Reggie Fowler, Bitfinex/Tether’s US money man, seeks 6-month sentencing delay

After a series of delays that have plagued his case since he was first indicted in April 2019, Reggie Fowler was supposed to be sentenced on Sept. 13. (His sentencing was originally scheduled for Aug. 30.)

This Tuesday, a Manhattan District Judge was to decide how many years the 63-year-old Fowler, who is charged with bank fraud, money laundering, and running an unlicensed money transmitting business, would spend behind bars. Likely, the rest of his life, given bank fraud alone carries a max imprisonment of 30 years. This would have meant that Fowler was enjoying his last weekend as a free man.

But on a Saturday night — three days before sentencing — Fowler’s lawyer Ed Sapone wrote to Judge Andrew Carter asking for a six-month adjournment. Sapone said that he (not his client) has been ill and still needs time to gather material relevant to the sentencing: [letter]

“I recognize that this is an unusually lengthy adjournment request. I have been suffering with a serious medical condition that is requiring invasive medical treatments. In addition, a significant amount of information and material relevant to an analysis under 18 U.S.C. §3553(a) must be obtained from financial institutions, entities, and individuals located in Europe. The requested adjournment will afford me the opportunity to gather the relevant material and prepare a sentencing submission for the Court’s consideration, while addressing my medical condition.” 

Sapone said that US prosecutors were okay with the request. 

Fowler is the ex-football guy and Arizona businessman tied to hundreds of millions of dollars of missing Tether and Bitfinex money. He is accused of setting up a network of shadow banks so crypto exchanges could skirt the traditional banking system. Fowler told the banks that the accounts were for his real estate business. He is also accused of funding a sports league with money that wasn’t his.

After fudging a plea deal that likely would have meant only spending five years in custody, Fowler was supposed to head to trial in May 2022. But in another surprising last-minute twist, he decided to enter a guilty plea and throw himself at the mercy of the court.  

My only guess as to why he did this is that trials are incredibly expensive and by this time, Fowler was down to one lawyer: Sapone. His previous legal team ditched him in 2021, saying their client owed them $600,000 and had been stringing them along for months with promises of “the check’s in the mail.”

I’ll be curious to hear what Judge Carter says, but given the government has no objection to Sapone’s request for adjournment, I suspect he will say, “sure whatever.” Fowler is currently living in Chandler, Arizona, free on bail

Update: Judge Andrew Carter has approved the motion. Reggie Fowler’s sentencing hearing has been adjourned until March 14, 2023, at 12 p.m. ET. [Order]

CBC Radio interview: Could crypto investments become virtually worthless?

Last week, I spoke with CBC Radio One, a national business radio show in Canada. Paul Haavardsrud interviewed me. The show went live on Sunday. [Cost of Living]

Paul was a great host. He let me do most of the talking! Paul wants to know why crypto is crashing. I tell him it’s because the money is all gone. He asks, “Well, where did it go?” Excellent question!

Naturally, that led me to bring up Tether. I also explained that while bitcoin’s value may never drop completely to zero, it could become a lot more difficult to trade if liquidity dries up.

The show repeats on Tuesday, June 28, at 11:30 a.m. NT in most provinces. 

If you want to learn more about why the crypto bubble is bursting, read “How 2020 set the stage for the 2021 bitcoin bubble,” by myself and David Gerard, along with “The Latecomer’s Guide to Crypto Crashing.”

How 2020 set the stage for the 2021 bitcoin bubble

  • By Amy Castor and David Gerard
  • Be sure to subscribe to our Patreon accounts — Amy’s is here; David’s is here.

We often get asked by reporters: “Why are crypto markets crashing?” The short answer is because there’s no money left, and no more coming in. The long answer is more complicated.

Bitcoin peaked at $64,000 in April 2021 and again at $69,000 in November 2021. Many of the network effects that drove the price of bitcoin to those heights were put into place in 2020.

The same network effects are now working in reverse. Markets take the stairway up and the elevator down.

The 2017 bubble was fueled by the ICO boom and actual outside dollars entering the crypto economy. Bitcoin topped out just below $20,000 in December 2017.

The crash that followed over the next 12 months was like air being slowly let out of a balloon — much like the 2014 deflation after Bitcoin’s prior 2013 peak. ICO and enterprise blockchain promoters tried to keep going through 2018 like everything was fine, but the party was clearly over.

In contrast, the 2022 crash is like a wave of explosive dominoes all crashing down in rapid succession. How did we get here?

A long, cold crypto winter

Let’s start in early 2020. It was the crypto winter. Bitcoin’s price had spent two years bobbling up and down from infusions of tethers, and traders on BitMEX rigging the price to burn margin traders. (And, allegedly, BitMEX itself burning its margin traders.) [Medium, 2018]

But the dizzying price rises were peculiarly bloodless. There was little evidence of fresh outside dollars from retail investors — the ordinary people. The press would write how bitcoin had just hit $13,000 — but they’d also call people like us, and we’d tell them about Tether.

Throughout 2019 and into 2020, crypto pumpers were desperately trying scheme after scheme — initial coin offerings, initial exchange offerings, bitcoin futures, selling to pension funds — to lure in precious actual dollars and get the party re-started.

Then Corona-chan knocked on the door.

Act I, Scene I: Pandemic Panic

On March 13, 2020, the US government declared a pandemic emergency. The panic drove down stocks and crypto. Investors sold everything and flew to the safest, hardest form of money they could find: the US dollar! Bitcoin dropped from $7,250 to $3,858 over the course of that day.

It was an edge-of-the-cliff moment for bitcoin. Any further drop could force liquidations and create a ripple effect across dozens more crypto projects. For bitcoin miners, the price of bitcoin was now below the cost of mining.

Worse, only two months away was the bitcoin “halvening” — an every-four-year event when the number of bitcoins granted in each freshly-mined block halves. If bitcoin dropped too low in price, the miners wouldn’t be able to pay their enormous power bills. The crypto industry desperately needed to push bitcoin’s price back before May.

Tether spins up the printing press

Tether, launched in 2014, is an offshore crypto company that issues a dubiously backed stablecoin of the same name. Tether works like an I.O.U. — Tether supposedly takes in dollars and issues a tether for each dollar held in reserve. Since Tether has never had an audit, nobody knows for sure what’s backing tethers. The company has an extensive history of shenanigans — see Amy’s Tether timeline.

The issuance of tethers in March 2020, was 4.3 billion, but that’s when the Tether printer kicked into overdrive — minting tethers at a clip nobody had ever seen before. 

Tether minted 4.4 billion tethers in April 2020 — crypto’s version of an economic stimulus package. By May, Bitcoin reached $10,000, just in time for the halvening.  

Once the price of bitcoin goes up, though, there’s no way to turn off the Tether printing press. It has to keep printing. If the price of bitcoin goes down, people will sell, creating an exodus of real dollars from the system. So Tether kept printing, pushing the price of bitcoin ever skyward. 

In May, June, and July 2020, Tether issued a combined total of 3 billion tethers. In August, when the price of bitcoin reached $12,000, Tether issued another 2.6 billion tethers. In September, when bitcoin slid below $10,000, Tether issued another 2.2 billion tethers. 

By the end of 2020, Tether had reached a market cap of 21 billion. The printer kept going. In 2021, Tether pumped out 60 billion more tethers. By May 2022, Tether’s market cap had reached 83 billion. Bitcoin’s price peaks in April 2021 ($64,000) and November 2021 ($69,000) both coincided with an influx of tethers into the market. 

You can’t just redeem tethers. Only Tether’s big customers — it has about ten of them — can redeem. You can try to sell your tethers on an exchange. But you can’t just go up to Tether to redeem them for dollars. There were no redemptions of tethers, ever, until May and June 2022 — the present crash.

Curiously, Tether’s reserve as declared to New York in April 2019 contained $2.1 billion of actual money — cash and US Treasuries. But Tether’s reserve attestation as of March 31, 2021, still contained just $2.1 billion of cash and treasuries!

This suggests that the rest of the reserve over that time was made up of whatever worthless nonsense Tether could claim was a reserve asset — loans of tethers, cryptocurrencies, and dubious commercial paper credited at face value rather than being marked to market.

Dan Davies, in his essential book Lying for Money, marks this as the key flaw in frauds of all sorts: they have to keep growing so that later fraud will keep covering for earlier fraud. This works until the fraud explodes.

Tether marketcap, CoinGecko

GBTC’s ‘reflexive Ponzi’

Grayscale’s Bitcoin Trust (GBTC) played a huge role in keeping the price of bitcoin above water through 2020. It offered a lucrative arbitrage trade, an exploitable inefficiency in markets, that a lot of big players went all-in on.

GBTC was an attempt to wrap Bitcoin in an institutionally compatible shell. All through 2020 and into 2021, GBTC was trading at a premium to bitcoin on the secondary markets. Accredited investors would acquire GBTC at net asset value — some large proportion being in exchange for direct deposits of bitcoins, not purchases for cash, although all the accounting was stated in dollars. After a six-month lock-up, the accredited investors would sell the shares to the public at a 20 percent premium, sometimes more. Rinse, repeat, and that’s a 40 percent return in a year. 

GBTC functioned like a “reflexive Ponzi.” When Grayscale bought more bitcoin for the trust, that drove up the price of bitcoin, which pushed up the GBTC premium, which resulted in investors wanting more GBTC and Grayscale issuing more shares. 

Grayscale ran a national TV advertising campaign at the time, targeted at ordinary investors. The ads warned that disaster was imminent, inflation would eat your retirement, and bitcoin was better than gold — so you should buy bitcoin. Or, this shiny GBTC, which was implied to be just as good! [YouTube, 2019]

In a bull market, retail investors didn’t mind paying a premium — because the price of bitcoin kept going up. The market treated GBTC as if it was convertible back to bitcoins, even though it absolutely wasn’t. [Adventures in Capitalism]

Grayscale ultimately flooded the market with GBTC. When an actual bitcoin ETF became available in Canada, GBTC’s premium dried up. Since February 2021, GBTC has been trading below the price of bitcoin. As of March 2022, the trust holds 641,637 bitcoins. And they’re staying there indefinitely — leaving GBTC holders locked in on an underwater trade.

