filming, the crew got shots of David and me at a coffee shop going through my Quadriga timeline in detail. Of course, the more we talked and went over things, the more unanswered questions we came up with.

Ripple has been paying Moneygram millions

Moneygram’s 8-K filing with the SEC must be a bit of an embarrassment for Ripple CEO Brad Garlinghouse. It reveals Ripple paid $11.3 million to Moneygram over the last two quarters. That’s in addition to the $50 million Ripple has already invested in the firm. (Cointelegraph, Coindesk.)

This is apparently the ugly truth to how Ripple works. The company appears to pay its partners to use its On-Demand Liquidity (formerly xRapid) blockchain platform and XRP tokens and then say nice things about how well things are going. (FT Alphaville)

Of course, none of this is news to @Tr0llyTr0llFace, who wrote about how Ripple pays its partners in his blog a year ago. “Basically, Ripple is paying its clients to use its products, and then pays them again to talk about how they’re using its products,” he said. 

Ripple class-action to move forward

In other Ripple news, a federal judge in Oakland, Calif., has granted in part and denied in part Ripple’s motion to dismiss a class-action lawsuit claiming the company violated U.S. securities laws. There’s a lot to unpack here, but overall it’s a win for the plaintiffs. In other words, the lawsuit will proceed even though it’s been trimmed back a bit. (Court order, CoinDesk, Bloomberg) 

Ripple had claimed in its November court filing that the suit could topple the $10 billion market for XRP. Well, yeah, one would think so, especially if XRP is deemed a security and gets shut down by the SEC. This class action may be laying the groundwork for that. 

Reggie Fowler gets hit with another charge

pexels-photo-2570139As if Reggie Flower did not have enough trouble on his hands. After forgoing a plea deal where three out of four charges against him would have been dropped, prosecutors have heaped on another charge — this one for wire fraud.

They allege that Fowler used ill-gotten gains from his shadow banking business, which he ran on behalf of Panamanian payment processor Crypto Capital, to fund a professional football league. The league isn’t named in the indictment, but a good guess says its the collapsed American Football League of which Fowler was a major investor. (My blog.)

The new charge should come as no surprise to those following the U.S. v. Fowler (1:19-cr-00254) case closely. In a court transcript filed in October 2019, Assistant U.S. Attorney Sebastian Swett told Judge Andrew Carter:

“We have told defense counsel that, notwithstanding the plea negotiations, we are still investigating this matter, and, should we not reach a resolution, we will likely supersede with additional charges.”

Fowler needs to go before the judge and enter his plea on the new charge before he can proceed to trial. Federal prosecutors are asking the judge to schedule arraignment for May 5, but it’s quite possible this is a typo and they meant March 5. (Court doc.)

Convicted fraudster won’t be buying Perth football team after all

LFE Founder Jim Aylward
LFE founder Jim Aylward on Twitter

The sale of Perth Glory Soccer Club to a London crypto entrepreneur fell through after it turned out that the man behind the company trying to buy Glory — businessman Jim Aylward — is convicted fraudster James Abbass Biniaz. (Imagine that, a person with a criminal past getting involved in crypto?)

Aylward had set up a group called London Football Exchange, a football stock exchange and fan marketplace powered by the LFE token. The grand scheme was for the company to buy soccer teams all over the world and integrate that business with the token.

Glory owner Tony Sage pulled out of the deal after traveling to London to go through a due diligence process with his lawyers and representatives of the London Football Exchange group. Sage had been promised $30 million by Aylward for 80% of the A-League club. (Sydney Morning Herald)

Here’s a recording of Aylward admitting the price of LFE is totally manipulated. “We control about 95% of the token holders,” he said.

Weird stuff happening with e-Payments

Something funny is going on with e-Payments, one of the biggest digital payments firms in the U.K. The London firm, which caters to the adult entertainment, affiliate marketing, and crypto industries, was ordered by the U.K.’s Financial Conduct Authority to suspend its activities as of Feb. 11 due to loose anti-money-laundering controls. That’s left ePayments’ customers unable to access their funds. Robert Courtneidge, one of its e-Payments’ directors stepped down the following week. Nobody knows why, but it looks like he was previously involved with the OneCoin scam. (FT Alphaville)

(BTW, on my flight back from Vancouver, I listened to the Missing Crypto Queen BBC podcast, which is all about OneCoin, and it’s fantastic. Definitely worth a listen.)

SEC shoots down another bitcoin ETF; Hester Pierce chimes in

In a filing posted Wednesday, the SEC set aflame another bitcoin ETF proposal. The regulator claims Wilshire Phoenix and NYSE Arca had not proven bitcoin is sufficiently resistant to fraud and market manipulation. (Their idea was to mix bitcoin and short-term treasuries to balance out bitcoin’s volatility, but the agency still wasn’t keen.) The SEC has rejected all bitcoin ETFs put before it to date, so there’s no new news here.

