Tag: Signature Bank

Crypto collapse: New Sam Bankman-Fried charge, Binance fallout, SEC sues exchange over crypto securities, how Signature died

  • By Amy Castor and David Gerard

“who needs an examiner when you can just hand sam an empty sheet of paper and wait”

— haveblue

Sam is a growing boy, he needs his crimes

A new superseding indictment against FTX founder Sam Bankman-Fried alleges that he paid Chinese officials $40 million in crypto in a bribe to unfreeze $1 billion in crypto on Alameda — which would violate the Foreign Corrupt Practices Act. Sam now faces 13 criminal counts. [Superseding indictment, PDF]

On Thursday, March 30, Sam took a trip to New York and pleaded not guilty to his latest five charges. He had to battle his way through a gaggle of reporters just to get in the door. At least it got him out of the house. [Twitter; YouTube; NYT]

In early 2021, China froze $1 billion of cryptos in various Alameda accounts on two of the country’s biggest crypto exchanges (which aren’t named in the indictment). Bankman-Fried “understood that the Accounts had been frozen as part of an ongoing investigation of a particular Alameda trading counterparty.” A bribe was sent from Alameda to a private blockchain address in November 2021. The accounts were unfrozen shortly after, and Alameda got its cryptos back.

Somehow, Daniel Friedberg, FTX’s chief counsel at the time knew nothing of this. Friedberg said in an affidavit dated March 19, 2021, when the FTX Arena naming rights deal was going through, that FTX and its affiliated companies “do not have any ownership or contracts or any other obligations with respect to any governmental agency of the People’s Republic of China, or any governmental agents or political persons.” [Miami-Dade Legislative Item, PDF, p. 54]

Sam will be kept on a very short leash while he’s out on bail. Sam gets a non-smartphone that only does voice and SMS — no internet access — and a locked-down laptop configured to access only certain websites. He can work with his lawyers, order food from DoorDash, and keep up with the sportsball. YouTube is also on the list, so we’re looking forward to the 10-hour video blogs detailing crimes hitherto unknown to humanity. [Order, PDF]

Sam’s father, Joseph Bankman, is paying his son’s lawyer fees with over $10 million that Sam borrowed from Alameda and gave to his father as a present in 2021. We wonder if John Jay Ray is going to come calling to claw this back for the bankruptcy estate. [Forbes]

In the FTX bankruptcy, a group of ad-hoc FTX creditors with $2 billion in claims want to participate in the bankruptcy without revealing their identities. They include “large institutional market makers and asset managers.” This is the precise sort of creditor that the Bankruptcy Act is not intended to protect from public scrutiny. [Doc 1137, PDF]

FTX appears to have been hiding money under the names of employees. The OKX exchange, formerly OKex, has agreed to turn over $157 million in FTX funds. $150 million of that was in an account of David Ratiney, a former FTX employee. Ratiney says the account was opened on behalf of Alameda. He has agreed to forfeit the assets. [Doc 1189, PDF; Doc 1190, PDF]

Binance: This is fine

The CFTC lawsuit against Binance, which we covered in detail on Tuesday, has rattled customers. Within days, the exchange saw outflows of $2 billion, out of a claimed reserve of $63.2 billion, according to Nansen. Currently, 28% of Binance reserves are in Tether and 10% are in BUSD. [WSJ, paywalled; Nansen]

The three large US hedge funds trading on Binance weren’t named in the CFTC complaint — though Radix Trading later came forward and said that they were “Trading Firm A.” Radix insists they did nothing wrong — they ran their apparent conspiracy to violate commodities laws past their in-house legal team, after all. [WSJ, paywalled]

But the CFTC complaint has “already sent chills” across the commodity trading industry — particularly firms who make their money from real commodity trading and only dabble in the toxic waste barrel of crypto. Market makers are wondering if they’re risking their own broker-dealer licenses. [Bloomberg]

Cash withdrawals from Binance US are no longer working via ACH through Signature. Binance says: “ACH deposits and withdrawals for a small subset of our users were disrupted last week and, out of an abundance of caution, remain paused. Our teams are working through this transition and expect to restore functionality within the next 24 hours.” It’s probably fine. Your funds are safe. [Reddit]