The rise of decentralized finance

Decentralized finance, or DeFi, didn’t directly pump the price of bitcoin in 2020. But DeFi was one of the stars of the 2021 bubble itself, and eventually caused the bubble’s disastrous explosion. All of the structures to let that happen were set up through 2020.

DeFi is an attempt to put traditional financial system transactions — loans, deposits, margin trading — on the blockchain. Regulated institutions are replaced with unknown and unregulated intermediaries, and everything is facilitated with smart contracts — small computer programs running on the blockchain — and stablecoins.

All through 2019 and 2020, DeFi was heavily promoted as offering remarkable interest rates. At a time of low inflation, this got coverage in the mainstream financial press. Here’s the diagram the Financial Times ran, depicting DeFi as a laundromat for money: [FT, paywalled, archive

The key to DeFi is decentralized exchanges, where you can trade any crypto asset that can be represented as an ERC-20 token — such as almost any ICO token — with any other ERC-20 token.

DeFi also lets you take illiquid tokens that nobody wants, do a trade, assign them a spurious price tag in dollars, then say they’re “worth” that much. This lets dead altcoins with no prospective buyers claim a price and a market cap, and attract attention they don’t warrant. If you put a dollar sign on things, then people take that price tag seriously — even when they shouldn’t.

You can also create a price for a token that you made up out of thin air yesterday and use DeFi to claim an instant millions-of-dollars market cap for it. 

This was the entire basis for the valuation of Terraform Labs’ UST and luna tokens — and people believed those “$18 billion” in UST were trustworthily backed by anything.

You can also use those tokens you created out of thin air as collateral for loans to acquire yet more assets. An unconstrained supply of financial assets means more opportunities for bubbles to grow, and more illiquid assets that you can dump for liquid assets (BTC, ETH, USDC) when things go wonky.

By September 2020, five hundred new DeFi tokens had been created in the previous month. DeFi hadn’t hit the mainstream yet — but it was already the hottest market in crypto. [Bloomberg]

The problem was that in 2020, to use DeFi you had to know your way around using the actual blockchain. Retail investors, and even most institutional investors, haven’t got the time for that sort of dysfunctional nonsense.

Retail was more attracted to the “CeFi” (centralized DeFi) investment firms, such as Celsius and 3AC, offering impossible interest rates. These existed in 2020 but didn’t gain popularity until the following year when the bubble had started properly.

A new grift: NFTs 

By late 2020, crypto promoters were searching for a new grift to lure in retail money, one that would have broader mainstream appeal. They soon found one. 

NFTs as we know them got started in 2017, with CurioCards, CryptoPunks, and CryptoKitties. NFT marketing had continued through the crypto winter — in the desperate hope that ordinary people might put their dollars into crypto collectibles.

The foundations of the early 2021 burst of art NFTs were laid in late 2020, when Vignesh Sundaresan, a.k.a. Metakovan, first started looking into promoting digital artists, such as Beeple — whose $69 million JPEG made international headlines for NFTs in March 2021, and officially kicked off the NFT boom. 

Late 2020 also saw the launch of NBA Top Shot, the only crypto collectible that ever got any interest from buyers other than crypto speculators. Top Shot traders were disappointed at how incredibly slow Dapper Labs was at letting them withdraw the money they’d made in trading — and became some of the first investors in the Bored Apes.

Coiner CEOs 

By late 2020, several big company CEOs started promoting the concept of bitcoin on the company dime. These included Jack Dorsey at Twitter, Dan Schulman at PayPal, and Michael Saylor at business software company MicroStrategy.

In October 2020, Saylor revealed his company had bought 17,732 bitcoins for an average of $10,000 per coin. Over the next 18 months, Microstrategy would plow through its cash reserves and take on debt to funnel more money into bitcoin, spending $4 billion in the process. Buying MSTR shares become the newest way for retail investors to bet on bitcoin. Saylor also put himself forward as bitcoin’s latest prophet and crazy god.

PayPal set up bitcoin trading in 2020, though only as a walled garden, where you couldn’t move coins in or out. Still, it made gambling on crypto more accessible to retail investors. 

Bitcoin miners start ‘hodling

By late 2020, we suspect there was very little actual cash in crypto. But bitcoin needed to continue its upward ascent. 

The biggest tip-off that the fresh outside dollars had stopped flowing was when bitcoin miners stopped selling their coins. Bitcoin miners mint 900 new bitcoins per day. They typically sell these to pay their energy costs — power companies don’t accept tether — and buy new mining equipment, which becomes obsolete every 18 months. At $20,000 per bitcoin, that would equate to $18 million, in actual dollars, getting pulled out of the bitcoin ecosystem every day.

In October 2020, Marathon Digital (MARA), one of the largest publicly traded miners, stopped selling its bitcoins. They took out loans, which allowed them to buy their equipment and hold their bitcoins. Marathon even bought additional bitcoins!  

Borrowing against mined bitcoins, and not selling them, reduced selling pressure on bitcoin’s price in dollars. US-based miners used this model heavily from July 2021 onward — taking low-interest loans from their crypto buddies, Galaxy Digital, DCG, and Silvergate Bank. Although, in 2022, the loans started running out and they had to start selling bitcoins.

This also set Marathon up for potential implosion when energy prices went up and the price of bitcoin dropped in 2022. Marathon is presently losing $10,000 on every bitcoin they mine. 

Easy money?

2020 was a weird year of market panics, bored day traders, and easy money — for some.

The Federal Reserve dealt with the pandemic panic by showering the markets with stimulus money. At the retail end, $817 billion was distributed in stimulus checks (Economic Impact Payments), $678 billion in extended unemployment, and $1.7 trillion to businesses, mostly as quickly-forgiven loans. [New York Times]

Bored day traders, stuck at home working their email jobs and unable to go out in the evening, got into trading stocks on Robinhood as the hot new mobile phone game. Car rental firm Hertz, a literally bankrupt company, whose stock was notionally worth zero, started going up just because Robinhood users thought it was a good deal. Instead of crypto becoming a more regular investment like stocks, the stonks* had turned into shitcoins.**

What isn’t clear is how much of this money found its way to the crypto market. At least some of it did. A study by the Federal Reserve Bank of Cleveland noted: “a significant increase in Bitcoin buy trades for the modal EIP amount of $1,200.” This increased BTC-USD trade volume by 3.8%! [Cleveland Fed]

But the trades only seemed to raise the price of bitcoin by 0.07%. And the dollars in question were only 0.02% of the money distributed in the EIP program.

* A cheap and nasty equity stock; the term comes from a meme image. [Know Your Meme]
** We are sorry to tell you that this is literally a technical term in crypto trading.

The final push over the line

A lot of channels into crypto were put into place in 2020. But the last step was to pump the price over the previous bubble peak of $20,000.

With that bitcoin number achieved, the press would cover the number going up — because “number go up” is the most interesting possible story in finance. That would lure in the precious retail dollars that hodlers needed to cash out.

The push started in late November, with deployments of tethers to the offshore exchanges. On December 18, 2020 — exactly three years after the previous high — bitcoin went over $20,000 again. And that’s when a year and a half of fun started.

The Latecomer’s Guide to Crypto Crashing — a quick map of where we are and what’s ahead

Since November 2021, when Bitcoin hit its all-time high of $69,000, the original cryptocurrency has lost 70 percent of its face value. And when Bitcoin falters, it takes everything else in crypto down with it. 

The entire crypto space has been a Jenga stack of interconnected time bombs for months now, getting ever more interdependent as the companies find new ways to prop each other up.

Which company blew out first was more a question of minor detail than the fact that a blow-out was obviously going to happen. The other blocks in the Jenga stack will have a hard time not following suit. 

Here’s a quick handy guide to the crypto crash — the systemic risks in play as of June 2022. When Bitcoin slips below $20,000, we’ll officially call that the end of the 2021 bubble.

Recent disasters

TerraUSD collapse — Since stablecoins — substitutes for dollars — are unregulated, we don’t know what’s backing them. In the case of TerraUSD (UST), which was supposed to represent $18 billion … nothing was backing it. UST crashed, and it brought down a cascade of other stuff. [David Gerard; Foreign Policy; Chainalysis Report]

Celsius crumbles — Celsius was the largest crypto lender in the space, promising ridiculously high yields from implausible sources. It was only a matter of time before this Ponzi collapsed. We wrote up the inevitable implosion of Celsius yesterday. [David Gerard]

Exchange layoffs — Coinbase, Gemini, Crypto.com, and BlockFi have all announced staff layoffs. Crypto exchanges make money from trades. In a bear market, fewer people are trading, so profits go downhill. Coinbase in particular had been living high on the hog, as if there would never be a tomorrow. Reality is a tough pill. [Bloomberg; Gemini; The Verge]

Stock prices down — Coinbase $COIN, now trading at $50 a share, has lost 80% of its value since the firm went public in June 2021. The company was overhyped and overvalued.

US crypto mining stocks are all down — Bitfarms ($BITF), Hut 8 Mining ($HUT), Bit Digital ($BTBT), Canaan ($CAN), and Riot Blockchain ($RIOT). Miners have been borrowing cash as fast as possible and are finding the loans hard to pay back because Bitcoin has gone down.

UnTethering

Crypto trading needs a dollar substitute — hence the rise of UST, even as its claims of algorithmic backing literally didn’t make sense. What are the other options?

Tether — We’ve been watching Tether, the most popular and widely used stablecoin, closely since 2017. Problems at Tether could bring down the entire crypto market house of cards.

