The latest from David and me! In this edition:
David and I are both incredibly busy in our non-crypto lives, but we’re getting these out weekly at least! Also, they keep ending up huge …
“All financial complexity is a footnote to ‘don’t hand all your money to some random guy promising high returns.’”
— Matt Levine on Celsius Network
Crypto bitterly resents any possible regulation. It’s an industry of proud scofflaws. This presents some difficulties to regulators, who are used to financial firms that listen to them.
Coinbase keeps demanding “regulatory clarity.” What this means is that they want special permission to do things that are presently just illegal.
FTX blew up spectacularly in November, and its CEO and top execs were indicted for fraud. In the wake of FTX’s collapse, the SEC has the political backing it needs to get much more serious about making crypto exchanges comply with rules that have always been there.
In the meantime, the SEC’s lack of jackbooted statist enforcement over the last decade has allowed Coinbase to grow larger and larger — which means that Coinbase has bigger guns to challenge the regulator with.
In July 2022, Coinbase petitioned the SEC to make a clear framework for crypto asset trading. Coinbase handwaved that putting unregistered securities on a blockchain was “a paradigm shift from existing market practices, rendering many of the Commission rules that govern the offer, sale, trading, custody, and clearing of traditional assets both incomplete and unsuitable for securities in this market.” [Petition, 2022, PDF]
The SEC didn’t respond — because this claim is just stupid — and in the time since have stated repeatedly that they think the Howey test of what is a security in the US is just fine.
In March, the SEC sent Coinbase a Wells notice saying that they were going to file an enforcement action. Coinbase promptly filed a petition for a writ of mandamus to try to force the SEC to respond to their July 2022 letter. [CNBC; Writ of Mandamus, PDF]
The petition pounds on the table and cites an extensive range of blog posts as legal authorities. The introduction sets the tone:
“Contrary to the prior actions and statements of the Commission and its officials, the SEC Chair now claims that it is ‘clear’ the securities laws already apply to digital assets and platforms.”
Never mind the DAO Report from 2017, let alone the past century of judicial precedent that securities laws apply to what you do, not what you call the assets you are trading. A security is a security is a security.
And the SEC has been very clear — it’s saying that most crypto tokens are securities. There are rules for trading in those securities, and Coinbase needs to comply — or stop trading in them.
As Gary Gensler’s latest dad joke video puts it: “Many crypto platforms are just pretending that these investment contracts that they offer are more like goldfish … It’s not a lack of regulatory clarity.” [Twitter, video]
Coinbase has also put up its response to the SEC’s Wells notice. [Response, PDF]
The exchange claims that the SEC approving the company’s S-1 filing to go public surely constitutes approval of all its possible business lines — a claim that crypto pumpers have been promoting heavily. This theory is, in legal jargon, on crack.
Coinbase also confidently asserts that none of what’s listed on the exchange is a security. None of it! Coinbase’s theory is that a given asset is a security only if and when it’s determined in court to be one — despite extensive legal precedent that something can be a security before it’s registered or has come to the SEC’s attention.
It’s just not possible to run a digital assets exchange trading in securities that follow SEC rules, Coinbase pleads. Apparently, this is a problem for the SEC, not for the violators.
Coinbase has threatened the SEC with a scorched earth legal battle: “if the Commission pursues this matter, it will face a well-resourced adversary that will necessarily be motivated to exhaust all avenues” — much as Ripple has been. We think this is unlikely to get the SEC to back down.
So confident is Coinbase in its legal position in the Wells notice that it’s making videos to reassure its user base that all is well. This just makes Coinbase look desperate and clownish — winners don’t make promotional videos for their legal filings. [YouTube]
Why is Coinbase so insistent on trading unregistered securities? Because Coinbase’s business is in deep trouble. Trading volume on the exchange is through the floor — it’s dropped to $26.8 billion so far in April. March was $49 billion in total. This is the lowest volume on the exchange since the crypto crash. [FT]
Binance US pulled out of its $1 billion purchase of Voyager Digital. On Tuesday, April 25, Binance sent Voyager a letter canceling the sale. [Twitter; Doc 1345, PDF]
Voyager will now proceed to liquidation — as it probably should have when it first declared bankruptcy in July 2022 — and give the creditors whatever’s left.
