Tag: Su Zhu

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

Crypto collapse: Bittrex files chapter 11, Binance loses market makers, FTX gets a tax bill, bitcoin gets apes 

  • By Amy Castor and David Gerard

Bittrex takes a dive

Bittrex’s US entity, Desolation Holdings LLC, and Bittrex Malta filed for Chapter 11 bankruptcy in Delaware on May 8. The move came just weeks after Bittrex shut down its US operations, which was soon after they were sued by the SEC for trading securities without registering as a securities exchange. [Bloomberg; Bittrex; case docket] 

The bankruptcy is apparently the fault of the SEC. The first-day declaration cites several SEC actions against other firms — and harps on about a “lack of regulatory clarity.” [Doc 9, PDF; first day declaration, PDF]

Bittrex says the bankruptcy will totally not impact its non-US operations, and funds are safe! Surely Bittrex didn’t do any commingling of company and customer funds like every other crypto exchange in trouble keeps turning out to have done.

The debts are largely fines levied against Bittrex by US government agencies — who are the only named creditors. OFAC is the largest creditor, owed $24.2 million. FinCEN is also a top 50 creditor with a $3.5 million claim. The SEC is listed with an undetermined amount of claims. [Doc 1, PDF]

Bittrex wishes to avail itself of a debtor-in-possession loan of 700 BTC so as to wind down Desolation and Bittrex Malta in an orderly manner and return customers’ funds. The loan will be from themselves — Aquila Holdings Inc, Bittrex’s parent entity, which is not in bankruptcy. [Liquidation plan, PDF]

The precedence of creditors (who gets paid back first) would be: themselves, then the customers, then the US government. That’s novel.

Michel de Cryptadamus notes several other interesting wrinkles. Bittrex’s US gross (not net) revenue for 2022 was $17 million, against the $30 million in government fines. “Several states alleged that BUS was undercapitalized and demanded that BUS immediately surrender its money transmitter licenses in those states.” Bittrex’s complicated corporate structure is reminiscent of FTX. And Bittrex may also be trying to protect the salaries of Bittrex executives from being seized by the SEC. [Twitter, archive]

Michel thinks the whole filing is a massive troll. We concur. The idea seems to be for Bittrex to set up a sacrificial entity to pay back their customers but stiff the US government. We are unconvinced that the government agencies will be inclined to let this one slide.

Good news for Binance

Market makers are leaving Binance US. Jane Street Group in New York and Jump Trading in Chicago — two of the world’s top commodities market makers — are pulling back from crypto in the US as regulators crack down on the industry. Their business in normal commodities is much larger, and they could do without the regulatory heat. [Bloomberg]

The Department of Justice is investigating Binance for possible violations of US sanctions against Russia. There’s already plenty of evidence that Binance has committed sanctions violations. Binance was the final destination for millions in funds from Bitzlato, an exchange shut down for money laundering. Now Dirty Bubble writes that Binance partner Advcash may be facilitating transfers from Russian banks. [Dirty Bubble]

Binance is withdrawing from Canada, owing to a surfeit of regulatory clarity. [Twitter, archive; Reuters]

Bitcoin has been trading at a premium of up to $650 on Binance US. A premium like this is usually an indication that people can’t get their dollars out of the exchange, so they buy bitcoins and move those to another exchange to cash out. [CoinDesk] 

We also saw bitcoin trading at a premium on Mt. Gox just before that exchange collapsed in 2014, and the same with QuadrigaCX, which imploded in 2019. Naïve traders who don’t understand what’s happening will often move their BTC to the dying exchange, thinking it’s an arbitrage opportunity.

Trading at a premium is not a good sign, but a worse sign is when people complain they can’t get their crypto off an exchange. Binance US has long had a reputation for demanding arbitrary new KYC documentation when users try to withdraw.

Monkey laundering comes to bitcoin

Binance paused withdrawals twice on Sunday, May 7. The first time was due to a “congestion issue.” Later in the day, Binance paused withdrawals again due to a “large volume of pending transactions.” [Twitter, archive; Twitter, archive]

For once, Binance might have been on the level. On May 7, the bitcoin mempool was clogged with 400,000 transactions waiting to be processed, and transaction fees surged.  

In bitcoin, the mempool, or memory pool, is where pending transactions pile up before a miner selects the most profitable ones and puts them together as a proposed block. If your transaction stays in the mempool too long, it gets dropped.

The best way to break a blockchain is to try to use it for something. In this case, some idiot worked out how to do NFTs on bitcoin.

“Ordinals” are a new way to create NFTs on bitcoin by linking a JPEG, video, or another image type to a satoshi, the smallest denomination of a bitcoin. Ordinals came out in January, and bitcoin has been filled with monkey pictures since. Bitcoin maxis condemn ordinals as a conspiracy to destroy bitcoin by using the network for a purpose. [Decrypt]

Child genius, adult moron

Sam Bankman-Fried’s defense team is trying to strike 10 of the 13 criminal charges against their client. They argue that the Bahamas did not agree to several of the charges — including one claim that Sam hid millions of dollars in political donations — while other claims didn’t meet the legal requirements of the underlying criminal statutes. [Docket, see filings 137-147]

The facts against SBF are solid. There’s no reason to doubt that Sam did everything the US claims. So the defense seems to be going for unreasonable doubt and hoping they have a dumb enough jury member or two.