Tether went into 2020 with an issuance of 4 billion USDT, and now there are 72 billion USDT sloshing around in the crypto markets. As of May 11, Tether claimed its reserve held $83 billion, but this has dropped by several billion alleged “dollars” in the past month. There’s no evidence that $10.5 billion in actual dollars was sent anywhere, or even “$10.5 billion” of cryptos.

Tether is deeply entwined with the entire crypto casino. Tether invests in many other crypto ventures — the company was a Celsius investor, for example. Tether also helped Sam Bankman-Fried’s FTX exchange launch, and FTX is a major tether customer.

Tether’s big problem is the acerbic glare of regulators and possible legal action from the Department of Justice. We keep expecting Tether will face the same fate as Liberty Reserve did. But we were saying that in 2017. Nate Anderson of Hindenburg Research said he fully expects Tether execs to end the year in handcuffs. 

Other stablecoins — Jeremy Allaire and Circle’s USDC (54 billion) claims to be backed by some actual dollars and US treasuries, and just a bit of mystery meat. Paxos’ USDP (1 billion) claims cash and treasuries. Paxos and Binance’s BUSD (18 billion) claims cash, treasuries, and money market funds.

None of these reserves have ever been audited — the companies publish snapshot attestations, but nobody looks into the provenance of the reserve. The holding companies try very hard to imply that the reserves have been audited in depth. Circle claims that Circle being audited counts as an audit of the USDC reserve. Of course, it doesn’t.

All of these stablecoins have a history of redemptions, which helps boost market confidence and gives the impression that these things are as good as dollars. They are not. 

Runs on the reserves could still cause issues — and regulators are leaning toward full bank-like regulation.

Sentiment

There’s no fundamental reason for any crypto to trade at any particular price. Investor sentiment is everything. When the market’s spooked, new problems enter the picture, such as: 

Loss of market confidence — Sentiment was visibly shaken by the Terra crash, and there’s no reason for it to return. It would take something remarkable to give the market fresh confidence that everything is going to work out just fine.

Regulation — The US Treasury and the Federal Reserve were keenly aware of the spectacular collapse of UST. Rumour has it that they’ve been calling around US banks, telling them to inspect anything touching crypto extra-closely. What keeps regulators awake at night is the fear of another 2008 financial crisis, and they’re absolutely not going to tolerate the crypto bozos causing such an event.

GBTC — Not enough has been said about Grayscale’s Bitcoin Trust, and how it has contributed to the rise and now the fall in the price of bitcoin. GBTC holds roughly 3.4 percent of the world’s bitcoin.  

All through 2020 and into 2021, shares in GBTC traded at a premium to bitcoin on secondary markets. This facilitated an arbitrage that drew billions of dollars worth of bitcoin into the trust. GBTC is now trading below NAV, and that arbitrage is gone. What pushed bitcoin up in price is now working in reverse.

Grayscale wants to convert GBTC into a bitcoin ETF. GBTC holders and all of crypto, really, are holding out hope for the SEC to approve a bitcoin ETF, which would bring desperately needed fresh cash into the crypto space. But the chances of this happening are slim to none.

The bitcoins are stuck in GBTC unless the fund is dissolved. Grayscale wouldn’t like to do this — but they might end up being pressured into it. [Amy Castor]

Whales breaking ranks — Monday’s price collapse looks very like one crypto whale decided to get out while there was any chance of getting some of the ever-dwindling actual dollars out from the cryptosystem. Expect the knives to be out. Who’s jumping next?

Crypto hedge funds and DeFi

Celsius operated as if it was a crypto hedge fund that was heavily into DeFi. The company had insinuated itself into everything — so its collapse caused major waves in crypto. What other companies are time bombs?

Three Arrows Capital — There’s some weird stuff happening at 3AC from blockchain evidence, and the company’s principals have stopped communicating on social media. 3AC is quite a large crypto holder, but it’s not clear how systemically intertwined they are with the rest of crypto. Perhaps they’ll be back tomorrow and it’ll all be fine. [Update: things aren’t looking good. 3AC fails to meet lender margin calls.] [Defiant; Coindesk; FT]

BlockFi — Another crypto lender promising hilariously high returns. 

Nexo — And another. Nexo offered to buy out Celsius’ loan book. But Nexo offers Ponzi-like interest rates with FOMO marketing as well, and no transparency as to how their interest rates are supposed to work out.

Swissborg — This crypto “wealth management company” has assets under management in the hundreds of millions of dollars (or “dollars”), according to Dirty Bubble Media. [Twitter thread]

Large holdings ready for release

Crypto holders have no chill whatsoever. When they need to dump their holding, they dump.

MicroStrategy — Michael Saylor’s software company has bet the farm on Bitcoin — and that bet is coming due. “Bitcoin needs to cut in half for around $21,000 before we’d have a margin call,” Phong Le, MicroStrategy’s president, said in early May. MicroStrategy’s Bitcoin stash is now worth $2.9 billion, translating to an unrealized loss of more than $1 billion. [Bloomberg]

Silvergate Bank — MicroStrategy has a $205 million loan with Silvergate Bank, collateralized with Bitcoin. Silvergate is the banker to the US crypto industry — nobody else will touch crypto. Silvergate is heavily invested in propping up the game of musical chairs. If Silvergate ever has to pull the plug, almost all of US crypto is screwed. [David Gerard]

Bitcoin miners — Electricity costs more, and Bitcoin is worth less. As the price of Bitcoin drops, miners find it harder to pay business expenses. Miners have been holding on to their coins because the market is too thin to sell the coins, and borrowing from their fellow crypto bros to pay the bills since July 2021. But some miners started selling in February 2022, and more are following. [Wired]

Mt. Gox — at some point, likely in 2022, the 140,000 bitcoins that remained in the Mt. Gox crypto exchange when it failed in 2014 are going to be distributed to creditors. Those bitcoins are going to hit the market immediately, bringing down the price of bitcoin even further.

Feature image by James Meickle, with apologies to XKCD and Karl Marx.

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Why is bitcoin dropping in price?

As I write this at 9 pm ET, on May 5, the price of bitcoin is $36,300. It slid from $39,000 Thursday to below $36,000 at one point, causing a disturbance in the force.  

There were two sharp drops — at 15:00 UTC precisely and 19:00 UTC precisely, with attempts to walk the price back up both times. The last thing you want is to kick off a panic, so there will always be whales in the background trying to lift bitcoin back up when it falters. 

After starting the year at $46,700, bitcoin saw a January sell-off, which pushed the price down to $35,000. Apart from that, the world’s most popular crypto has been trading in a range of around $40,000 — a far cry from its record of $68,990 in November 2021. 

Why did it slip Thursday? Because bitcoin mirrors the stock market, mainly tech stocks. 

On Wednesday, Fed Chairman Jerome Powell said there may be .5% rate increases over the summer, but that officials weren’t considering a .75% increase.  

The momentary glee pushed stocks up on Wednesday, but those gains were erased on Thursday when the Federal Reserve raised its target federal funds rate by half a point — the second increase by the central bank this year.

Stocks tumbled. The Dow Jones fell 3.1%. The S&P 500 fell 3.6%, and the tech-heavy Nasdaq slid 5% — its biggest drop since June 2020.

Bitcoin is down 27% since the beginning of the year — and 47% since it’s November all-time high. Tech stocks have also done poorly this year. Google’s parent company Alphabet lost 20% of its share price, Microsoft is down 17%, and Meta has fallen 34% since the start of the year. 

Are the good times coming to an end? 

Over the last two years, the stock and crypto markets have been able to turn a blind eye to the reality of the pandemic because there was plenty of money flowing into the game to keep things going. 

Stimulus bills approved by Congress beginning in 2020 unleashed the biggest flood of federal money into the US economy ever. Roughly $5 trillion went to households, shops, restaurants, airlines, hospitals, local governments, schools, and other institutions. 

Stimulus checks ($1,200 in April 2020, $600 in December 2020, and $1,400 in March 2021) helped fuel a stock-buying spree — and a crypto buying spree. 

Starting in 2022, government programs meant to invigorate the economy during the pandemic ended. Now, reality is settling in. Americans are starting to think hard about the future. They are taking a good long look at their bank accounts and their budgets. 

The longer the Russia-Ukraine war goes on, the bigger its economic costs will be — and the war is looking like it will drag out for possibly years. 

Inflation is at its highest level since the 1980s, reaching 8.5% in March from a year ago. When I go to the grocery store, I can see the prices going up weekly. Avocados at Trader Joe’s are $2.29! 

Rising food prices are terrifying to a lot of people. Gas prices in parts of the country (California, Nevada) are over $5. It takes a lot of money to fill up the tanks in the SUVs Americans love. 

People are moving away from risky investments — like crypto — and fleeing to safety. They want to make sure they can weather inflation and any future slowdown in the economy. 

So they are putting their money into things like I Bonds right now. Just go to Treasury Direct. You can put $10,000 per year in I Bonds and they are paying 9.62%. That’s a lot safer than bitcoin. 

Of course, it’s not just rising interest rates that are rattling the crypto markets. Bitcoin needs fresh cash to keep prices buoyed, and it’s not clear where that next batch of fresh cash is going to come from. 

I wrote earlier about Grayscale’s Hotel California. The Grayscale Bitcoin Trust (GBTC) arb opportunity that pushed bitcoin to new heights in 2020 and early 2021 has dried up.  

Between January 2020 and mid-February 2021, bitcoin climbed from $7,000 to $56,000. GBTC is now trading at 25% below net asset value, and Grayscale stopped issuing new shares in March 2021. 

Grayscale is pushing for the SEC to convert GBTC into a spot bitcoin ETF to open the gates for more cash to flow into the cryptoverse. But it is doubtful that will happen. 

The SEC has rejected every spot bitcoin ETF to date, and — as I’m sure the commission will recognize — Grayscale can redeem those shares on its own at NAV if it wants.  

