Our latest roundup of everything that’s falling over is on David’s site. [David Gerard]
In this edition:
“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.
“Of all the offspring of Time, Error is the most ancient, and is so old and familiar an acquaintance, that Truth, when discovered, comes upon most of us like an intruder, and meets the intruder’s welcome.”
~ Charles Mackay, Extraordinary Popular Delusions and the Madness of Crowds
Celsius Network seems to be admitting the company’s dead and it’s not coming back. The debtor companies filed a motion on September 29 to sell off whatever assets remain.
The leading contender is, wait for it, Sam Bankman-Fried of FTX, who was previously noted to be sniffing around the gaping balance sheet hole called Celsius. [Bloomberg]
Here’s the filing to sell off everything, with its marvelous title in full: Debtors’ Motion Seeking Entry of an Order (I) Approving the Bidding Procedures in Connection with the Sale of Substantially All of the Debtors’ Assets, (II) Scheduling Certain Dates with Respect Thereto, (III) Approving the Form and Manner of Notice Thereof, (IV) Approving Contract Assumption and Assignment Procedures, and (V) Granting Related Relief. [Motion, PDF]
The filing asks to start a bidding process, in a conventional manner, for any remaining spare change to be found in the stiff’s pockets. Celsius would like bids to be put in by November 15, with a hearing to approve the winner around November 28. Celsius hopes to sell any remaining assets by December 20. The auction would be advertised in the New York Times and CoinDesk.
This isn’t actually a bad idea. We’ve said repeatedly that taking Celsius out of everyone’s misery is the right move. Celsius is an ex-parrot. It is bereft of life. There’s no viable business here. In any ordinary bankruptcy, selling off whatever’s left would be the correct thing to do at this point.
But this isn’t an ordinary bankruptcy. Vermont’s filing sets out the issues. There have been shenanigans here, and Vermont doesn’t want those put aside before the examiner can report: [Objection, PDF]
“As of the Petition Date, at least 40 state securities regulators were engaged in a multistate investigation arising from, inter alia, concerns about potential unregistered securities activity, mismanagement, securities fraud, and market manipulation by Celsius and its principals. At least six of those states had taken regulatory enforcement action against Celsius as of the Petition date, and several more states have done so since then.”
Ownership of the “custody” and “withhold” accounts have yet to be resolved. Do the accounts belong in full to the named creditors or are they part of the general pool of assets? (See our list of Celsius account types.) And who owns the stablecoins?
If any of the assets constitute securities, Vermont wants those to be registered as offerings of securities. (Spoiler: many of them are likely to constitute securities, and none are registered.)
Also unresolved: Celsius insiders withdrew nearly $18 million in cryptos in the weeks before Celsius froze withdrawals on June 12.
Texas, Alabama, Arkansas, California, the District of Columbia, Hawaii, Maine, Missouri, New York, North Dakota, and Oklahoma all concur with Vermont’s objections. The states want to see the examiner’s report before any sale goes forward. They also want to approve the bidders to verify that they are compliant with state regulations, or can become compliant in a timely manner. [Texas objection, PDF; Coordinating states’ objection, PDF]
The US Trustee also objects to the auction. As well as the above objections, the Trustee asks that a privacy ombudsman be appointed, as “customers of these Debtors have significant concerns regarding transparency and irregularities.” [Objection, PDF]
Some individual creditors object on the same grounds — e.g., Daniel Frishberg, who thinks the examiner’s report may show that Celsius was a Ponzi scheme. Immanuel Herrmann has objected on behalf of an unofficial “Steering Committee” of Earn, Loans, and CEL depositors — they don’t object to an asset sale but do feel this current proposal is rushed. [Frishberg objection, PDF; Herrmann objection, PDF]
The US Trustee held a 341 creditors’ meeting on October 13. Celsius interim CEO Chris Ferraro responded to questions under oath — and Ferraro knows nothing, nothing! Most of his answers amounted to “I’ll have to follow up on that,” “I don’t know,” and “I need to consult with my lawyers.” [Reddit]
The next Celsius hearing is on October 20 at 10 am ET. There’s an omnibus hearing on November 1 at 11 a.m. ET. Custody and withhold hearings are scheduled for December 7 and 8 at 9 a.m. ET. [Schedule, PDF]
Celsius has requested to set a “bar date,” the deadline for customers to submit proofs of claims, of December 13, 2022. [Motion, PDF]
If you agree with the schedules of assets and liabilities that Celsius filed earlier, you don’t need to file a claim. Go to page 92 to check your claim. [Schedule, PDF]
If you do need to file a claim, Celsius has submitted a form for approval with the bar date motion.