You’ll be shocked to hear that Binance kept substantial business links to China for years after its claimed 2017 exit, despite Binance executives repeatedly saying otherwise. [FT]

The Block reported in 2019 that Binance had offices in Shanghai. CZ hit the roof and threatened to sue them, with the explicit aim of outspending them on lawyers … and The Block stood by its story. (Ben Munster, then of Decrypt, helped with the response story, though The Block took out Ben’s harsher additions.) [The Block, 2019; Twitter, archive; Twitter, archive; The Block, 2019]

The sale of Voyager Digital to Binance US is on hold. The Department of Justice and the US Trustee appealed the sale on the basis that the order granted inappropriate immunity from prosecution, and asked for a stay. The appeals court has granted the request for a stay while the appeal proceeds. [Doc 1222, PDF; Doc 1223, PDF; Bloomberg]

Be your own Signature Bank

In his statement on the recent bank failures and the federal regulatory response, FDIC Chairman Martin Greunberg explained why Signature failed: the bank was insolvent, contrary to Barney Frank’s claims. [FDIC, PDF]

On March 10, Signature Bank lost 20 percent of its total deposits in a matter of hours, depleting its cash position and leaving it with a negative balance with the Federal Reserve as of close of business. Bank management could not provide accurate data regarding the amount of the deficit, and resolution of the negative balance required a prolonged joint effort among Signature Bank, regulators, and the Federal Home Loan Bank of New York to pledge collateral and obtain the necessary funding from the Federal Reserve’s Discount Window to cover the negative outflows. This was accomplished with minutes to spare before the Federal Reserve’s wire room closed. 

Over the weekend, liquidity risk at the bank rose to a critical level as withdrawal requests mounted, along with uncertainties about meeting those requests, and potentially others in light of the high level of uninsured deposits, raised doubts about the bank’s continued viability. 

Ultimately, on Sunday, March 12, the NYSDFS closed Signature Bank and appointed the FDIC as receiver within 48 hours of SVB’s failure.

The FDIC has told crypto clients with deposits at Signature Bank that they have until April 5 to close their accounts and move their money. The FDIC is looking to sell off Signature’s Signet inter-crypto-exchange dark liquidity pool. [Bloomberg]

Frances Coppola explains precisely what happened at Signature. [Coppola Comment]

We noted previously how larger US banks don’t want to go within a mile of crypto. But some smaller banks are still feeling lucky. [WSJ, paywall]

The SEC shuts down Beaxy

The Beaxy crypto exchange shuttered after the SEC filed charges against it for failing to register as a national securities exchange, broker, and clearing agency, and over its 2018 ICO. The SEC also charged a market maker operating on Beaxy as an unregistered dealer. [SEC press release; complaint, PDF; CoinDesk]

Beaxy ran a “private sale” ICO for its internal exchange token BXY from May 2018 to June 2019. The SEC is charging Beaxy and its founder Artak Hamazaspyan over the ICO as an unregistered offering of securities to US retail.

That’s the sort of complaint we’re used to seeing from the SEC — but they’re also charging Windy Inc., who ran the Beaxy platform, and Windy’s founders, Nicholas Murphy and Randolph Abbott, over unregistered securities trading on the exchange.

If cryptos being traded are securities — and it’s likely that most are — that leaves even the normal activities of an exchange subject to a vast array of additional regulations.

The SEC is also charging Brian Peterson and Braverock Investments as unregistered dealers for market-making on Beaxy for the BXY and Dragonchain DRGN tokens. The SEC sued Dragonchain in August 2022, alleging that DRGN was an unregistered offering of securities; that case is proceeding. [SEC, 2022; case docket]

Hamazaspyan is also alleged to have misappropriated $900,000 from the ICO for his own use. Murphy and Abbott discovered this in October 2019 and convinced Hamazaspyan to pay back $420,000 to Beaxy and let Windy run Beaxy going forward.

Windy, Murphy, Abbott, Peterson, and Braverock settled, paying a total penalty between them of $228,579. The SEC case against Beaxy and Hamazaspyan over the ICO is proceeding.