Predictably, though, SEC Commissioner Hester Pierce, aka “crypto mom,” filed her statement of dissent. She said the agency’s approach to bitcoin ETFs “evinces a stubborn stodginess in the face of innovation.” For some reason, Pierce seems to consistently confuse innovation with anarchy and giving bad actors free rein.

Speaking of which, she recently posted on Coindesk asking for suggestions to her ICO “safe harbor” plan. Attorney Preston Byrne responded, saying it would be hilarious if it weren’t so serious. He thinks the plan should be tossed in the bin.

Canada’s central bank venturing into e-currency

Canada’s central bank plans to lay the foundation for its own digital currency should the day arise where cash no longer rules. In a speech he gave in Montreal, Deputy Governor Tim Lane said there isn’t a compelling case to issue a central bank-backed digital currency right now, but the Bank of Canada is starting to formulate a plan in the event Canadian notes and coins go out of style. (Calgary Sun.)

Despite so many countries jumping into the game, central bank digital currencies are nothing new. They have been around since the 1990s, only nobody cared about them until Facebook’s Libra popped into the scene. Bank of Finland’s Alexi Grym recently did a podcast, where he talks about how the country launched its own Avanti project (a form of CBDC) in 1993. The idea sounded great in theory, but in practice, consumers didn’t like being charged to load the cards, especially since ATM withdrawals were free.

Drug dealer loses all his bitcoin

The problem with keeping track of the keys to your bitcoin is that it’s just too easy to lose them, as this U.K. drug dealer demonstrates. He jotted down the keys to his illicit $60 million BTC on a piece of paper. But then when he went to jail, his landlord gathered up all his belongings and took them to the dump. (Guardian.) This isn’t the first time millions of dollars worth of bitcoin have ended up in a trash heap.

FCoin insolvency bears hallmarks of funny business

Screen Shot 2020-02-26 at 9.39.31 PMFCoin, a crypto exchange based in Singapore, announced its insolvency on Feb. 17 after making the surprise discovery it was short 7,000 to 13,000 bitcoin—worth roughly $70 million to $130 million. The exchange blamed the shortage on a cacophony of errors following the launch of a controversial incentive program called “trans-fee mining.” There has been a lot of speculation that this was an outright scam. Now a new report by Anchain.ai shows BTC leaving the exchange’s cold wallets in droves right before FCoin shuttered and its founder Zhang Jian happily moved on to start a new business.

Quadriga was using Crypto Capital

The law firm representing QadrigaCX’s creditors believes the failed Canadian crypto exchange was funneling money through Crypto Capital. Financial documents that two former Quadriga users posted on Telegram show that to be true. (My blog)

Next question: Was Crypto Capital holding any Quadriga funds at the time the exchange went under? That’s going to be hard to track down given the exchange had no books.

Buffett still thinks crypto is a joke

Tron CEO Justin Sun paid $4.6 million to spend three hours with Warren Buffett and turn him into a crypto fan. He even gave the multi-billionaire some bitcoin. Turns out Buffett, promptly handed those BTC over to charity. He doesn’t want anything to do with bitcoin and still thinks crypto has zero value. “What you hope is someone else comes along and pays you more money for it, but then that person’s got the problem,” he told CNBC.

Steven Segal pays the price of being a shitcoin shill

Steven Segal thought he would bring in a little extra dough by shilling a shitcoin, but the effort backfired. The Hollywood actor has agreed to pay $314,000 to the SEC for failing to disclose payments he received for touting an ICO conducted by Bitcoiin2Gen (spelled with two “i”s) in 2018. He’ll pay a $157,000 disgorgement, plus a $157,000 fine on top.

The agency claims that Seagal failed to disclose he was promised $250,000 in cash and $750,000 worth of B2G tokens in exchange for his promotions. He even put out a cringe-worthy press release in 2018 titled “Zen Master Steven Seagal has become the brand ambassador for Bitcoiin2gen.” (SEC press release, Variety, CNBC)

Can someone check IOTA for a pulse?

How long does a blockchain need to be shut down for before it’s considered dead? How is it even possible to shut down something that is decentralized? Oh, wait, maybe it’s not.

IOTA has been offline for 14 days and counting ever since the IOTA Foundation turned off its coordinator node, which puts the final seal of approval on any IOTA currency transactions, to stop an attacker from slurping up funds from its wallet service.

The project has put together a tedious three-part series explaining the theft of its Trinity wallet, its seed migration plan and all the lessons it’s learned from the mishap. It’s all a bit mind-numbing, and you’ll feel a little dead after you read it, too.

Posted on by Amy Castor 0