As soon as she was appointed examiner in the Celsius bankruptcy on September 29, Shoba Pillay, previously an assistant US attorney, set to work.
She has already spoken to the debtors. She has outlined the various documents she will be requesting and has set forth a plan on how to avoid duplicating work already done.
Pillay has also filed a “Rule 2004 Motion,” to collect almost anything she might need. This motion will be heard on October 20 and is sure to be granted. [Rule 2004 motion, PDF; Notice motion, PDF]
Federal Rule of Bankruptcy 2004 — that’s a rule number, not a year — allows tremendously broad discovery and deposition. A witness in a 2004 examination 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, in order to do their job. [Cullen Dykman; Nolo]
Pillay has proposed a work plan: [Motion, PDF]
Core Scientific provides hosting services to Celsius Mining. Core claims the bankrupt company owes them $5.4 million. They’re tired of subsidizing Celsius’ failing mining business. They want their money, or they want out of their contract before Celsius turns them into a dead parrot too.
Celsius argues that Core breached their agreement by failing to deploy mining machines on time, and is unjustly trying to pass on power charges. They say Core is in violation of the automatic stay, which stops creditors from trying to collect debts until court bankruptcy proceedings are completed. They have called for a hearing on October 20 to ask the court to enforce the stay. [Filing, PDF; Coindesk; The Block]
Core responded saying that Celsius’ claims were “premised on the incorrect notion that Core Scientific must subsidize the Debtors’ money-losing mining business to the tune of millions of dollars a month.”
Core says they have deployed all of the mining equipment Celsius gave them and are paying out of pocket to keep the machines running. They are seeking relief from the court to either terminate their contract or to get paid. They want to delay the hearing on October 20 and they are requesting a status conference. [Letter, PDF]
Celsius’s lawyers responded that Core’s request for a status conference is “unwarranted and premature.” We think Celsius is dragging this out for as long as they can run up a tab with Core that will never be paid. [Letter, PDF]
There’s a new tool that lets you search the Celsius creditor database with your name and find your coinage! You can use the leaderboard to find the top losers. [Celsiusnetworth; Gizmodo]
US federal prosecutors from the Southern District of New York subpoenaed Celsius days after it blocked withdrawals in June. The subpoena was issued by a grand jury. Federal grand juries are used by Department of Justice prosecutors to conduct criminal investigations and potentially issue indictments. [FT, archive]
The SDNY subpoena is disclosed on p. 48 of this October 5 filing. Pages 48-50 list investigations by multiple state regulators. [Filing, PDF]
Celsius has filed its proposal for a key employee retention plan (KERP). They want to divvy up $2.96 million amongst 62 key non-insider employees — so as to keep them working on the dumb “Kelvin” plan to revive this dead parrot. Celsius currently has 275 employees in total. [Motion, PDF]
Alex Mashinsky, who recently stepped down as Celsius CEO, is dumping his CEL tokens for USDC dollar-equivalent stablecoins. [Twitter, Twitter]
Celsius cofounder Daniel Leon, who also just stepped down, sold $11.5 million worth of CEL in 2020 and 2021. [FT]
Jason Stone of KeyFi, a.k.a. DeFi whale 0x_b1, used to manage Celsius’ investments. Stone sued Celsius in July, saying they hadn’t paid him and called Celsius a Ponzi scheme. Celsius countersued in August, claiming Stone was an incompetent thief. Anyway, Celsius has just updated their counterclaim. [Complaint, PDF]
In a Chapter 11 bankruptcy, the debtor has to file a disclosure statement with their bankruptcy plan. The statement needs to provide “adequate information” about the debtor’s financial affairs so creditors can make an informed decision when they go to vote on the bankruptcy plan.