Beaxy shut down on Tuesday, March 28, owing to “the uncertain regulatory environment surrounding our business.” We think it’s deadly certain. [Beaxy, archive]

This is the first SEC action over securities trading on an exchange. It’s a likely template for future SEC cases against other crypto exchanges — like, say, Coinbase.

The Coinbase employee convicted in a criminal case of wire fraud by insider trading is fighting an SEC civil case claiming that the insider-traded tokens were securities. [WSJ]

SEC chair Gary Gensler will be testifying before Congress on April 18. The very non-partisan committee announces that “Republicans will hold @GaryGensler accountable for his flagrant disregard for the law, jurisdiction, and the APA.” (The Administrative Procedure Act.) We hope the Blockchain Eight show up. [Twitter]

More good news for decentralization

Judge Larry Alan Burns of the Southern District of California has denied the motion to dismiss of members of the bZx DAO who held governance tokens (BZRX), finding the DAO is plausibly alleged to be a general partnership. [Order, PDF; CoinDesk]

One of the earliest objections to the original DAO in 2016 was that it would be a general partnership, leaving everyone involved jointly and severally liable. (This is why incorporation is a thing.) The same problem was frequently noted in the rise in DAOs in the recent crypto bubble. Nobody involved can claim they had no idea.

Regulatory clarity, European style

The European Banking Authority has a new consultation paper on anti-money laundering (AML) risk factors that national bank regulators should consider. Crypto-asset providers are listed as an area that regulators should examine closely, including if “Distributed Ledger Technology” is “essential to the sector’s business model and operation” or “where services of the subject of assessment are provided using DLT or blockchain technology.” Comments are due by June 29, 2023. [EBA, PDF]

Coming soon in European AML: no anonymous crypto payments in the EU of over 1,000 EUR. Crypto asset managers will be required to verify “their customers’ identity, what they own and who controls the company.” [EP]

Terra-Luna

After he was arrested last week, Do Kwon of Terraform Labs is serving time in a Montenegrin prison. Kwon is likely to stay in jail there for at least a year, while his appeals and extradition hearings proceed. We expect he’ll be sent to South Korea first, and only then to the US. [YNA, in Korean; Protos] 

South Korean prosecutors are making another effort to arrest Terraform Labs cofounder Daniel Shin, who left the company in March 2020. [Bloomberg]

MicroStrategy doubles down 

As part of winding the bank down, Silvergate struck a deal with MicroStrategy to accept $161 million to repay a $205 million bitcoin-backed loan — taking a $44 million loss. Silvergate had said repeatedly that its bitcoin-backed loans were safe. [WSJ, paywall]

MicroStrategy sold 1.35 million shares of MSTR in Q1 2023, diluting shareholders by over 10% to pay off its Silvergate loan — and bought $150 million more BTC between February 16 and March 23. This is a Hail Mary pass praying for number to go up, which it is quite unlikely to do. [8-K; Twitter]

More good news for bitcoin

Hindenburg Research’s latest short-seller report is on Jack Dorsey’s Block, formerly Square. Cash App’s growth is aimed at targeting the “unbanked” — which mostly means embracing noncompliance to grow its user base. A Cash App employee told Hindenburg, “every criminal has a Square Cash App account.” And this is before Block has even got into crypto in any substantial way. [Hindenburg]

Indicted crypto promoter Guo Wengui used his culture-war social network Gettr to pump cryptos. Wengui was fined a billion dollars by the SEC in 2021 over his crypto offerings. [Washington Post]

The British Virgin Islands has ordered Three Arrows Capital founders Zu Shu and Kyle Davies to attend an examination on May 22 or be in contempt of court. We’re sure they’ll be right on that. [CoinDesk]

Freeing yourself from fiat history

If you click on a lot of old links to theblockcrypto.com, it’ll tell you that The Block has “sunset our News+ product” — their previous paywalled news offering. They didn’t open up those old pages — they’ve just effectively deleted a whole swathe of their journalism from 2018 to 2020!

We discovered this when Amy went looking for one of her old Block pieces on Binance for our article on Tuesday and when David looked for various other Block articles for today’s story.