And then there’s Tether. On March 11, 2020, when the WHO declared COVID-19 a pandemic, causing a massive sell-off in stocks and crypto, Tether’s market cap was $5 billion. Today, 83 billion tethers are underpinning the price of bitcoin. What’s underpinning tethers?

It’s widely accepted amongst crypto critics that Tether is a fraud. Hindenburg’s Nate Anderson predicted that Tether’s two public faces would end 2022 in handcuffs. 

If you include the 48 billion USDC sloshing around in the crypto markets, I suspect insiders can pump the price of BTC past $50,000 anytime they want with stablecoins — but they don’t because there would not be enough cash in the system to keep up with withdrawals.

The same network effects that pushed bitcoin to its highs can unravel. At some point, people will want to sell their bitcoin for cash — not tethers or USDC. That means someone has to be on the other side of the deal ready to hand over real dollars. 

I don’t think the Big Crash is happening now, but the bitcoin sell-off on Thursday was an indication of just how wobbly things have become. All the conditions are ripe for a collapse in the crypto markets. It’s just a matter of time. 

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Reggie Fowler, Bitfinex/Tether’s alleged US money man, to plead guilty

In another last-minute twist, Reggie Fowler, the man at the center of hundreds of millions of dollars in missing Bitfinex-Tether money, is going to forgo a trial and enter an open plea to charges next week. His trial was scheduled to begin in May.

Fowler is charged with bank fraud, money laundering, and running an unlicensed money transmitting business. An open plea leaves the defendant’s sentence in the hands of the court, with no agreement from the prosecutor.

Fowler’s lawyer, Edward Sapone, filed a letter with a Manhattan court on April 21, asking Judge Andrew Carter to schedule a Rule 11 change of plea hearing. Fowler, who lives in Arizona, is hoping for a virtual hearing due to COVID, so he won’t have to get on a plane.  

The former football player allegedly ran a shadow banking service for Crypto Capital, a payment processor that crypto exchange Bitfinex was using to skirt the traditional banking system. Before his indictment on April 30, 2019, Fowler’s accounts were frozen by the Department of Justice.

This isn’t the first time Fowler has attempted to plead guilty. He came very close to a plea deal on January 17, 2020, but backed out in front of the judge at the very last moment.  

Had he accepted that deal, he would have likely spent five years in prison with three years of supervised release and paid a fine of up to $250,000.

But the deal, which required Fowler to forfeit $371 million held in some 50-odd bank accounts, fell apart at the last minute. Nobody was sure of the exact amount in the bank accounts and Fowler would have been on the hook for the difference.

On Feb. 20, 2020, the government followed up with a superseding indictment against Fowler, adding wire fraud to existing charges of bank fraud and illegal money transfer. 

According to federal prosecutors, from June 2018 to February 2019, Fowler obtained money through “false and fraudulent pretenses” to fund a professional sports league in connection with his ownership stake in the league. 

As it turned out, Fowler had invested $25 million in the Alliance of American Football — an attempt to form a new football league — shortly before his arrest in 2019.

Sapone has been Fowler’s lawyer since April 2021, when Fowler’s prior defense team withdrew from the case due to nonpayment. Fowler owed them $600,000.

Going to trial is a huge cost, which is why Fowler’s previous legal team stepped down when they did. They did not want to do all that work and risk not getting paid — for any of it. 

Sapone is stuck with the case. He cannot step down, as Judge Carter gave him fair warning when he took Fowler on as a client: “You are going into this with your eyes wide open.”

However, I do wonder if part of the reason Fowler is seeking an open plea has something to do with money. You would have to be a fool of a lawyer not to get paid upfront.

I have also heard that Fowler is strongly averse to media coverage, and journalists would have been all over the trial. He wouldn’t have liked that.

If you are just getting up to speed on all of this, the New York Attorney General charged Bitfinex and Tether with fraud in April 2019, claiming that Bitfinex covered up the fact that it had lost access to $850 million put in the trust of Crypto Capital, without so much as even a written contract.

The companies had to pay an $18.5 million fine as a result. They also can no longer operate in the state of New York, and Tether has to release public attestations on a regular basis. 

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Crypto predictions for 2022: A bitcoin crash is coming—eventually. Regulators will kill stablecoins, soon NFTs

I wrote a prediction piece last year, wherein I spoke to several nocoiner luminaries to get their predictions for 2021. I also gave my own predictions. Were we right? Did any of our predictions hold true?

Well, yes, we were spot on. All our predictions were 100% correct!

We predicted 2021 would be a year of comedy gold. It was! Where to begin? El Salvador adopted bitcoin as a national currency. You can’t get any dumber than that—or maybe you can. How about Bitcoin Volcano bonds? Or Elon Musk sending the bitcoin price falling when he tweeted a broken heart emoji?

Several of us also predicted bitcoin would collapse in value. Bitcoin has not suffered a stupendous crash yet, but the conditions are ripe for a crash—loose regulatory oversight and a lack of real dollars in the system. It’s just taking a little longer than we thought. 

Bitcoin started 2021 at $32,000. It went on to set a new record high of $69,000 in November 2021. It’s now below $50,000—already a 30% drop in price. The higher it goes, the farther it has to fall. The question is not if crypto will plunge, but when.  

Nicholas Weaver, a researcher at the International Computer Science Institute in Berkeley, who has been following Bitcoin since 2012, told me he expected the crypto markets to collapse six months ago. 

“I’m surprised the [bitcoin] mining hasn’t collapsed yet, but I think it’s being propped up by mining companies HODLing and going into debt on power bills.” Bitcoin miners mint 900 new bitcoins per day and they have to sell those for cash to pay their monstrous electricity bills.

Weaver added: “I think the huge hype with Crypto.com, Robinhood, and the others IS drawing in some retail suckers, just not enough.”

Robinhood, the popular stock trading app, starting shifting into crypto in 2020. In an attempt to become a household name, Singapore crypto exchange Crypto.com plastered its name on L.A.’s Staples Center. The media attention helps lure more real dollars into the crypto ecosystem.

Carol Alexander, professor of finance at Sussex University, told CNBC that she expects bitcoin to collapse to as low as $10,000 in 2022. As far as she’s concerned, bitcoin “has no fundamental value.” It’s not a real investment, just a “toy.”

To keep the game going a little bit longer, coiners will need to come up with a new way to lure dumb money into the crypto markets. How will they do this in 2022?

In 2017, initial coin offerings were the answer. In 2021, NFTs lured in the dumb money. David Gerard, author of “Attack of the 50-foot Blockchain,” predicts “there will be some attempt to invent a new form of crypto magic bean that’s more blitheringly stupid than NFTs, but I’m at a loss as to what it could be.”

Changing tides

Jorge Stolfi, a computer science professor at the State University of Campinas in Brazil, is reluctant to make bitcoin price predictions but he thinks change is definitely in the air. “If 2022 doesn’t see a massive crash plus regulations, enforcement, etc then I will be really shocked,” he said in a private chat. 

Stolfi pointed out that critics are less restrained now. In the past, they would tell you to “be careful.” Now they are outright calling bitcoin a Ponzi. Headlines tell the story. A recent opinion piece in the FT carried the headline: “Why bitcoin is worse than a Madoff-style Ponzi scheme.” On CNBC: “‘Black Swan’ author calls bitcoin a ‘gimmick’ and a ‘game,’ says it resembles a Ponzi scheme.” And a June 2021 headline in Vice read: “President of the Minneapolis Federal Reserve Called DOGE a Ponzi Scheme.”

Stablecoins

Stablecoins spun completely out of control in 2021. The supply grew 388%, driven by decentralized finance (DeFi) and derivative trading, according to research by The Block

In early 2021, there were 21 billion tethers sloshing around in the crypto markets. Twelve months later, that number quadrupled to 78 billion. Tether is now shamelessly moving tethers in 1 billion and 2 billion batches. And where are Tether’s two remaining principles—CEO Jean-Louis van der Velde and CFO Giancarlo Devasini? Nowhere to be seen is where. They disappeared from the public eye long ago. I suspect we won’t see them again until the U.S. DOJ catches up to them. 

Growth in the second most popular stablecoin was even more staggering in 2021. Circle’s USDC went from 4 billion to 42 billion. In July 2021, Circle shocked everyone when it announced plans to go public via a SPAC, thereby sidestepping the financial scrutiny of an IPO.

We haven’t heard any news on that SPAC since, even though the merger was supposed to close in Q4 2021. My guess is the heat is excessive.

Both Tether and Circle claim that their stablecoins are fully backed by reserves, but the big question is — how carefully are these reserves audited? Some of those reserve assets, like commercial paper, are riskier to convert to cash. Regulators are worried that stablecoins could fuel digital-era “bank runs” if a large number of investors rush to redeem them.

The Biden administration said in 2021 that it wants to regulate stablecoin issuers the same way as banks. SEC Commission Chairman Gary Gensler likened stablecoins to “poker chips at the casino.”

I predict stablecoin companies will continue to feel the pressure from regulators in 2022, and eventually, it will become impossible for them to stay in business. They are becoming too big of a risk.

NFTs — another regulatory loophole to be closed

In 2021, NFTs became dinner table talk after a Beeple piece sold for $69.3 million in crypto at a Christie’s auction. It turned out, the person behind the sale was the former operator of a shady cryptocurrency exchange in Canada, who partnered with Beeple on plans to fractionalize the NFT with a B20 token. He actually gave Beeple 2% of the B20 supply and kept 60% for himself.

Out of seemingly nowhere, NFTs have now become a $40 billion market.  

The initial coin offering market was huge in 2017, until regulators gave fair warning that most ICO tokens were unregistered securities. I predict the regulatory noose will tighten on the NFT market as well. Regulators are already warning that fractionalized NFTs resemble illegal securities. 