Voyager filed its first amended disclosure statement related to its second amended joint plan on October 5. The plan involves selling off all of its assets to FTX US. [Statement, PDF]
The US Trustee objected to Voyager’s disclosure statement. The plan doesn’t say it’s a liquidation plan, but the proposal is basically to liquidate Voyager. The plan also shields Voyager CEO Stephen Ehrlich and his assets from third-party claims. The Trustee wants clearer disclosure for creditors of precisely what this statement is. [Objection, PDF]
The Texas State Securities Board objects to the sale of Voyager to FTX, “because, at this time, the Debtor and FTX are not in compliance with Texas law.” Texas thinks the plan “attempts to limit the Debtors’ liability for unlawful post-petition — but pre-sale closing — conduct for which state-regulatory fines and penalties may apply.” That is, they think the quick sale is an attempt to hide malfeasance. [Objection, PDF]
Specifically, Texas thinks FTX has been offering investment contracts that constitute unregistered securities to Texas residents. The affidavit from Joe Rotunda, Director of the TSSA Enforcement Division, details Texas’ ongoing case against Voyager since April 2022 for unlicensed offerings of securities — and then it gets stuck into FTX.
Rotunda states that the interest-bearing accounts offered by FTX US are likely unregistered securities. FTX US claims to be registered with FinCEN as a money transmitter — but it isn’t registered with Texas as a money transmitter. FTX Capital is registered with Texas as a broker-dealer, so that’s nice.
The FTX trading app lets US customers use FTX non-US despite FTX Trading’s claims not to serve US customers, and despite Rotunda correctly entering his address as Austin, Texas. Rotunda transferred ether to a wallet on FTX. Rotunda is pretty sure the FTX (US or not) yield program is an investment contract and not a registered one.
Rotunda also confirms that “The Enforcement Division is now investigating FTX Trading, FTX US, and their principals, including Sam Bankman-Fried.” [Affidavit, PDF]
Bankruptcies are expensive. The professionals operating on behalf of Voyager Digital and Celsius Network have begun submitting their bills.
Kirkland & Ellis in Voyager: $2,994,615.46 for July 5 to July 31. [Fee statement, PDF]
Kirkland & Ellis in Celsius: $2,570,322.67 for July 13 to July 31 July — yes, that’s only two and a half weeks. [Fee statement, PDF]
Akin Gump in Celsius: $741,898.56 for July 13 to Aug. 31. [Fee statement, PDF]
Alvarez & Marsal in Celsius: $2,961,249.80 for July 14 to Aug. 31. [Fee statement, PDF]
South Korean crypto investment firm Blockwater Technologies defaulted on a loan from TrueFi, a decentralized lending protocol. TrueFi issued a “notice of default” to Blockwater on October 6 after Blockwater missed a payment on a loan of 3.4 million BUSD. TrueFi said the debt represents about 2% of its total outstanding value. Blockworks’ loan was “restructured” in August, and they paid back 654,000 BUSD at that time. TrueFi wants “a potential court-supervised administrative proceeding” —i.e., putting Blockwater into something like bankruptcy. [TrueFi blog; Bloomberg; Twitter]
Do Kwon is the founder of Terraform Labs, whose UST “stablecoin” collapsed in May, took the rest of crypto down with it, and started us on writing this newsletter series. Kwon talked to Laura Shin for her Unchained podcast on October 14 from a totally legitimate unknown location where he definitely isn’t on the run. The podcast comes out on October 18. [Twitter; Unchained]
Grayscale runs crypto investment funds, most notably GBTC, which Amy has dissected at length. Grayscale is now creating Grayscale Digital Infrastructure Opportunities, to buy up used bitcoin mining rigs from distressed mining companies. These will be used for mining by Foundry Digital, which is also owned by Grayscale owner Digital Currency Group. This will be made available as a fabulous investment opportunity to “accredited investors such as hedge funds and family offices at a minimum investment of $25,000.” [Bloomberg]
The Department of Justice has issued a new report on crypto crime: “The Role Of Law Enforcement In Detecting, Investigating, And Prosecuting Criminal Activity Related To Digital Assets.” This report was as required by President Biden’s March 2022 executive order on crypto. [DOJ, PDF]
“To the crowd there assembled, I was the realization of their dreams….The ‘wizard’ who could turn a pauper into a millionaire overnight!”