You’d think a publisher wouldn’t just trash their own search optimization — but in practice, both mainstream and specialist publications destroy their own URLs and content all the time. So it’s pretty likely this was an error. Hopefully a reversible one.

We remember when Decrypt moved their domain from decryptmedia.com to decrypt.co. They saw their Google hits go through the floor and thought they’d been shadowbanned … not realizing they’d done it to themselves. The Block changed its URL to theblock.co around the same time, with similar effects.

In the meantime: ARCHIVE EVERYTHING. Stuff that’s blocked from the Internet Archive saves just fine into archive.is, and archive.is also accepts pages from the Internet Archive, Google cache, and Bing cache and indexes them correctly under the source URL. David uses and recommends the Get Archive extension for Firefox. [Mozilla Add-Ons]

Posted on by Amy Castor 0

Crypto collapse: Silvergate implosion continues, Signature Bank, Tether lied to banks, Voyager, Celsius

  • By Amy Castor and David Gerard

“I like the Bernie Madoff test: does this have a higher return than Bernie Madoff promised? If so, it’s probably a scam!”

— HappyHippo

Media stardom

Amy wrote about why Bitcoin would rather continue contributing to the destruction of the planet than switch to proof of stake. [MIT Technology Review]

Amy was also quoted in Cointelegraph talking about stablecoins, mostly BUSD. [Cointelegraph]

David did a fun podcast with C. Edward Kelso back in November, about FTX exploding and the ongoing forest fires in the world of pretend nerd money. He also did a video in November with El Podcast. [Anchor.fm; YouTube]

Silvergate’s goose continues cooking

What’s next for crypto’s favorite bank? Will a team of FDIC agents storm Silvergate? The market is expecting an unfriendly resolution. The bank’s stock (NYSE:SI) is 95% down on its one-year price and is still being heavily shorted.

We wrote up Silvergate’s current problems on Thursday. One of the many ways that Silvergate screwed itself over was by putting cash deposits into long-term treasuries. When their panicky crypto customers needed their money, Silvergate had to sell bonds at a loss of $1 billion in Q4 2022. If they had just bought one-month T-bills, they would have been better off — but those don’t pay as much interest. 

Silvergate has paid back its $4.3 billion loan from FHLB-SF, though. [American Banker]

What we still don’t know is who pressured Silvergate to pay back the loan immediately. It’s utterly unclear why they had to liquidate a chunk of mildly underwater securities to pay off FHLB-SF instead of rolling over the advances.

How did Silvergate end up in this situation in the first place? Greed. A banking charter is a literal license to print money. But that wasn’t enough for them. So Silvergate CEO Alan Lane, who joined the bank in 2008, got into cryptocurrency because crypto was an under-served customer base. But Silvergate didn’t stop to ask themselves why it was under-served. Anyway, look at all this free money!

Worse than that, Silvergate de-diversified — they got rid of those tawdry and tedious retail deposits and mortgages that the bank had focused on since the 1980s. This left them at the mercy of the sector crashing, or one large customer collapsing.

Frances Coppola said: “The problem is not the business model, it’s the customers. If your customers are volatile, you’re at risk of runs. And if your customers are fraudsters, you’re at risk of lawsuits.” [Twitter]

On Friday afternoon, Silvergate made a “risk-based decision” to shut down its inter-crypto-exchange payments network, the Silvergate Exchange Network (SEN). [Silvergate website, archive]

This was a major part of Silvergate’s business. The SEN allowed real-time transfers of real money, any time of day or night, which crypto companies loved. It helped Silvergate attract billions of dollars in deposits from crypto exchanges and stablecoin issuers.

Signature Bank’s similar Signet platform is still up and running, for some reason. 

Moody’s just downgraded Silvergate’s credit rating for borrowing from B3 to Ca. This is Moody’s second-lowest grade: “highly speculative and are likely in, or very near, default, with some prospect of recovery in principal and interest.” [Bloomberg; Moody’s, PDF]

MicroStrategy has a loan to pay off to Silvergate — or its successor — by Q1 2025. “For anyone wondering, the loan wouldn’t accelerate b/c of SI insolvency or bankruptcy,” says MicroStrategy. [Twitter]

The MicroStrategy loan is not delinquent — and it has nothing to do with Silvergate’s present crisis. But this loan, and similar loans to bitcoin miners, are part of the thinking that got Silvergate here. If you’re making loans secured by bitcoins at bubble prices, then you’re an idiot.