If NFT marketplaces are deemed art dealers, they could fall under the bank secrecy act, which means platforms will have to ID their customers and submit suspicious activity reports to the government. 

In short, 2022 will be a year that regulations put a stranglehold on crypto. Until then, expect more comedy gold and corruption in El Salvador, where President Nayib Bukele is now trading bitcoin on his phone and tweeting about it.

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News: EU to make BTC traceable, Circle’s stab at transparency, DoJ probes Tether for bank fraud

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Regulation

It’s time for Bitcoin to put on its big-boy pants. If you want to be real money, it turns out, you have to follow real money rules.

In light of that, the European Commission, the EU’s executive body, wants to apply FATF’s travel rule to crypto to make transactions more traceable. The rule, which already applies to real money transfers, will require all transfers of crypto assets to be accompanied by full details of both the sender and the receiver. 

“Crypto assets are increasingly used for money laundering and other criminal purposes,” the European Commission VP said in a press conference. “We’ll now bring crypto assets fully in scope of EU AML rules. (Press release; BBC)

In my last newsletter, I touched on a new stablecoin academic paper — “Taming Wildcat Stablecoins.” I’m bringing it up again because of the paper’s political importance, which is getting overlooked right now.  

The paper describes Tether as an equity instrument akin to a money-market fund and all other stablecoins as debt instruments. This appears to be an intentful regulatory distinction. I’m guessing it will come up again when the hammer falls on stablecoins — particularly Tether. Read the paper!

A bipartisan infrastructure bill agreed on by Senators and President Biden proposes to raise $28 billion from crypto investors by applying stricter IRS reporting requirements to exchanges and other parties. (Bloomberg)

CFTC Commissioner Dan Berkowitz spoke about decentralized finance at DACOM DeFI 2021. He has talked about DeFi platforms in the past. But this time, he said the contracts themselves are illegal. (Youtube)

“If you have a system where you take out the intermediary and you just have a bunch of people trading contracts, those contracts are still in violation of the Commodity and Exchange Act,” he said. “It’s not just the intermediaries that are regulated — it’s the instruments themselves and the people that are using them.”

On June 27, the Senate Banking Committee held a hearing called “Cryptocurrencies: What are they good for?” If you don’t have time to listen to the whole thing, Alexis Goldstein, senior policy analyst at nonprofit coalition Americans for Financial Reform, recaps the important bits in a Twitter thread.

Sen. Elizabeth Warren is concerned about the risk crypto poses to the financial system. In a letter to Treasury Secretary Janet Yellen, she suggested Yellen tap the Financial Stability Oversight Council — a panel of top regulators that the Treasury secretary chairs — to “act with urgency.” Warren cited stablecoins, DeFi, exposure to hedge funds, and risk to banks. (Politico)

Tether’s criminal probe

The big news: The US Justice Department is investigating Tether for bank fraud. It looks like the DoJ may have leaked a target letter to Bloomberg. (If you’re not sure what that is, here is a sample target letter.)

I wrote a blog post explaining Tether’s banking history. David Gerard and I also did a podcast on the topic for “When the Music Stops.” 

Why would the DoJ leak a target letter? Because they are giving the public a heads up on what is to come. Fifty percent of all bitcoin is still traded against tethers and this could have a potentially big impact on the market. In other words: Get your funds off Tether exchanges now. 

The Tether printer is still paused, as it has been since the end of May/early June. There are currently 62 billion USDT in circulation, with Tether having burned another 200 million USDT in the last week. 

We don’t know why Tether stopped printing. But the timing corresponds with China’s crackdown on crypto and all the stuff going on with Binance. It’s also possible Tether knew the DoJ was onto them.

Tether says that its reserves consist mostly of commercial paper, which would make it one of the largest commercial paper holders in the world. Is it Chinese commercial paper? Tether won’t say, but if it is, that could pose a problem for Tether as Chinese regulators want real estate developers — major issuers of CP — to start disclosing more details of CP issuance on a monthly basis. (CNBC)

In their infinite wisdom, Tether execs — CTO Paolo Ardoino and General Counsel Stuart Hoegner — decided it would be a good idea to go on CNBC to be interviewed by Deirdre Bosa. (Youtube)

Naturally, Bosa asked them about their commercial paper. 

“We don’t disclose our commercial partners, so that is quite important,” Ardoino said. “Given our portfolio composition in commercial paper, we believe that it is quite important to respect the privacy of the banking partners that we work with.” 

Privacy of banking partners? Just about every money-market fund out there lists all of its holdings by size and issuer and CUSIP — a unique code assigned to most financial instruments.  

“Everything in this interview melted my brain,” says Bloomberg’s Matt Levine. 

Circle releases a new attestation

Circle released its May attestation with additional transparency around its USDC stablecoin. The Boston firm is trying to go public via a SPAC. 

In the past, Circle’s attestations pointed vaguely to “approved investments.” Now it has released a full breakdown of its investments, sort of. (Doomberg)

Sure, it’s a step toward greater transparency, but why doesn’t Circle just go ahead and release its Q1 financials? If everything is on the up and up, that would seem like the simplest way to remove any doubt about USDC’s backing. 

Frances Coppola, who worked in banking for over a dozen years, thinks Circle is commingling funds. (Twitter thread)

Binance loses another wheel

The wheels keep falling off the Binance bus. UK bank NatWest has joined Santander and Barclays in cutting off payments to the crypto exchange. (Coindesk)

The bad news follows the UK’s Financial Conduct Authority issuing a consumer warning about Binance on June 26, which Binance played down as no big deal.  

In the UK, crypto businesses are required to register with the FCA. Binance Markets Ltd., the company’s UK arm, applied but withdrew its application on May 17 after intensive engagements with the FCA who had concerns with the exchange’s AML safeguards and lack of a headquarters. 

Hedge funds are also backing away from the ticking time bomb that is Binance. Tyr Capital has significantly reduced its exposure, along with ARK36. (FT)

Binance changed its withdrawal limit from 2 BTC to just 0.06 BTC for all users without KYC. The change goes into effect for new users right away and existing users on Aug. 4. (Binance website; archive)

Either Binance is making a greater effort to comply with AML rules — or they are insolvent. I’m going to go with #2. 

Meanwhile, CZ is pretending everything is fine, so people don’t move all their funds off the exchange in a panic, causing the entire house of cards to collapse, like Mt Gox in 2014. 

CZ talks a big game about making Binance compliant, but that is all it is and all that it’s ever been — talk. Along those lines, he is now discussing taking Binance US public via an IPO. (Cointelegraph)

He also says he wants to hire a new CEO as the exchange tries to comply with regulations.(Coindesk)

If you still have money on Binance, get it off now. Otherwise, #SFYL.

A world of hell for BlockFi

New Jersey-based crypto lending firm BlockFi is getting into all sorts of trouble over its high-yield BlockFi Interest Accounts, or BIAs, which look a lot like unregistered securities.

You send crypto to BlockFi and they issue you BIAs, which earn 7.5% interest. You get paid monthly, and the incentive is to just keep rolling the funds back into BIAs, because look how rich you are — on paper!

The New Jersey Bureau of Securities issued a summary cease and desist order to BlockFi ordering the company to stop offering BIAs to customers in NJ. Originally, the order was set to hit on July 22, but it has been delayed to Sept. 2, according to BlockFi. 

In a press release on July 21, the Alabama Securities Commission said it has issued a show of cause to the firm. The order gives BlockFi 28 days to explain why they should not be directed to cease and desist from selling unregistered securities in Alabama. 

Following that, the Texas State Securities Board said in a notice of hearing on July 22 that the BIA is a security under state law. A hearing is set for Oct. 13. Texas also claims BlockFi violated the state laws by selling securities without being registered as a dealer or agent. 

Vermont also issued a show of cause order on July 22.

Meanwhile, BlockFi CEO Zac Prince has spun this like a bunch of good news. “We’ve said time and again that the key to our industry’s success is appropriate regulation. Ultimately, we see this as an opportunity for BlockFi to help define the regulatory environment for our ecosystem,” he said in a blog post.

Virgil Griffith taken into custody

Virgil Griffith, the former Ethereum developer who got himself into hot water by going to DPRK and giving a talk on crypto, has got himself into more hot water. 

Griffith, who has been living with his parents since his indictment, violated his bail conditions by trying to access his crypto on Coinbase. The judge thinks he is a flight risk, so he’s put Griffith behind bars to await trial in September. 

Since his arrest in November 2019, Griffith’s $100,000 in ETH has grown to $1 million in ETH. He had his mother reach out to Coinbase on his behalf. Griffith is a smart guy, who apparently does dumb things. 

“Though the defendant is a bright well-educated man, his method of circumvention of the Order was neither clever nor effective,” the judge said. (Court filing)

Other newsworthy bits

MicroStrategy just posted a $299 million loss for Q2 after betting the house on Bitcoin. But like any crazed degenerate gambler, Michael Saylor plans to keep buying more bitcoin. (Press release; Forbes)

El Salvador’s President Nayib Bukele is pioneering hustle bro populism. Bukele distracted from his self-coup when he announced bitcoin soon after. (FP)

El Faro got a copy of the presentation Cardano gave to the El Salvador government. This is somewhere between hilarious and tragic. Bukele and his regime want to implement their colón-dollar stablecoin by Sept. 7, yet they literally have no plan for how to make it happen, so they are fishing for anything. (Leaked presentation)

Coinbase is the target of a class-action. The lead plaintiff, Brandon Leidel, claims he lost money investing in COIN when the price of the shares fell right after all the VCs cashed out. (Complaint; Law360, paywalled)

Dfinity has been hit with a class-action claiming the company sold its Internet Computer Project (ICP) tokens as an unregistered security. The suit targets Olaf Carlson-Wee’s crypto hedge fund Polychain Capital, venture capital firm Andreessen Horowitz, and Dfinity’s founder Dominic Williams as the “controlling defendants.” (Complaint; Decrypt)

DeFi exchange Uniswap is blocking 100 tokens from its website — including tokenized stocks and some derivatives. The move came right after the CFTC commissioner said contracts were illegal on DeFi. (Alexis Goldstein)

Paxos’ General Counsel takes aim at Tether and USDC, claiming that the two stablecoins it issues — Paxos Standard and BUSD — are both regulated, while Tether and USDC are not. It also claims Paxos Standard and BUSD are are backed by 96% cash or cash equivalents. (Paxos blog post; The Block)

Multilevel-marketing schemes are a predatory wealth transfer from low-information people recruited into the scheme directly to the company upper ranks’ pockets. Stephen Dhiel writes about unintentional scams. (Blog post) 

Bitcoin’s gold rush was always an illusion. Millions of people have bought into the idea that crypto could make them rich, fast. But these booms are fake. Really good story in the New Statesmen.