~ Charles Ponzi
For years, Celsius founder Alex Mashinsky told people banks were the enemy, and Celsius was your friend. Now everyone is wondering where their money went. Here’s our summary of the current situation at Celsius:
Let’s review the four types of Celsius customers:
The big question now in the Celsius bankruptcy is how to classify creditors: who’s first in line to get their money back, and who’s last in line? This is why, in addition to the official Unsecured Creditors’ Committee (UCC), there are currently three ad-hoc groups, all vying to get the judge’s attention.
Celsius believes that funds held in Earn and Borrow accounts are property of the bankruptcy estate, meaning those customers will have to wait until the lawyers finish to see what’s left. But Celsius wants to return money held in specific Custody and Withhold accounts to customers now. [Motion, PDF]
Celsius argues that $50 million of the $120 million in Custody and Withhold accounts should go back to customers, if they meet one of the following criteria: [Twitter]
Much of the discussion at the third bankruptcy hearing on Sept. 1 centered around whether custody holders should be able to get their money back. [Coindesk]
During the hearing Judge Martin Glenn also emphasized: “Nobody is getting their money back if they remain anonymous. Let me make that clear.” [Twitter]
According to new financial docs, Celsius seems to have magically found $70 million “from the repayment of USD denominated loans.” Imagine that! The company originally forecasted it would run out of money by October, but now it has more runway. [Docket #674, PDF; Coindesk]
Last month, the Trustee called for an independent examiner and filed a motion to show cause. [Motion, PDF] Creditors — the UCC and the ad-hoc groups — are worried that an examiner will drain more of their dwindling pool of funds.
David Adler, a lawyer with the firm McCarter & English, representing four Celsius borrowers, says an examiner will cost too much money. The group thinks the job can be done with a Chapter 11 Trustee. [response, PDF]
The Vermont Department of Financial Regulation says Celsius sure looked like a Ponzi scheme and is urging the court to appoint an examiner. Vermont is concerned about Celsius’ offerings of unregistered securities. “At a minimum, Celsius has been operating its business in violation of state securities laws. That improper practice alone warrants investigation by a neutral party.” Vermont also alleges that without Celsius’s holdings of its own native CEL token, the firm has been insolvent since at least February 2019. [FT; court filing, PDF]
Celsius has agreed to the Trustee hiring an examiner — as long as the examiner does not duplicate work already done by the UCC. Celsius says they’ve reached an agreement with the Trustee on this point. [response, PDF]
The next Celsius bankruptcy hearing is set for Sept. 14. There is also a hearing scheduled for Oct. 6 to discuss the custody account holders.
Meanwhile, Celsius has announced a Celsius-themed Monopoly game! It appears to be an unlicensed knockoff — not officially endorsed by Hasbro. This seems to have been in the works since well before the bankruptcy. [Web 3 Is Going Great]
Alex Mashinsky had a favorite slogan: “Unbank Yourself.” His wife Krissy is now selling a new T-shirt: “Unbankrupt Yourself.” [Twitter]
Daniel Leon, one of the founders of Celsius, says his 32,600 shares of Celsius stock are worthless. It looks like he wants to use them as a tax write-off. [Docket 719, PDF]
On Aug. 30, the US Trustee held the first 341 creditors’ meeting for Voyager, where the Trustee and the creditors got to ask CEO Steven Ehrlich questions about the bankruptcy — under oath. The Trustee is an agent of the federal government. If you lie to the Trustee, it is like lying to the FBI — a federal crime.
(We wrote about Celsius’ 341 meeting previously.)
Listening to creditors, it’s clear that they’re upset and confused as to why their crypto, including USDC, has become part of the bankruptcy estate. They thought the money was theirs and they could have it back at any time. It didn’t help that Voyager gave users the false impression that their money was FDIC insured.