Signature Bank, crypto’s tiny lifeboat 

There were two banks critical to US crypto. Silvergate on the West Coast and Signature Bank in New York. With the potential collapse of Silvergate, that means $750 billion per year in USD transfers between crypto exchanges is gone. Now it’s all on Signature.

Signature Bank’s 10-K for 2022 is out. [Business Wire; 10-K, PDF] 

Crypto was one-quarter of deposits to Signature in Q3 2022. When FTX crashed in November, crypto companies were caught short and had to withdraw their dollars in a hurry.

Signature could weather this rush because they were diversified, unlike Silvergate. They then claimed in December, and later in their 10-K, that they were totally trying to get out of crypto anyway. The January letter from the Fed, the FDIC, and the OCC warning banks to stay away from crypto probably helped push this opinion along.

(We wonder slightly where all these crypto exchanges are going to get US dollar banking now. If you have any thoughts, let us know!) 

In 2022, Signature’s deposits declined $17.54 billion or 16.5% to 88.59 billion. Most of that ($12.39 billion) was crypto deposits leaving the bank. At the end of last year, the bank’s crypto asset deposits totaled $17.79 billion, or 20% of its deposits. 

Unlike Silvergate, Signature doesn’t lend money to the crypto industry, nor do they have loans secured with crypto. Their relationship with crypto clients is only US dollar deposits and their Signet platform.

But Signature’s stock price (NASDAQ:SBNY) is being dragged down with Silvergate’s. SBNY is 64% down on its one-year price. 

Tether (again)

The Wall Street Journal got hold of some Tether emails. Tether “intermediaries” used faked companies and shell accounts in 2018 to skirt the Bank Secrecy Act and move money for terrorists. Oops. [WSJ]

One of those intermediaries was a major USDT trader in China. On a list of several accounts created for use by Tether and Bitfinex, another account was in Turkey and was allegedly used to launder money raised by Hamas. 

Elsewhere, the sentencing of Tether/Bitfinex US money mule Reggie Fowler has been adjourned again. It’s now scheduled for April 20 at 3:30 p.m. ET. [Twitter]

Voyager Digital: a terminally stupid loan to the cool kids at 3AC

Voyager Digital went broke because a single unsecured loan to Three Arrows Capital was over a quarter of their loan book, and then 3AC went bust. The Unsecured Creditors’ Committee has prepared a report on Voyager’s loan practices in general, but especially that one fatally stupid loan. [Committee Report, PDF] 

Voyager’s rewards program was run at a substantial loss — it was “primarily implemented as a marketing tool.” So Voyager implemented the lending program to fund its rewards program.

Evan Psarapoulos, Voyager’s chief commercial offer, told Ryan Whooley, the company’s treasury director “we have to beef up the team and onboard/lend to riskier borrowers.”

So Voyager ran a super risky lending program. Just in 2022, 3AC, Celsius, and Alameda Research each borrowed more than 25% of Voyager’s total assets at various times. If 3AC hadn’t taken down Voyager, it would have been someone else.

Voyager’s risk committee met through 2022, though Voyager executives didn’t believe the committee had the power to overturn decisions by Psarapoulos or CEO Steve Ehrlich.

Various borrowers sent varying amounts of information to be able to borrow from Voyager. Genesis sent audited financials. Galaxy sent unaudited financials. Celsus and BitGo sent balance sheets. Wintermute sent income statements.

But 3AC sent only a single-sentence statement of their net asset value and had a half-hour phone call with Voyager. Here is the complete text of the letter from 3AC that let them borrow a quarter of Voyager’s assets:

AUM Letter PRIVATE & CONFIDENTIAL

Three Arrows Capital Ltd. (the “Company”)

1-January-2022

To Whom It May Concern,

We confirm the following for Three Arrows Capital Ltd as at 1-January-2022 in millions of USD.

NAV 3,729
On behalf of Three Arrows Capital Ltd.