Podcast: ‘Target Letter, Tether’ (Amy Castor and David Gerard)

I did a podcast for “When the Music Stops” with fellow crypto skeptic David Gerard, where we discuss the Justice Department’s criminal probe into Tether. You can also listen to the podcast on Spotify and Apple Podcasts.

David and I talk about what the DoJ probe means, why they may have leaked the info to Bloomberg, and take a guess as to when Tether may have gotten a “target letter” from federal prosecutors. (Hint: probably about the time that Tether stopped printing.)

Aviv Milner is the host. He has been doing a number of interviews with crypto skeptics, and I highly recommend perusing his other podcasts as well.

If you want more details on Tether’s banking history, read my blog post — “The DoJ’s probe into Tether — what we know” — which relates to much of what we talk about in the podcast.

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The DOJ’s criminal probe into Tether — What we know

Early this morning, Bloomberg reported that Tether executives are under a criminal investigation by the US Department of Justice.  

The DOJ doesn’t normally discuss ongoing investigations with the media. However, three unnamed sources leaked the info to Bloomberg. The investigation is focused on Tether misleading banks about the true nature of its business, the sources said.

The DoJ has been circling Tether and Bitfinex for years now. In November 2018, “three sources” — maybe even the same three sources — told Bloomberg the DOJ was looking into the companies for bitcoin price manipulation. 

Tether responded to the latest bit of news in typical fashion — with a blog post accusing Bloomberg of spreading FUD and trying to “generate clicks.” 

“This article follows a pattern of repackaging stale claims as ‘news,” Tether said. “The continued efforts to discredit Tether will not change our determination to remain leaders in the community.”

But nowhere in its post did Tether deny the claims. 

Last night, before the news broke, bitcoin was pumping like crazy. The price climbed nearly 17%, topping $40,000. On Coinbase, the price of BTC/USD went up $4,000 in three minutes, a bit after 01:00 UTC. 

After a user placed a large number of buy orders for bitcoin perpetual futures denominated in tethers (USDT) on Binance — an unregulated exchange struggling with its own banking issues — The BTC/USDT perpetual contract hit a high of $48,168 at around 01:00 UTC on the exchange.

Bitcoin pumps are a good way to get everyone to ignore the impact of bad news and focus on number go up. “Hey, this isn’t so bad. Bitcoin is going up in price. I’m rich!”

So what is this DoJ investigation about? It is likely a follow-up to the New York attorney general’s probe into Tether — and its sister company crypto exchange Bitfinex — which started in 2018. 

Tether and Bitfinex, which operate under the same parent company iFinex, settled fraud charges with the NY AG for $18.5 million in February. They were also banned from doing any further business in New York.

“Bitfinex and Tether recklessly and unlawfully covered-up massive financial losses to keep their scheme going and protect their bottom lines,” the NY AG said.

The companies’ woes started with a loss of banking more than a year before the NY AG initiated its probe. 

Banking history

Tether and Bitfinex, both registered in the British Virgin Islands, were banking with four Taiwanese banks in 2017. Those banks used Wells Fargo as a correspondent bank to process US dollar wire transfers. 

In other words, the companies would deposit money in their Taiwanese banks, and those banks would send money through Wells Fargo out to the rest of the world. 

However, in March 2017, Wells Fargo abruptly cut off the Taiwanese banks, refusing to process any more transfers from Tether and Bitfinex. 

About a month later — I would guess, after Wells Fargo told them they were on thin ice — the Taiwanese banks gave Tether and Bitfinex the boot.  

Since then, Tether and Bitfinex have had to rely increasingly on shadow banks — such as Crypto Capital, a payment processor in Panama — to shuffle funds around the globe for them. 

They also started furiously printing tethers. In early 2017, there were only 10 million tethers in circulation. Today, there are 62 billion tethers in circulation with a big question as to how much actual cash is behind those tethers.  

Crypto Capital

Partnering with Crypto Capital turned out to be an epic fail for Bitfinex and Tether.

The payment processor was operated by principals Ivan Manuel Molina Lee and Oz Yosef with the help of Arizona businessman Reggie Fowler and Israeli woman Ravid Yosef — Oz’s sister, who was living in Los Angeles at the time.

In April 2019, Fowler and Ravid were indicted in the US for allegedly lying to banks to set up accounts on behalf of Crypto Capital. Fowler is currently awaiting trial, and Ravid Yosef is still at large. 

Starting in early 2018, the pair set up dozens of bank accounts as part of a shadow banking network for Crypto Capital. Some of those banks — Bank of America, Wells Fargo, HSBC, and JP Morgan Chase — were either based in the US, or in the case of HSBC, had branches in the US, and therefore, fell under the DOJ’s jurisdiction. 

In total, Fowler’s bank accounts held some $371 million and were at the center of his failed plea negotiation in January 2020. Those accounts, along with more frozen Crypto Capital accounts in Poland, meant that Tether and Bitfinex had lost access to some $850 million in funds in 2018.

Things spiraled downhill from there. Molina Lee was arrested by Polish authorities in October 2019. He was accused of being part of an international drug cartel and laundering funds through Bitfinex. And Oz Yosef was indicted by US authorities around the same time for bank fraud charges.

Tether stops printing

At the beginning of 2020, there were only 4.5 billion tethers in circulation. All through the year and into the next, Tether kept issuing tethers at greater and greater rates. Then, at the end of May 2021, it stopped — and nobody is quite sure of why. Pressure from authorities? A cease and desist order? 

Usually, cease and desist orders are made public. And it is hard to imagine that there would be an order that has been kept non-public since May.

One could argue, you don’t want to keep printing dubiously backed stablecoins when you’re under a criminal investigation by the DOJ. But as I’ve explained in prior posts, other factors could also be at play. 

For instance, since Binance, one of Tether’s biggest customers, is having its own banking problems, it may be difficult for Binance users to wire funds to the exchange. And since Binance uses USDT in place of dollars, there’s no need for it to acquire an additional stash of tethers at this time.

Also, other stablecoins, like USDC and BUSD, have been stepping in to fill in the gap.

The DOJ and Tether

You can be sure that any info pulled up by the NY AG in its investigation of Tether and Bitfinex has been passed along to the DoJ and the Commodities and Futures Trading Commission — who, by the way, subpoenaed Tether in late 2017. 

Coincidentally — or not — bitcoin saw a price pump at that time, too. It went from around $14,000 on Dec. 5, 2017, the day before the subpoena was issued, to nearly $18,000 on Dec. 6, 2017 — another attempt to show that the bad news barely had any impact on the bitcoin price. 

Tether relies on confidence in the markets. As long as people believe that Tether is fully backed, or that Tether and Bitfinex probes won’t impact the price of bitcoin, the game can continue. But if too many people start dumping bitcoin in a panic and rushing toward the fiat exits, the truth — that there isn’t enough cash left in the system to support a tsunami of withdrawals — will be revealed, and that would be especially bad news for Tether execs. 

Will Tether’s operators be charged with criminal actions any time soon? And which execs is the DoJ even investigating? The original operators of Bitfinex and Tether — aka “the triad” — are Chief Strategy Officer Phil Potter, CEO Jan Ludovicus van der Velde and CFO Giancarlo Devasini.

Phil Potter supposedly pulled away from the operation in mid-2018. And nobody has heard from van der Velde or Devasini in a long, long time. Now, the two main spokespersons for the companies are General Counsel Stuart Hoegner and CTO Paolo Ardoino, who give lots of interviews defending Tether and accusing salty nocoiners like me of FUD.  

Tracking down bad actors takes a lot of coordination. Recall that the DoJ had to work with authorities in 17 different countries to finally arrest the operators of Liberty Reserve, a Costa Rica-based centralized digital currency service that was used for money laundering. Similar to Liberty Reserve, Tether is a global operation and all of the front persons associated with Tether — except for Potter who lives in New York — currently reside outside of the US. 

It may still take a long while to completely shut down Tether and give it the Liberty Reserve treatment. But if the DoJ files criminal charges against Tether execs, that is at least a step in the right direction.

Read more: 
The curious case of Tether — a complete timeline
Nocoiner predictions: 2021 will be a year of comedy gold 

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Reggie Fowler, man at the center of Tether’s missing funds, ready for trial

It looks like Reginald Fowler, the man tied to hundreds of millions of dollars of missing Tether and Bitfinex money, has ditched plans for renegotiating a plea deal. Instead, he is planning to head to trial. 

In a letter filed with the New York Southern District Court on July 7 on behalf of both parties, the government stated: “The parties are not currently engaged in plea negotiations and do not anticipate resuming negotiations.”

Prosecutors are requesting a trial date in early February with pretrial motions beginning in October. The trial is expected to last two weeks. 

[Update Aug. 4: Fowler’s trial is set for Feb. 14, 2022. Here is the order.]

Fowler was indicted in April 2019, along with Israeli woman Ravid Yosef, who is still at large. The pair allegedly lied to banks, telling them they were in the real estate business so they could illegally open up accounts to store funds for cryptocurrency exchanges on behalf of Crypto Capital, a shadow banking operation. 