Ehrlich kept referring the distraught creditors back to the customer agreement, which many had never read, or never fully understood.
Ehrlich noted during the meeting that Voyager is still staking crypto. He said the firm had filed a motion asking the court if it’s okay to stake even more. The court has allowed Voyager to continue staking pursuant to their ordinary business practices. The UCC oversees their staking. [Docket 247, PDF]
Staking is risky!
Some staking, such as proof-of-stake staking, doesn’t risk losing the coins in that currency. Once Ethereum switches to proof-of-stake and, perhaps several months later provides a way for you to withdraw your stake, there’s little risk when your ETH staking is denominated in ETH.
But most staking activity involves first moving your liquid crypto (such as ETH) into a company’s own crypto (such as CEL or UST), which is basically a self-assembled Ponzi scheme for staking. And a lot of “staking” is just lending to a DeFi structure, which means you’re at risk even when it’s denominated in that staked crypto.
Voyager says it got multiple bids to buy the company. The deadline for bids was Sept. 6 — extended from Aug. 26 — so now it’s headed to auction. The auction will be held on Sept. 13 at 10 a.m. ET in the New York offices of Voyager’s investment bank Moelis & Co. A court hearing to approve the results is scheduled for Sept. 29. [Bloomberg; court filing, PDF]
Sam Bankman-Fried’s FTX and Alameda disclosed a joint bid for Voyager in July. Voyager dismissed this as a lowball bid — but we think SBF is the one who is most interested in Voyager. Maybe they’ll up their offer in the auction?
What is there left to buy anyway? That’s what we want to know. Voyager is in much the same position as Celsius — its liabilities are real, but its assets are fake. What does FTX get if it buys Voyager?
The Georgia Department of Banking and Finance has a limited objection to the sale of Voyager. Voyager is a licensed money transmitter in the state of Georgia. If the auction is a success, the department is asking the court to stay the acquisition unless or until the new buyer is also licensed in the state as a money transmitter. We wonder how harshly that will limit the field of buyers. [limited objection, PDF]
Bankruptcies are expensive. Quinn Emanuel, special counsel for Voyager, has submitted their first-month fee statement: $244,080. That’s for 196.7 hours of work. The lead lawyer charges $2,130 an hour for his services. Voyager brought Quinn Emanuel on board in July to look into the possibility of insider trading at 3AC. [Doc 358, PDF; Bloomberg Law]
The next Voyager omnibus meeting is on Sept. 13 at 11 ET. The deadline for filing a proof of claims is Oct. 3.
FTX is paying an undisclosed sum for a 30% stake in Anthony Scaramucci’s SkyBridge, and SkyBridge will buy $40 million of crypto to hold “long-term.” Scaramucci is not giving up any of his own share of SkyBridge. [Bloomberg; FT]
SkyBridge used to be a general hedge fund then went hard into crypto. “We will remain a diversified asset management firm, while investing heavily in blockchain,” says Scaramucci.
The weird part of this is that SkyBridge is already an investor in FTX and FTX US. We’re reminded of how FTX “bailed out” Voyager, then it turned out that Voyager owed FTX a bundle.
Three Arrows Capital (3AC) withdrew 20,945 staked ether (worth about $33.3 million) from Curve and $12 million in various assets (wrapped ETH, wrapped bitcoin, and USDT) from Convex Finance. Nobody seems to know why they withdrew the funds. [The Block]
The Algorand Foundation has admitted it had $35 million (in USDC) exposure to collapsed crypto lender Hodlnaut. [Algorand blog]
Another class action has been brought against Terraform Labs. This one was brought by Matthew Albright. He is represented by Daniel Berger of Grant & Eisenhofer. The claim alleges Terraform violated the RICO act by artificially inflating the price of their coins and publishing misleading information following UST and luna’s collapses to cover up for an $80 million money laundering scheme. “UST amounted to a Ponzi scheme that was only sustained by the demand for UST created by Anchor’s excessive yields.” The proposed class is all individuals and entities who purchased UST and luna between May 1, 2019, and June 15, 2022. [Complaint, PDF]
From May: Chancers, the Korean crypto streamer who went to Terraform CEO Do Kwon’s house. [BBC]
“Lotta stadiums getting renamed in the next few years”
— Ben McKenzie
Centralized finance (CeFi) is centralized DeFi — investment firms that played the DeFi markets. CeFi was where a lot of the money in DeFi came from.