[signed]

Kyle Davies

Director

Voyager sought out a relationship with 3AC in particular because of “the prestige that 3AC had at the time in the industry.” So 3AC could set its terms. It only wanted to borrow without providing collateral, and, incredibly, it refused to provide audited financial statements.

Psarapoulos figured 3AC was safe because Genesis had lent to 3AC and Voyager thought Genesis’ diligence process was robust. Ehrlich said refusing to provide financials was “not uncommon for hedge funds.”

Voyager’s first loan to 3AC was on March 8, 2022. Two months later, Terra-Luna collapsed.

Tim Lo from 3AC told Voyager in May that 3AC had lost only $100 million in the Terra-Luna collapse. But on June 14, 2022, Lo told Psarapoulos that 3AC directors Zhu Su and Kyle Davies had disappeared, and things were “in bad shape.”

Voyager recalled all its loans. 3AC returned no assets. On June 24, 2022, Voyager issued a notice of default. 3AC entered liquidation on June 27. Voyager filed for Chapter 11 on July 6.

In other Voyager bankruptcy news, Judge Michael Wiles said the SEC had asked him to “stop everybody in their tracks” with its claims that Voyager’s internal VGX token may have been a security. The SEC needs to explain its claim and how to address its concerns. [Reuters]

The Department of Justice, the FTC, New Jersey, and Texas object to wording in Voyager’s latest proposed confirmation order that might purport to restrict government action against Voyager. [Doc 1134, PDF; Doc 1135, PDF; Doc 1136, PDF]

Celsius Network

NovaWulf put in a bid to start a new Celsius company with actual lines of business and issue shares to Celsius creditors. This is now the official Stalking Horse bid. NovaWulf hopes to get the new company up and running by June 2023. We think the plan is a hope-fueled bet on crypto bubbling again, but it’s this or liquidation. [Doc 2150, PDF; Doc 2151, PDF]

Celsius, the UCC, and the Custody ad-hoc group want the court to let them put to creditors a settlement that would get Custody holders “72.5% of their eligible Custody Assets on the effective date of the Debtors’ Plan.” [Doc 2148, PDF]

A 60-day stay, with further discovery, has been agreed upon in the KeyFi v. Celsius suit and countersuit. [Stay order, PDF]

Celsius is moving to compensate cooperating witnesses for their time and effort — both their past help to the examiner and further help Celsius may need going forward — in the cause of recovering money for creditors. [Doc 2147, PDF]

Posted on by Amy Castor 0

Crypto collapse: FTX family subpoenas, SBF witness tampering, Celsius bids revealed, more crypto banking woes

  • By Amy Castor and David Gerard

FTX: It’s a family affair

FTX’s lawyers have questions. Specifically, they have questions for Sam Bankman-Fried’s brother Gabriel and his parents, Joseph Bankman and Barbara Fried.

Joseph advised FTX. He recruited its first lawyers and joined FTX staff in meetings on Capitol Hill. When visiting the FTX offices in the Bahamas, he and Barbara stayed in a $16.4 million house with its title in their names. Barbara founded a political action committee called Mind the Gap, which received donations from FTX.

Gabriel launched Guarding Against Pandemics, an organization funded by Sam. Gabriel purchased a multimillion-dollar property in Washington D.C., which John Jay Ray III’s current FTX team believe was purchased using FTX customer funds.

Every member of Sam’s family had some involvement in FTX — and they aren’t responding to requests for documents. So Ray’s team and the Unsecured Creditors’ Committee (UCC) want to subpoena Joseph, Barbara and Gabriel under rule 2004. [Doc 579, PDF; Bloomberg]

We’ve detailed rule 2004 previously. Federal Rule of Bankruptcy 2004 allows tremendously broad discovery and deposition. A witness is not always entitled to attorney representation or cross-examination and has only a limited right to object to questions. 2004 exams are sometimes referred to as “fishing expeditions” — because they need to be.