Voyager’s lawyers said in a Wednesday hearing that they were surprised by the letter — Binance was still talking with them about the deal up to the previous Friday. Likely recoveries for Voyager creditors are in the range of 40% to 65%. [CoinDesk]
Imagine how much creditors’ money Voyager could have saved on expensive bankruptcy professionals if they’d just gone straight for liquidation nine months ago. Recoveries would have been on the order of 70%.
Terraform Labs has answered the SEC’s February suit, which claims that the collapsed UST stablecoin and its free-floating twin LUNA were offered as securities. The SEC’s case asserts that UST was part of Terraform’s Anchor Protocol investment scheme because you had to first buy UST to get into Anchor.
Terraform wants the suit dismissed on the grounds that digital assets can’t be securities — good luck with that one, guys! — and even if they can, UST was a stablecoin, and therefore can’t be a security. Terraform’s motion appears to be written in crayon. [Notice of motion, PDF; Memorandum, PDF]
Crypto VC firm Paradigm submitted an amicus brief in support of Terraform’s very stupid theory. Paradigm argues that SEC’s premise for treating stablecoins as securities would “radically and impermissibly” expand the definition of a security. [Amicus, PDF; Docket]
Terraform Labs co-founder Daniel Shin was finally indicted in South Korea along with nine others. Shin is facing charges that include violating capital markets laws. Do Kwon, the other co-founder of Terra, was arrested in Montenegro last month. [YNA; Bloomberg]
The legal net around Binance tightens. Last month the CFTC filed a civil suit against them. A long-running criminal investigation is being led by the Justice Department’s Money Laundering and Asset Recovery Section and prosecutors in the US attorney’s office in Seattle. The SEC is conducting a parallel investigation.
Binance and CZ have lawyered up and are in discussion with regulators and the Justice Department: [NYT, archive]
“In February, Patrick Hillmann, its chief strategy officer, revealed the exchange was in talks with regulators about a settlement to resolve the various legal investigations with a fine or some other penalty. He said the company was ‘highly confident and feeling really good’ about the discussions. A month later, the C.F.T.C. filed its lawsuit.”
David Silver thinks Binance is screwed: “The truth will come out,” he said. “And Binance will be held culpable.”
Binance has resumed its support for Russian-issued credit and debit cards after Russian cards were cut off for the past year. Payments go via Qiwi. The withdrawal limit is 200,000 RUB (about $2,486). [Meduza]
The FBI has searched the Washington, DC, home of former FTX executive Ryan Salame on the morning of Thursday, April 27. It’s not clear what they were looking for. Salame was the first FTX insider to turn on Sam Bankman-Fried. [NYT]
Gemini wants to set up a non-US crypto derivatives exchange. Their first product would be BTC-GUSD perpetual futures, with ETH-GUSD to follow. [Bloomberg; Gemini]
The US Justice Department has charged North Korean bank official Sim Hyon Sop for his role in two crypto laundering conspiracies. “The IT workers gained employment at U.S. crypto companies using fake identities and then laundered their ill-gotten gains.” [Press release; Sop indictment, PDF; Sop et al indictment, PDF]
Digital Currency Group subsidiary Genesis is bankrupt. Creditors have noticed that DCG is substantially cashed-up compared to Genesis and are insisting that DCG put more money toward the bankruptcy estate — particularly given how much control DCG clearly exercised over Genesis. So Genesis has filed for mediation over the amount that DCG will need to contribute to the reorganization. [CoinDesk]
Bloomberg writes about Celsius Network creditors and how they’re feeling. Their money is just gone, and it’s not coming back. Mashinsky et al. stole some of it and set the rest on fire through ineptitude. All the creditors have left is hope. Celsius really should have liquidated rather than declared Chapter 11. [Bloomberg]
David Rosenthal has written a marvelous summary of his decades in the world of blockchains: “Crypto: My Part In Its Downfall.” [blog post]
Image: Coinbase CEO Brian Armstrong. Photo by Steve Jennings (Getty Images for TechCrunch) enhanced for (regulatory) clarity.
Stuff keeps happening. Make it stop happening. In today’s selection: [David Gerard]
Image: Groundskeeper Gensler
“I kept up the bluff, hoping that I might eventually hit upon some workable plan to pay all my creditors in full.”
— Charles Ponzi, The Rise of Mr. Ponzi
Crypto has crashed, and some of our readers are asking us why the price of bitcoin has been holding steady at around $19,000 to $20,000 for the past few months. Why won’t it go down further?