CeFi looked like an industry of separate institutions — but it turned out to be a few companies all investing in each other. The chart of who invested in who would look like an inverted pyramid resting on a single point — Terraform Labs’ Anchor protocol.
Anchor offered 20% interest rates on holdings of dollar-equivalent stablecoin Terraform USD (UST), the interest being paid in UST. You could get UST by buying Terraform’s luna token from exchanges like Crypto.com or KuCoin. (Crypto.com Arena used to be Staples Center in Los Angeles.)
All the other CeFi firms just put their money into Anchor at 20%, then offered slightly lower interest to their own investors and skimmed the difference. Terraform made its money by dumping luna on these UST buyers.
UST and luna were both tokens that Terraform made up one day — neither had any reason to be worth anything. Everyone in DeFi knew how rickety UST/luna was for months — they just went along with it while it made them money. A truly fiat currency.
The party ended on May 9, when UST and luna imploded, setting off a cascade of insolvencies across cryptoland. We’re still seeing the fallout.
Crypto hedge fund Three Arrows Capital (3AC) went into liquidation as it was heavily invested in UST and luna. Firms that had big loans to 3AC, such as Voyager, Celsius, and BlockFi, had to file bankruptcy or seek bailouts from other crypto firms. Even crypto exchanges had been playing the CeFi markets with customer funds, and many had to close their doors.
Thousands of South Koreans also lost money when UST and luna collapsed. Terraform Labs founders Daniel Shin and Do Kwon are stuck in South Korea for now, while investigators look into the incident.
On Wednesday, July 20, investigators from the Seoul Southern District Prosecutors Office raided seven crypto exchanges, including Upbit, Bithumb, and Coinone. They’re looking for clues as to whether Terraform intentionally caused the collapse. They also raided some exchange executives’ homes and the home of Daniel Shin. [Yonhap News; Donga News, in Korean]
Elsewhere, South Korean prosecutors have discovered a shell company called “Flexi Corporation” that Kwon allegedly used to launder large sums of money out of Terra and into his own private accounts via over-the-counter trades. How can this be? Kwon said he only took a small salary from Terraform. [KBS, in Korean; Twitter]
UST and luna went under, and pulled crypto hedge fund Three Arrows Capital down with them.
The Terra collapse completely nuked 3AC. Their exposure was about $600 million. (This is triple what co-founders Su Zhu and Kyle Davies had claimed in mid-June.) [Fortune]
Zhu and Davies are in now hiding. Nobody knows where they are. They told Bloomberg they were headed to Dubai. [Bloomberg, archive]
The pair knew immediately that they were screwed. But on May 11, when investors asked if 3AC had survived the Terra collapse, 3AC told them everything was fine — and kept taking in money!
3AC had abandoned its Singapore office by late May — they just locked the door and skipped the country — and they finally admitted there were problems only in mid-June.
But Zhu and Davies have been telling the public — especially their creditors — how they lost money too, how they fear for their lives, and how they are so overwhelmed that they can’t turn over banking information just yet, but they’ll get to that soon, for sure.
The two old school buddies say they were shocked by how quickly things unraveled. “What we failed to realize was that luna was capable of falling to effective zero in a matter of days.”
Never mind that the instability of UST/luna was obvious to outside observers, that UST/luna worked exactly the same way as the Titan/Iron pair that collapsed in 2021, and that these guys were supposed to be a crypto hedge fund with alleged competence, and not the drooling crypto degen brainlet rubes they appear to have been trading like.
Zhu and Davies never planned for number go down, and had just been piling leverage on leverage. “We positioned ourselves for a kind of market that didn’t end up happening,” Zhu told Bloomberg. Never mind that a “hedge fund” is named for the act of hedging your speculations, and not just assuming you’re a genius because there’s a bubble going on.