Included in the same 2004 motion, Ray is also asking the court’s permission to subpoena Sam and several other FTX insiders, including FTX cofounders Gary Wang and Nishad Singh, former Alameda CEO Caroline Ellison, and former FTX COO Constance Wang. Along with SBF’s family, they have not been very responsive:

“Mr. Wang and Ms. Ellison expressly declined to provide the requested information, and Ms. Fried has ignored the Requests altogether. The Debtors have not received meaningful engagement or any response from Mr. Singh or Mr. Gabriel Bankman-Fried.”

Ray’s team are investigating the FTX hack on November 11-12, which saw $300 million in crypto siphoned off the exchange while crypto Twitter watched in horror. They’ve requested an order pursuant to Rule 2004 here too — under seal, because the information in the motion could “reveal or lead to evidence that will reveal the identity and activities of the perpetrator(s).” It sounds like they already have a very good idea who was behind the hack. [Doc 581, PDF]  

A mostly-unredacted list of FTX creditors is now available. It includes investment banks, such as Goldman Sachs and JPMorgan; media companies, such as the New York Times and Wall Street Journal; commercial airliners, including American, United, Southwest, and Spirit; as well as several large tech players, including Netflix, Apple, and Meta. Individual customers’ names remain withheld. [Doc 574, PDF] 

FTX objects to the US Trustee’s request to appoint an independent examiner. They argue an examiner would duplicate work that’s already underway by FTX, the UCC, law enforcement, and regulators. “Indeed, if history is a guide, the cost could near or exceed $100 million.” They point out that “it is difficult to imagine an examiner candidate whose qualifications exceed those of Mr. Ray.” Which is a good point. The UCC concurs. [Doc 573, PDF; Doc 571, PDF]

What’s a little witness tampering between friends?

SBF is playing fast and loose with potential witnesses in his criminal trial. He contacted “Witness-1,” the “current General Counsel of FTX US” (Ryne Miller) to work out a story with. We doubt Miller would want anything to do with such a scheme. But this was enough for the government to ask Judge Lewis Kaplan to modify Sam’s bail: [DOJ letter to judge, PDF]

“Specifically, the Government respectfully requests that the Court impose the following conditions: (1) the defendant shall not contact or communicate with current or former employees of FTX or Alameda (other than immediate family members) except in the presence of counsel, unless the Government or Court exempts an individual from this no-contact rule; and (2) the defendant shall not use any encrypted or ephemeral call or messaging application, including but not limited to Signal.”

SBF’s lawyers responded by pounding the table. Judge Kaplan has told both sides to chill. The government should get its reply in, with substantiation of its claims, by February 2. [letter, PDF; order, PDF]

Dirty Bubble has found another link between FTX and the fraud-riddled binary options industry. In September 2021, FTX purchased the ZUBR derivatives exchange for $11 million. The exchange was registered in Gibraltar. By the time Gibraltar rescinded ZUBR’s license, the exchange had no active customers. The exchange was a collaboration between Belarusian binary options and crypto “billionaire” Viktor Prokopenya and his former business partner Said Gutseriev, the son of one of Russia’s wealthiest oligarchs. [Dirty Bubble]  

(Update, March 15, 2023: Viktor Prokopenya tells us he “never had any commercial interest or other involvement in ZUBR.” Dirty Bubble has updated his story to note that FTX purchased ZUBR directly from Prokopenya’s business partner Said Gutseriev. Dirty also notes interesting connections between ZUBR and Prokopenya’s other entities in his story.) 

Would it surprise you to learn that FTX made political donations to George Santos? [SFGate]

Celsius Network: Let’s make more magic beans!

Celsius has rejected the Binance US bid for Celsius assets, and four other bids. In the January 23 hearing, Ross Kwasteniet of Kirkland & Ellis, speaking for Celsius, said the bids “have not been compelling.”

Instead, Celsius have concocted a plan to reorganize into a publicly traded company and issue a new “Asset Share Token” to creditors. Those following the Celsius disaster will recognise this as Alex Mashinsky’s very dumb and bad Kelvin Plan from September 2022.