We think the price of bitcoin is a high wire act. If the price drops too low, some leveraged large holders could go bust. So the number needs to be kept pumped above that level. If the price goes up too far, the suckers — not just retail, but the bitcoin miners — may be tempted to cash out at last.
The idea is to pump just enough to keep the price up — but not so much that suckers dump their bitcoins directly into the pump.
If too many bagholders try to sell, what quickly becomes obvious is there are no actual buyers. At least, none with real money.
The party is over. Retail investors have all gone home, so there are no more suckers getting in line to pump the price up anymore. Coinbase’s 10-Q showed a drop in retail dollars.
In addition to a dearth of real dollars, there’s also been a dearth of fresh tethers coming in since June. That dearth lasted until October 25 — when a billion tethers were printed and prices suddenly jumped 10%, just in time to liquidate a pile of short-margin traders on FTX.
Bitcoin miners in North America have been taking on increased debt, so there’s still no real incentive for them to sell their bitcoin. Core Scientific is the exception, as we note below, because they’re running out of cash — not least because they’re stuck with hosting Celsius.
Bitcoin derivatives — assets that derive their value from bitcoin — aren’t doing well either. The ProShares Bitcoin Strategy ETF (BITO) tracks the CME’s bitcoin futures. These are just bets in dollars on the price of bitcoin. Bloomberg Intelligence analyst James Seyffart says: “If you just want exposure to Bitcoin” — i.e., not doing anything so gauche as touching a bitcoin — “BITO is the best option in the ETF landscape, at least in the US.” But in the more than a year that it’s existed, BITO has performed even worse than bitcoin itself. BITO holders have mostly stayed holding, so its holders are just like bitcoin bagholders too. [Bloomberg]
Celsius Network is dead. It’s an ex-parrot. Most of the back-and-forth in the bankruptcy is over the spare change that might be in the corpse’s pockets. Also, the spare change is being nibbled away by lawyers’ fees and operational costs. So the creditors think it’s time to see what they can get by just selling it all for parts.
At the same time, Celsius is saying “I’m not dead yet!” and throwing up plans to come back to life. That’s the difference between a Chapter 7 liquidation and a Chapter 11 reorganization — Celsius has to pretend it has a future.
And also, the US Trustee got an examiner on the case, to see just what happened here — if this bankruptcy was the result of ineptitude … or of Celsius being a scam.
The examiner’s report is a wild card. It could blow up the whole bankruptcy proceeding. We think the Trustee, who is part of the Department of Justice, suspects Celsius is a crime scene.
Judge Martin Glenn has approved the bidding procedure plan for Celsius to sell virtually all of its assets — including its mining business. He is quite concerned that this business is, in bankruptcy jargon, a “melting ice cube,” and wants to make the sale happen for the sake of the creditors. [Memorandum Opinion and Order, PDF]
The initial bid deadline is November 21. Final bids are due on December 12. An auction, if necessary, is scheduled for December 15.
The court directed the Trustee to “promptly” appoint a privacy ombudsman with experience in consumer privacy laws to protect consumer data. The Trustee has appointed Lucy L. Thompson. [Appointment, PDF; Order, PDF]
The Trustee, the examiner, and the consumer privacy ombudsman will be able to listen in on the auction — but they can’t interfere.
Celsius is required to submit any stalking horse approval to the court. A stalking horse is a bid that is arranged in advance to prevent other bidders from making lowball offers.
The final deadline for bids falls after the examiner begins to reveal her findings. An interim report is due on November 18, and an initial report is due on December 10.
The court has yet to decide whether the contents of Celsius Custody and Withhold accounts belong to the individual customers, or to the bankruptcy estate.
The issues are set to be heard on December 7 and 8, and they’ll raise a host of questions about what constitutes ownership in crypto. If someone else controls the keys to your crypto, is that really your crypto? There is no straightforward answer to this.
In a letter filed with the court on October 17, Judge Glenn notes: “cases involving cryptocurrency may raise legal issues for which there are no controlling legal precedents in this Circuit or elsewhere in the United States or in other countries in which cases arise.”
So, he’ll be using the Law Commission of England and Wales’ lengthy and detailed “Digital Assets Consultation Paper” as his framework in this case. [Doc 1073, PDF; Consulting Paper]
We think he’ll be particularly interested in Chapter 16 of the paper, which specifically talks about custody and what happens in an insolvency.