Teneo is the firm handling 3AC’s liquidation, and they are moving quickly. They filed Chapter 15 in the US on July 1. Shortly after, they also filed for recognition of 3AC’s British Virgin Islands liquidation with the Singapore high court.
Someone leaked Teneo’s 1,157-page Singapore filing earlier this week. The comprehensive document is a gem — it gives us a full update on the bankruptcy proceedings up to July 9. Teneo’s Christopher Farmer and Russell Crumpler left no rock unturned. [Filing, archive]
We recommend reading at least the first 35 pages — it tells the story of Ponzi borrowing, multiple defaults, ghosting creditors and liquidators, and doing deals with some lenders while cutting out others. The rest of the filing is exhibits, other court filings, and affidavits of furious creditors.
3AC’s biggest creditor is Barry Silbert’s Digital Currency Group, the parent company of Genesis Trading, which had a $2.4 billion partially collateralized loan to 3AC. DCG is now stuck with up to $1.1 billion in losses. [The Block]
Other large creditors include Voyager Digital ($687 million), Blockchain.com ($302.6 million, up from the originally claimed $270 million), and Deribit ($80.6 million).
Kyle Davies’ wife, Chen Kaili Kelly, filed a claim for $65.7 million, and Zhu Su himself submitted a $5 million claim. We have no idea how 3AC was structured to allow an owner and a cofounder to be a listed creditor in a bankruptcy.
Zhu and Davies reportedly made a $50 million down payment on a yacht — with borrowed money, while they defaulted on their lenders. (We’re definitely feeling the Quadriga vibes with this one.) They wanted it to be bigger than any of the yachts owned by Singapore’s billionaires, and ready for pick-up in Italy. Zhu told Bloomberg that the yacht story was a “smear.”
Tai Ping Shan Capital, an over-the-counter desk in the BVI, claimed it operated independently of 3AC, but it turns out to have tight connections. On June 14, 3AC transferred $30.7 million in USDC and $900,000 in USDT to TPS. It’s unclear where those funds subsequently went. [Coindesk]
Good news! In a supplemental Chapter 15 filing, Teneo says it’s recovered $40 million of assets! The bad news is that this is a drop in the bucket. Creditors have so far submitted $2.8 billion in claims, and there’s plenty more coming. [Court filing]
3AC creditors have picked a creditor committee consisting of the largest creditors: Voyager, DCG, CoinList, Blockchain.com, and Matrixport. The committee will work closely with Teneo to “maximize the value of the assets available for distribution.” [The Block]
Blockchain.com is struggling to survive in the aftermath. It just laid off 25 percent of staff. [CNBC]
In addition to owning CryptoDickButt #1462, 3AC had also started a $100 million NFT fund with pseudonymous NFT trader Vincent Van Dough. They supplied the funding, while Van Dough curated the art. (We mentioned CryptoDickButt last time, and we’re shocked that some of you thought we were just making that up. You should know by now that crypto is always stupider.)
The fund, called “Starry Night Capital” planned to launch a physical gallery in a “major city” by the end of 2021. [The Block, 2021]
The Defiant noted on June 17 that the Starry Night portfolio had been aggregated into a single Ethereum address, probably controlled by Zhu, Davies, and Van Dough. Teneo has noticed and is concerned. [The Defiant]
Celsius promised 18% returns on your crypto. When too many people tried to pull their money out at once, Celsius paused withdrawals on June 21 and filed for bankruptcy on July 13. We covered the bankruptcy filing and CEO Alex Mashinsky’s declaration in our last post.
Celsius admits to a $1.2 billion hole in its balance sheet. Others think the assets are fake and the liabilities are very real, which would put the hole at $4 billion to $5 billion.
Mashinsky says that Celsius’ losses include $15.8 million from investments in UST and luna, along with $40.6 million in loans to 3AC. He also said that Celsius lost 35,000 ether tokens in 2021 due to an incident involving a staking provider that “misplaced” the keys to its tokens. Oops!