Fowler is currently represented by Ed Sapone of Sapone & Petrillo. He hired Sapone in April after his previous legal team withdrew from the case due to nonpayment. They claimed to be out over $600,000.

At the time, Judge Andrew Carter gave Sapone three months to get up to speed on the case and warned: “You are going into this with your eyes wide open.”

Preparing for trial means a lot more work for Sapone, so it is a surprise he wasn’t able to work out something with prosecutors. 

Fowler came very close to a plea deal on January 17, 2020. 

On that day, the former football player stood before the judge in a Manhattan courtroom ready to plead guilty to count four of his indictment — charges of operating an unlicensed money transmitter business — pursuant to negotiating with the government. 

Had he accepted the deal, Fowler would have likely spent five years in prison with three years of supervised release, and paid a fine of up to $250,000.

But the deal, which required Fowler to forfeit $371 million held in some 50-odd bank accounts, fell apart at the last minute. Why? Because nobody was sure of the exact amount in the bank accounts and Fowler would have been on the hook for the difference.

James McGovern, Fowler’s defense attorney at the time, told the judge:

“The issue with respect to the forfeiture that became an issue for us today stems from the fact that none of the parties seem to have an idea of how much money is at play here in the forfeiture order because these accounts that have all been frozen by one entity or another have an amount of money that nobody seems to know how much is in there. So our issue is how much actual exposure under the forfeiture order after the accounts are liquidated is Mr. Fowler looking at. That’s kind of the heart of the issue.”

On Feb. 20, 2020, the government filed a superseding indictment against Fowler, adding wire fraud to existing charges of bank fraud, illegal money transfer, and conspiracy. Wire fraud alone is punishable with up to 20 years in prison, so Fowler, 61, could be looking at spending the rest of his life behind bars.

There was speculation that Fowler’s defense team would try again to work out something with the government. He could still negotiate a deal, but by the tone of the prosecutor’s letter today, it sounds unlikely. 

Related stories:
Reginald Fowler, man tied to missing Bitfinex funds, out on $5M bail

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News: Tether printer on hold, China’s crypto crackdown, the world hates Binance, El Salvador’s Chivo wallet

In case you missed my tweet, I ended up sick at the end of June. I was chatting with a friend over Zoom when he noticed that I was tilting over in my chair. Was I drunk? No. Should he call an ambulance? I’m fine.

I ended up in the ER the next day on IV fluids and hooked to monitors. Turns out I had Anaplasmosis from a tick bite. Doxycycline did the trick, and I was on my feet again within 48 hours. 

Apparently, this is the price you pay for walking blissfully unaware through grassy fields and woodsy trails. 

I mentioned earlier I was writing a book on NFTs. While I did a lot of research on the subject, I’m putting the book on hold for now. My concern is, who would read it? NFTs seem to have been a fad, slipping out of fashion. 

If you are interested in the topic, check out my recent notes on NFTs and money laundering. I also wrote for Business Insider on how Metakovan was pumping Beeple NFTs months before he bought Beeple’s $69.3 million NFT at Christie’s. 

I think we can all admit that the art behind almost every NFT is absolute garbage, which the author of this blog post does a fine job of pointing out. 

China’s crackdown on crypto

The People’s Bank of China has hated crypto since 2017, when it initially kicked the crypto exchanges out. 

In recent months, the country has gone after crypto with a renewed vengeance, banning FIs from providing services to crypto firms and forcing bitcoin miners in the country to take their hardware offline. 

Up until recently, most of the world’s bitcoin mining (~ 65% to 75%) took place in China. The country’s crackdown on mining caused more than 50% of the bitcoin hashrate to drop since May.

The hashrate dropped faster than bitcoin’s difficulty algorithm could keep up. Every 2,016 blocks, the difficulty adjusts to account for how many miners are on the network. 

On July 3, bitcoin experienced a record 27.94% drop in mining difficulty, according to BTC.com, meaning now, bitcoin miners will have an easier time finding blocks. (CNBC)

Beijing even told companies they are no longer allowed to provide venues, commercial displays, or even ads for crypto-related businesses. On Tuesday, the PBoC said it had ordered the shutdown of Beijing Qudao Cultural Development, a company that makes software for crypto exchanges. (Reuters)

Why does China loathe crypto? Some people say the PBoC is trying to make way for China’s CBDC, but I doubt that has anything to do with it. The most likely reason is the country wants to stem capital outflows. According to a Chainalysis report last August, $50 billion in crypto assets moved from China to other regions in a 12-month period. 

Why has Tether stopped printing?

Tether is currently at 62.7 billion tethers, and it’s been stuck there for more than a month. Tether had several big prints at the end of May and now, crickets all through June and into July. The printer has totally stopped. 

Nobody is really clear on why Tether has put its printing presses on hold, but the timing seems to correlate with China’s crackdown on crypto.  

We have three theories for why Tether stopped printing

Theory #1 — Less demand

The China crackdown has created a reduced demand for tethers. When bitcoin’s hash rate dropped precipitously, so did the number of newly minted BTC per day — at one point it was down to 350 new BTC per day, as opposed to the 900 BTC per day the network should be producing.

Binance and OKex have mining pools, so bitcoin miners can mint bitcoin directly to their own exchange accounts. Since there is no way to cash out directly, miners convert BTC to tethers (USDT). And then convert USDT to RMB on unregulated over-the-counter platforms, such as Huobi and CoinCola.

With the exodus of miners from China, there was less demand for tethers. 

Theory #2 — Chinese junk debt

Another theory floating around is that Tether may have been getting Chinese junk debt to issue tethers, and now that is no longer possible due to the risks. 

Tether’s latest composition report showed that 50% of the assets backing USDT were unspecified commercial paper. In the US commercial paper market, that would place Tether among the likes of fund managers like Vanguard and BlackRock, which seems unlikely. (FT)

So maybe it’s holding Chinese paper?

“If Tether is holding Chinese commercial paper, the issuer can default on those debts with impunity. What is Tether going to do? Sue in Chinese courts?,” Tether whistleblower Bitfinexed said in a tweet.

He revealed in a DM that the info comes from a “reliable source.”

Theory #3 — USDC is picking up the slack

While the tether printer stopped, the USDC printer appears to have picked up speed, issuing 10 million USDC since May 8. 

As of July 5, there are 25.5 billion USDC stablecoins in circulation, so maybe USDC is stepping into Tether’s shoes?

In other news, Tether is working hard to shine up its tarnished image. The company is hiring a Reputation Manager, to “advocate for the company in social media spaces, engaging in dialogues and answering questions where appropriate.” 

If you want to fight the FUD spread by salty nocoiners like myself, this job could be for you. (Teether, archive)

Binance vs the world

The UK, Singapore, Japan, Germany, Canada and now the Cayman Islands are all moving against Binance, the world’s largest crypto exchange. I wrote a blog post detailing Binance’s pariah status. 

The bad news keeps getting worse. Following the FCA banning Binance in the UK on June 26, Barclays says it is blocking customers from using their debit and credit cards to make payments to Binance. (They will let you take money out, but they won’t let you put money in.)

Binance “talks a big game on anti-money laundering and know-your-customer” rules, but was “resistant to throwing human resources at compliance issues,” an executive at a payments company that helped connect Binance to the broader financial market before cutting ties with the group, told the (FT)

And worse still — on Tuesday, Binance told its customers that it will temporarily disable deposits via SEPA bank transfers. Binance said the move was due to “events beyond our control.” (FT)

Binance founder CZ says it’s all FUD.

Binance’s organizational structure

Binance has a lot secrets. The company refuses to say where its headquarters is located. And it’s tight-lipped about its organizational structure, too. 

On May 1, Brian Brooks, former Coinbase chief legal officer and former acting head of the Comptroller of the Currency, took over as CEO of Binance.US, replacing Catherine Coley. (WSJ)

In a Coindesk interview in April, he said he reports to the board of directors, yet he wouldn’t name who was on the board. 

Coindesk: “Brian, what is the reporting structure with Binance US. Who do you report to?”

Brooks: “I have a board of directors, which I will be a member of, and I will report to that board.” 

Coindesk: “Who else is on the board?”

Brooks: “The board is obviously the founder of the company and another person. It’s a private company, so we don’t necessarily go into the governance structure…”

Later when Coindesk asks him where Binance.com is located, Brooks dances around that question as well. He did say, however, that Binance keeps its US customer data separate from Binance.com. 

Binance.US also just brought onboard Manuel Alvarez, a former commissioner at the California Department of Financial Protection and Innovation, as its new chief administrative officer. (Coindesk)

FATF releases 12-month review 

The Financial Action Task Force, a Paris-based global anti-money laundering watchdog, published its second 12-month review of its revised standards for virtual assets and virtual asset service providers, or VASPs

VASPs include crypto exchanges, bitcoin ATM operators, wallet custodians, and hedge funds. 

When the FATF published its guidance in 2019, it recommended full AML data collection by VASPs — and Rule 16, also known as the “travel rule.” 

The travel rule requires VASPs to disclose certain customer data and include that data with a funds transfer, so that the info “travels” down the funds transfer chain.  

Of FATF’s 128 reporting jurisdictions, 58 have implemented the revised FATF standards. The other 70 have not. And the majority of jurisdictions have yet to implement the travel rule.

“These gaps in implementation mean that there is not yet a global regime to prevent the misuse of virtual assets and VASPs for money laundering or terrorist financing,” the FATF said. 

The FAFT plans to publish its revised guidance by November 2021 with a focus on accelerating the implementation of the travel rule as a priority. (Forkfast)

Kaseya ransomware  

The REvil ransomware operation is behind a massive attack centering on Kaseya, a company that develops software for managed service providers. MSPs provide outsourced IT services to small and medium-sized businesses that can’t afford their own IT department. 