Creditors weren’t told about the other bids. As it happened, Tiffany Fong — Celsius creditor and YouTuber — got all the bids in a leak in December. Bidders included Binance US, Bank To The Future (Simon Dixon), Galaxy Digital, Cumberland DRW, and NovaWulf. Fong posted full text of the leaked bids. [Substack; Youtube] 

  • Binance US: buy just the crypto, assume liabilities (with a haircut); excludes FTT, CEL, and other illiquid trash tokens. Pay $15 million cash.
  • Bank to the Future: crypto returned to customers pro rata. Other Celsius assets to special-purpose vehicles, customers get an ownership share. Cash to be raised through rights offering to creditors.
  • Galaxy Digital: Acquire illiquid assets and staked ETH. Pay $66.8 million cash.
  • Cumberland DRW: Purchase certain tokens and portfolio of alternative investments, excluding CEL. $1.8 billion total payment, includes various haircuts.
  • NovaWulf: Transfer substantially all assets and businesses to SEC-compliant NewCo, 100% owned by the creditors. Issue revenue share tokens. NovaWulf to pay $60-120 million, mostly in tokens. This is also a version of the Kelvin plan.

Many ad hoc creditors were disappointed that the Binance bid was rejected — but it shouldn’t be surprising, given the issues that Binance is already having with its bid for Voyager.

Frankly, we don’t think the other bids look all that great either — they’re fanciful coiner dreams that first assume the crypto market is healthy, which it isn’t.

We think Celsius should have just liquidated in July rather than taking several months and handing millions of dollars to bankruptcy professionals to get to the same place.

Banks

Silvergate is short on cash, so it’s suspended dividend payments on its preferred stock. [Business Wire] 

The stock in question (NYSE:SI) is going down the toilet. It’s crashed from $220 in November 2021 to below $14 in January 2023. Signature Bank (NASDAQ: SBNY) has gone from $365 to $127 over the past year.

Moonstone Bank says that “recent events” — FTX tried to use them as a financial laundromat — and “the changing regulatory environment around crypto businesses” — the regulators are on the warpath — have prompted it to ditch the “innovation-driven business model” it adopted in recent years. [WSJ, paywall] 

Federal bank regulators are not keen on dodgy crypto banks authorized by captured Wyoming state regulators. Custodia Bank can’t get a Fed account: [Federal Reserve]

“The Board has concluded that the firm’s application as submitted is inconsistent with the required factors under the law. Custodia is a special purpose depository institution, chartered by the state of Wyoming, which does not have federal deposit insurance. The firm proposed to engage in novel and untested crypto activities that include issuing a crypto asset on open, public and/or decentralized networks.”

Crypto.com’s old gateway for GBP and EUR was Transactive Systems of Lithuania. Transactive has been cut off by the Bank of Lithuania, after it found “significant violations and shortcomings of the Law on the Prevention of Money Laundering and Terrorist Financing.” Transactive had apparently been giving accounts to a long list of low-quality institutions in low-quality jurisdictions. Transactive can no longer serve financial institutions, forex, or crypto clients. They also got cut off from the UK Faster Payments system. Your EUR and GBP sent to Crypto.com via Transactive are probably now stuck. [Twitter; Offshore CorpTalk; Bank of Lithuania, in Lithuanian]  

Before Crypto.com got kicked off Silvergate, it used to get US dollar deposits via an oddly roundabout method: customers would send USD to Circle’s account at Silvergate, and Circle would mint that much USDC and send the USDC to Crypto.com. It is possible this was not in full compliance with KYC and AML regulations. [Twitter; crypto.com, archive]

Other happy little accidents

London-based crypto exchange Luno, a subsidiary of DCG, is laying off 35% of its staff. About 330 employees will be let go from the firm, which has offices in Africa, Asia, and Europe. [WSJ, paywall; archive] 

DeFi volumes are right down. The amount of money (or “money”) involved has been flat for months, and — most importantly — you can’t get the ridiculous yields you could in the bubble. Oh no! Anyway. [Bloomberg]

Happy Penis Day, to those who celebrate

It was five years ago today, January 28, 2018, that the Prodeum initial coin offering took everyone’s money and disappeared, leaving behind only a new jargon term for “exit scam” or “rugpull.” You get a penis! And you get a penis! And you get a penis! Everybody gets a penis! [The Next Web, 2018]

Image: Sam Bankman-Sopranino and family.

Posted on by Amy Castor 2