Celsius held its first bankruptcy hearing on July 18. SDNY Judge Martin Glenn is presiding over the case. Kadhim Shubber from the Financial Times live-tweeted the hearing, which took place over Zoom. Here’s a copy of the presentation Celsius gave to the judge on Monday. [Stretto; Twitter thread]
Celsius’ lawyer Patrick Nash told the judge there won’t be a liquidation. Celsius has a recovery plan: to HODL — and mine bitcoins! That’s right, Celsius wants to mine their way out of bankruptcy. Nash says the plan is to mine 10,000 bitcoins in 2022.
How did Celsius end up in bankruptcy? You might think it had something to do with Celsius making horrible investments and losing everyone’s money, but no! As Nash explained, Celsius was driven to insolvency by unfounded Terra/luna fears, worries about Coinbase’s bankruptcy risk factor disclosure in May, and a bank run that knocked over an otherwise well-run business.
Former Celsius employees tell a different story. Celsius compliance and financial crimes director Timothy Cradle spoke of the company’s “sloppiness and mismanagement.” [Coindesk]
Cradle also told CNBC that Celsius execs “were absolutely trading the token [CEL] to manipulate the price.” A former HR employee said she was told not to do a background check on Yarom Shelem, the former Celsius CFO who was arrested in Israel for fraud. [CNBC]
Celsius creditors have been filing claims since July 18. [Twitter] The letters make for some disturbing reading. Molly White has been posting excerpts on Twitter. It’s a reminder that Celsius investors were ordinary people lured in by Mashinsky’s false promises. [Twitter thread]
Québec pension fund CDPQ also has some questions to answer. CDPQ invested $150 million in Celsius in October 2021 as part of a $400 million funding round co-led by WestCap Investment Partners LLC. “We understand that our investment in Celsius raises a number of questions.” [Bloomberg]
Celsius’ next bankruptcy hearing is August 10.
Crypto broker Voyager said its secret sauce was “low-risk investments.” Yet it loaned out three-quarters of its assets under management to 3AC.
In June, the firm signed an agreement with Sam Bankman-Fried’s Alameda Ventures for a revolving line of credit so it could keep the music playing a bit longer. But on July 1, Voyager Digital filed Chapter 11 bankruptcy.
Coffeezilla points out that Voyager is trying to sell people on this “Chapter 11 bankruptcy reorg,” and hides the fact that under bankruptcy law, a company that describes itself as a broker cannot file Chapter 11. They should be required to liquidate under SIPA. (Securities Investor Protection Act) [Youtube; Twitter]
The CEO of of crypto media outlet Benzinga will be on the unsecured creditor committee in the Voyager bankruptcy. Jason Raznick is among the largest unsecured creditors for Voyager. [Inside Bitcoins]
Voyager’s next bankruptcy hearing is on August 4. It has $350 million of customer money in an omnibus account at Metropolitan, and it keeps reassuring everyone that they’ll get their money soon! It just has to work things out with the judge first. [Voyager blog; archive]
In the meantime, Bankman-Fried proposed a partial bailout. Under his proposal, Voyager customers would have the opportunity to open new accounts at FTX with a cash balance funded by their bankruptcy claim. They would be able to withdraw the cash, or use it to purchase crypto on FTX. [FTX press release; FT, archive]
Vauld is a Singapore-domiciled crypto lender that serves mainly customers in India. It stopped withdrawals on July 4 and owes $402 million in crypto to its customers.
After suspending withdrawals and laying off 30% of its staff, Vauld filed for protection against creditors in Singapore on July 8. [WSJ]
A Singaporean moratorium order is similar to Chapter 11 in the US. It allows Vauld to avoid a complete cessation of operations and liquidation of assets, while it tries to get its act together.
Vauld later disclosed they were short $70 million, partly from exposure to UST/luna. Vauld issued a statement on July 11. Vauld and Nexo are still discussing an acquisition of Vauld. [Vauld blog, archive]
BlockFi released its Q2 2022 transparency report. The report showed it had $1.8 billion in open loans from retail and institutional investors by the end of June and $600 million in “net exposure.” [BlockFi blog, archive; Decrypt]
Amy Castor 