This is surprisingly big news for US crypto in general — it will introduce a whole swathe of legal thinking that’s entirely new for US crypto regulation and jurisprudence. This may turn out to be a lasting consequence of the Celsius bankruptcy.
Who owns cryptos in custody is already fraught. A few months ago, it turned out that cryptos held in Coinbase Custody are not the customer’s cryptos, being held by Coinbase — instead, they’re assets of Coinbase that are liabilities Coinbase has to the customer, just like cryptos on deposit on the Coinbase trading platform. This is precisely not what Coinbase was selling Custody to its customers as! But that’s how SEC regulations said to account for it.
Judge Glenn has denied the motion for an official equity committee, which would have allowed Celsius investors to bill their professional fees to the bankruptcy estate. We discussed this motion last time.
It’s actually not uncommon for equity security holders to request the appointment of official equity committees to represent their interests in bankruptcy cases — and to get a formal seat at the negotiations table.
But in this case, Judge Glenn wasn’t convinced. He thinks the equity investors already have adequate representation in the form of existing stakeholders, particularly the board of directors, who literally represent the owners of the company. The court also feels there is little chance investors will recoup any of their $400 million — it’s normal in bankruptcy for equity holders to get zero — and the costs involved are unlikely to benefit the estate. [Doc 1166, PDF]
The equity investors also want Celsius to list liabilities and assets in dollars, not crypto — which is quite normal even for volatile and illiquid assets like crypto. [Doc 1183, PDF]
The purpose of filing Chapter 11 is to wipe out debt and start anew. But a party can object to the discharge of a particular debt — or the entire bankruptcy case — by filing an adversary proceeding, as we detailed last time.
In Chapter 11, the deadline to file objections to dischargeability is 60 days after the first creditors’ meeting. Celsius has agreed with state regulators to extend the states’ deadline by six months, to April 18, so the states can finish their investigations. And they’ve agreed on the same with the Federal Trade Commission. [Doc 1107, PDF; Order, PDF]
The Securities and Exchange Commission wants to extend its deadline to January 17. If Celsius raised money in a way that knowingly violated securities law or other laws — which they totally did, come on — then those debts might not be dischargeable. [Order, PDF]
As we mentioned last time, Core Scientific doesn’t want to keep paying the ever-increasing electricity bills for hosting Celsius’ bitcoin mining. Core Scientific, Celsius, and the Unsecured Creditors’ Committee are asking Judge Glenn to schedule a hearing on the matter on or after November 9. [Scheduling, PDF]
Celsius’ bills are a big problem for Core Scientific, who are already short on cash. Core Scientific dumped $20 million of bitcoin in September, and still only has $27 million in cash on hand — they burned through $25 million in the last month. They are on the verge of filing for bankruptcy themselves: [SEC]
“Furthermore, the Company may seek alternative sources of equity or debt financing, delay capital expenditures or evaluate potential asset sales, and potentially could seek relief under the applicable bankruptcy or insolvency laws. In the event of a bankruptcy proceeding or insolvency, or restructuring of our capital structure, holders of the Company’s common stock could suffer a total loss of their investment.”
Data Finnovation thinks he’s found Tether’s loans to Celsius, which are a major point of contention in the Celsius bankruptcy. “We found the Tether-Celsius loans, Tether’s equity investment into Celsius, and can therefore prove a lot about both defects in the Celsius business model and questionable conduct by Tether.” [Data Finnovation]
There’s failing upward, and then there’s whatever this is: ex-Celsius exec Aaron Lovine joins JPMorgan as the new executive director of crypto regulatory policy! [Reuters]
The next Celsius omnibus hearing is November 1. The November 30 omnibus hearing has been rescheduled for December 5. [Doc 1169, PDF]
Voyager is trying to sell itself off to FTX US. The deal is still tentative. Texas is concerned that FTX is offering unregistered securities to US retail customers. New York is sniffing around Voyager as well.
Voyager’s sale to FTX is part of Voyager’s broader bankruptcy plan, which creditors need to vote on next month. If they vote yes, the court still has to confirm the plan. A hearing for plan confirmation is set for December 8. In the meantime, Judge Micheal Wiles wants Voyager to stay open to better offers.