Former federal prosecutor Sean Shecter of Lewis Brisbois says SBF’s lawyers want to preserve an appeal, so they have to try everything they can think of, “even if it involves throwing spaghetti against the wall.” He thinks the defense is likely hoping that the government gives up “nuggets of information” in response to the motions. [Law360, paywall]

Prosecutors have until May 29 to respond. Judge Lewis Kaplan will hear oral arguments on June 15. 

The IRS has hit the FTX companies with a $44 billion tax bill, with the largest chunk being $20.4 billion for Alameda. It looks like the IRS reclassified all FTX employees from contractors to employees and charged for unpaid employment taxes. [Docket, see filings April 27, 28; IRS Alameda claim, PDF; CoinDesk]

The IRS has not released its calculations in detail, but we’d assume the bill is inflated by fraud (fictitious profits), penalties, and interest. John Jay Ray is sure to fight this. But even if Ray gets that amount substantially reduced, this is still sure to be a huge hit for FTX creditors.

The IRS claims are treated as unsecured — but they will receive priority status as ordinary and necessary business expenses of the bankruptcy estate. So the IRS will come before ordinary unsecured creditors.

The searing light of regulatory clarity

Ishan Wahi will spend two years in prison for insider trading as a former product manager at Coinbase. He previously admitted to passing on confidential information from Coinbase to his brother and friend, who profited from the tips. [WSJ, paywall; DOJ press release]

In Estonia, nearly 400 VASPs (“virtual asset service providers,” the FATF term for companies dealing in crypto) have shut down or had their licenses revoked after the government’s recently enhanced terrorist financing prevention and anti-money laundering laws came into effect in March. [Protos; Estonia Financial Intelligence Unit] 

Bakkt has delisted a bunch of tokens from the institutional crypto business they bought from Apex Crypto, including several that the SEC has indicated it considers securities. “Our review process ensures those interests are best served when we contemplate the most up-to-date regulatory guidance.” [CoinDesk]

John Reed Stark thinks an SEC action against Coinbase is imminent. He explains the regulations and how they work in detail and why Coinbase doesn’t stand a chance.

Stark notes also that Coinbase’s “regulatory estoppel” claim — that the SEC approving their S-1 public offering means the SEC must have approved the exchange dealing in securities — is directly contradicted by the mandatory “no approval clause” in the S-1: “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.” Whoops. [LinkedIn]  

Unvaxxed bitcoin is the new bitcoin

QuadrigaCX bankruptcy claimants will get 13% on the dollar. They will be paid out the dollar value of their crypto at the time Quadriga filed for bankruptcy — April 15, 2019, when bitcoin was in the toilet.

It’s amazing that creditors will even get back that much. Most of the Quadriga money was gambled away by cofounder Gerald Cotten and filched by shady payment processors. We’re surprised no criminal charges were filed — but then, most of the money was stolen by a guy who is supposedly dead. [EY notice, PDF; CoinDesk]

Arthur Hayes of BitMEX has been tweeting at Three Arrows Capital co-founders Su Zhu and Kyle Davies because 3AC owes him $6 million following its collapse in June 2022. Rather than returning Hayes’ money, 3AC cofounder Su Zhu has filed a Singapore restraining order to prohibit Hayes from using “threatening, abusive or insulting words” and “making any threatening, abusive or insulting communication, that would cause the Applicant harassment, alarm or distress.” [Twitter, archive; Twitter, archive; CoinDesk]

BlockFi users discover that BlockFi owned their coins. Bankruptcy Judge Michael Kaplan ruled that BlockFi users who had money in BlockFi’s interest-bearing accounts gave up ownership of their bitcoins — all they owned was a liability from BlockFi — and all of the $300 million in crypto deposits is now the property of the bankruptcy estate, as is normal. [Bloomberg]   

P2P exchange Paxful has resumed operations after it shut down last month amidst a messy dispute between cofounders Ray Youssef and Artur Schaback. The entire operation has been comedy gold. Youssef and Schaback say the exchange is now owned by a custodian — who they never actually name — and the custodian, Schabeck, and Youseff all serve as directors. [Paxful, archive; CoinDesk]

In the crypto bubble, Miami crypto companies boomed with the enthusiastic support of Mayor Francis Suarez. Now there’s empty real estate and lawsuits. “Most of crypto was a pyramid scheme,” said local businessman Ryan Kirkley. Suarez is now trying to lure tech startups into Miami instead. [WSJ, paywalled]  

Robert F. Kennedy Jr., who is running for US President on the gibbering insane Twitter blue check conspiracy theorist ticket, will be making the first appearance of his campaign giving the keynote at Bitcoin 2023 in Miami later this month. So, on brand then. [Twitter; NBC]

A propaganda movie is in the works for bitcoin mining — because consuming a country’s worth of electricity is actually good news for bitcoin. Based on the trailer, the film is amazing, but not in a good way. [Dirty Coin the Movie]

Media stardom  

Amy spoke to Bloomberg about the growing ranks of crypto skeptics after the crypto collapse: “There were a handful of us before, screaming into the abyss. Now there’s a lot more.” We’ll just be over here, quietly being right. [Bloomberg]

Posted on by Amy Castor 0