The sale to FTX is valued at about $1.4 billion, of which $51 million is in cash. As part of the sale, FTX US would move customers onto its platform and return them 72% of their claims. [Second Amended Plan, PDF; Bloomberg; Bloomberg Law, archive]
Only creditors who transition to FTX US will receive crypto — customers who don’t go to FTX US will receive cash from the bankruptcy estate. FTX US doesn’t support Voyager’s VGX token, but it has offered to purchase all VGX for $10 million.
Voyager is pushing the FTX sale plan hard. Creditors have until November 29 to cast their votes. [Voyager, archive]
We mentioned on October 16 that Texas objected to the Voyager sale because the state was going after FTX, and then the rest of the crypto media covered the story the day after we posted it. The Texas Tribune spoke to Joe Rotunda, Director of the TSSA Enforcement Division, who discovered that FTX would let him trade securities from his Austin office. [Texas Tribune]
In its response to objections, Voyager holds that the sale to FTX is within its business judgment. For Texas’ objections regarding FTX, they’re adding a note that nothing should be construed as restraining state regulators. [Doc 558, PDF, Doc 559, PDF]
The New York Department of Financial Services has applied for an order lifting the automatic bankruptcy stay on an action against Voyager to “permit DFS to proceed with an investigation into whether the Debtors, or any one of them, have engaged in fraudulent activity and/or violated applicable law with respect to unlicensed cryptocurrency business activities within New York.”
There’s a provision in section 362 of the Bankruptcy Code for “police action” to proceed during a stay. Payment of a fine might be delayed — but that shouldn’t stop an investigation. The DFS outlines why it thinks it could just proceed anyway — but it’s asking nicely. There’s a hearing on November 15. [Doc 573, PDF]
Kadhim Shubber from the Financial Times spotted a hilarious detail in a disclosure statement that Voyager filed on October 17 — on precisely how Three Arrows Capital screwed them over. [Doc 540, PDF, p47 on; Twitter]
Terraform Labs’ UST and luna tokens collapsed in mid-May. This sent 3AC bust, immediately — they were up to their necks in Terraform’s Anchor protocol and had a ton of UST.
Voyager asked their debtors if they had been affected by the UST-luna crash. Voyager’s contact at 3AC assured them everything was fine.
Later that month, 3AC reached out to Voyager asking to borrow even more from them — when 3AC was already 25% of Voyager’s loan book. Voyager said no.
Celsius froze withdrawals on June 12. Voyager again reached out to its debtors, asking how things were. Their 3AC contact assured Voyager on June 13 that 3AC was not exposed to Celsius.
Voyager put out a press release on June 14 assuring everyone that everything was fine. [Press release, archive]
Upon seeing the press release, Voyager’s 3AC contact called them straight away and told them that the founders of 3AC had gone silent and weren’t answering queries from their own employees. Their contact suggested that Voyager should recall all of its loans to 3AC immediately. This was the point at which Voyager knew that it, too, was bust.
We now know, of course, that 3AC’s founders had skipped Singapore sometime in late May — as soon as they realized there was no way to come back from the UST-luna collapse. They just locked the office doors and vanished. We even have a photo of the mail piling up on the office floor.
(You can tell it’s a rug pull from the lack of a carpet.)
Teneo is the court-appointed receiver in 3AC’s bankruptcy. Teneo wants US Judge Martin Glenn — yes, the same one overseeing Celsius — to let them subpoena 3AC founders Zhu and Davies via Twitter and email.
Teneo previously requested that Advocatus Law, the Singapore law firm representing the founders, accept the service of papers. Advocatus resisted. [Doc 54; Doc 55; The Block]
The CFTC and SEC are looking into the collapse of 3AC, according to “people familiar with the matter.” The question is whether 3AC broke any laws by misleading investors about the strength of its balance sheet and not registering with the agencies. [Bloomberg]
Laura Shin’s podcast with Terraform Labs founder Do Kwon is now up! David Z. Morris at CoinDesk dissects it, straight-up calling Kwon a sociopath. [Unchained; CoinDesk]
The latest crypto crash update is up!
David Gerard and I discuss:
The full update is on David’s blog this time. Head on over there and read it! [David Gerard]
Image: They look smug here, yes?
David Gerard and I just published our latest news roundup and analysis on the ongoing crypto crash.
In this update, we cover:
Head over to David’s blog to read the full post! [David Gerard]
Image: GPU crypto miners in Vietnam appear to be jet washing their old mining gear before putting the components up for sale.
Amy Castor 