Between 800 and 1,500 businesses have been compromised by the global ransomware attack, including schools in New Zealand and supermarkets in Sweden. 

The REvil gang has offered to decrypt all victims for $70 million in Monero (XMR), a cryptocurrency that is harder to track than bitcoin. The immediate ransom demand is $45,000 worth of XMR, rising to $90,000 after a week.

Nicholas Weaver, a researcher at the International Computer Science Institute in Berkeley, wrote a story for Lawfare breaking down the Kaseya ransomware attack. 

He also wrote an earlier story for Lawfare titled “The Ransomware Problem Is a Bitcoin Problem,” where he explains why getting rid of crypto is a great idea. “The ransomware gangs can’t use normal banking. Even the most blatantly corrupt bank would consider processing ransomware payments as an existential risk.”

El Salvador, bitcoin and Bitcoin Beach

Who is the San Diego surfer who brought bitcoin to El Zonte? A white evangelist named Michael Peterson. I wrote about him and his Bitcoin Beach project at length in a recent blog post. 

Peterson read my story. He says it’s full of “glaring inaccuracies” and “plagiarized pieces of other bad reporting.” When asked to substantiate his defamatory accusations, he never replied back. 

Does he use these same bully tactics to get people in El Zonte to use bitcoin? 

David Gerard wrote up a detailed blog post explaining the latest developments on bitcoin and El Salvador. 

Here are some notes, if you want to catch up quick:

  • Nayib Bukele, El Salvador’s president, has announced a government wallet — the Chivo wallet — that will be available for download in September. (Youtube)
  • The Chivo (slang for “cool”) wallet will hold both USD and bitcoin balances. 
  • Salvadorans who sign up for the mobile app will get $30 in bitcoin, but they have to spend it. They can’t sell their BTC for cash — which makes you wonder if Bukele is simply planning to issue new dollars under the guise of bitcoin. (I also recommend you read Gerard’s piece in Foreign Policy on this topic)
  • The technical details of the Chivo wallet are totally unclear. Is Jack Mallers, the CEO of Zap and the remittance app Strike, going to develop the wallet? We don’t know.  
  • Originally, Mallers said Strike was using tether for remittances. (My blog post.) Now, he says Strike is no longer using tethers, and the folks in El Salvador receiving remittances on his app will receive actual dollars. (What Bitcoin Did)
  • How will this happen? Mallers said in his What Bitcoin Did interview that his company has local banking relationships in ES, but we don’t know what banks, where. 
  • Here is a direct quote from the transcript of the interview: “So, I was like, ‘Well, fuck, I don’t know then how I’m going to pull this off!’ So, what I did is, we built Tether into Strike, which was the equivalent of the Chase bank account in America, and it at least gave us some MBP basic functionality, where I can go and just observe and listen and see how people used it and see if it was helpful. But now, we’re already integrating with the top five banks in the country.”
  • Mallers tends to be long on plans and short on details. When the media reaches out to him with questions — like Decrypt did when they learned Zap is not licensed to operate in most US states — he generally just ignores them. 
  • Despite what Mallers keeps claiming, sending remittances via Western Union from the US  to El Salvador isn’t really that costly, to begin with. Steve Hanke, Nicholas Hanlon, and Mihir Chakravarthi point this out in their paper: “Bukele’s bitcoin blunder.”
  • Jack Maller’s company Zap (the parent company of Strike) got $14.9 million in fresh funding in March from “Venture Series – unknown,” on top of a $3.5 million seed round a year prior. Nobody seems to know who is behind the funding. (Crunchbase)
  • Athena, the company that Bukele ordered 1,000 new bitcoin ATMs from, installed a new bitcoin ATM machine — the country’s third installed machine! — in La Gran Vía shopping center. They had a ribbon-cutting ceremony and everything.
  • Unfortunately, the machine was located in front of an upscale department store owned by the Simán family, Bukele’s arch enemy. Worried that the ATM would draw foot traffic to his rival’s business, Bukele had the machine relocated next to the toilets, where it sits unplugged. (Twitter) 
  • The US State Department named 14 El Salvadorans, many associated with the Bukele regime, as corrupt or undemocratic actors. (US State report)

Robinhood’s planned listing

Robinhood had plans to go public in June, but the SEC has some questions about its cryptocurrency business, according to Bloomberg.

The company also agreed to pay FINRA $70 million to settle allegations that the brokerage caused customers “widespread and significant” harm on multiple different fronts over the past few years.

Specifically, FINRA’s investigation found that millions of customers received false or misleading information from Robinhood on a variety of issues, including how much money customers had in their accounts, whether they could place trades on margin and more.

In its SEC S-1 filing, which dropped on July 1,  Robinhood notes that a “substantial portion of the recent growth in our net revenues earned from cryptocurrency transactions is attributable to transactions in Dogecoin. If demand for transactions in Dogecoin declines and is not replaced by new demand for other cryptocurrencies available for trading on our platform, our business, financial condition and results of operations could be adversely affected.”

Robinhood currently supports seven different cryptos. When you trade crypto on Robinhood, you don’t ever hold the keys to your own crypto. Robinhood itself buys the actual crypto and maintains custody, so you can’t move your coins onto or off the platform. You’re stuck in there.

Bitcoin mining turns NY lake into a hot tub

The Greenidge Generation Bitcoin mining plant, owned by private equity firm Atlas Holdings, sits on the shores of beautiful Seneca Lake in New York. 

The tagline on its website reads, “Green Power for Generations to Come.”  

The firm uses lake water to cool its 8,000 computers used to mine bitcoin within the gas-fired plant. Greenidge’s current permit allows it to take in 139 million gallons of water and discharge 135 million gallons daily, at temperatures as high as 108 degrees Fahrenheit in the summer and 86 degrees in winter.  

Locals want the mining facility gone. They have been staging protests. They claim the plant is polluting the air and heating the lake, thanks to its use of fossil fuels.

“The lake is so warm you feel like you’re in a hot tub,” said one nearby resident. (NBC) (Arstechnica)

RSA Conference’s blockchain moment

Over the weekend, the RSA Conference gave infosec and computer science Twitter a bit of a shock when it suggested replacing the entire internet with — a blockchain. 

The tweet quickly disappeared, but not before being archived. The blockchain is immutable! I wrote about the event in a blog post.

(Updated on July 8 to note that Brian Brooks replaced Catherine Coley as CEO of Binance.US.)

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News: Tether—now 3% backed, Binance under investigation, Bitfinex shareholder charged, fickle Elon Musk

I’ve been inconsistent with my newsletters lately because I’m struggling to write this dang NFT book. It is slow going, and I keep falling down these rabbit holes. I feel like if I don’t hurry, the entire crypto market will collapse and NFTs will become a distant memory. Nevertheless, next week, I’ll begin publishing drafts of chapters on Patreon. You can subscribe here. 

Tether has so far issued 58.5 billion tethers—8 billion in the first two weeks of the month. You will notice that it keeps printing tethers at a faster and faster rate. That’s to make up for all the real money that isn’t in the system. When will Tether blow up? When regulators and law enforcement step in or it crumbles in on itself. Remember, Madoff’s Ponzi fell apart on its own.

Currently, the price of bitcoin is $45,000, down after Elon dissed it (more below) and Jack Dorsey’s Square said it is no longer buying bitcoin after suffering $20 million in losses on its $220 million investment in the last quarter.

Tether’s muddy pies

You asked for transparency, and Tether finally delivered in the form of two, uh, pie charts. I wrote about it here. David Gerard covered it here. And there’s also a story in the FT. 

There’s been endless chatter on Twitter about “commercial paper,” because apparently, it accounts for half of all the assets backing tethers. What’s CP?

In the case of Tether, it’s likely another way to disguise IOUs—i.e., handing out free tethers to their buds at Binance, FTX, and elsewhere. The real story here is that less than 3% of Tether’s reserves now consist of cash. What is the NYAG going to do about it? A FOIL request sent to the prosecutor recently yielded this response.

Folks are asking why Tether hasn’t collapsed yet, given that everyone knows it’s a farce and they are just printing money out of thin air. The answer is because Tether has no obligation to redeem tethers, to begin with—that’s written into its terms of service. The reckoning will come when people try to cash out of bitcoin, and it dawns on them there is no real money in the system to support withdrawals, because the markets were based on funny money.

Binance under investigation

Binance, the world’s biggest crypto exchange, is under investigation by the DoJ, the IRS, and the CFTC, according to Bloomberg. Binance is unregulated, registered in the Caymans, and likes moving around a lot.

“Wherever I sit is going to be the Binance office. Wherever I need somebody, is going to be the Binance office,” CZ, the company’s founder, told a podcaster last year.

The investigations come right after a report by Chainalysis that traced $2.8 billion worth of illicit bitcoin on exchange and trading platforms. Of that, $756 million went through Binance.

They also follow Germany’s financial regulator BaFin warning that Binance may have violated securities rules when it issued tokenized shares of Tesla, MicroStrategy, and Coinbase Global.

IRS agents are concerned traders are evading taxes. The CFTC is looking into whether Binance allowed US citizens to illegally trade derivatives on the platform. And the DoJ has reportedly assigned the investigation to its bank integrity unit, which handles particularly complex cases. (Arstechnica)

If you are a US citizen, and you want to trade on Binance, all you need is a VPN to disguise your whereabouts. And once you rack up a substantial winning, you can move your earnings to Coinbase for cashing out. (That’s one of the reasons this story upset so many bitcoiners earlier this year.)

Gensler: crypto exchanges need more regulation

During a public hearing on May 6, newly appointed SEC Chair Gary Gensler said he wants Congress to write new regulations for crypto exchanges to better protect investors.

“Right now these exchanges do not have a regulatory framework at the SEC or at our sister agency, the Commodity Futures Trading Commission,” he said. “Right now there’s not a market regulator around these crypto exchanges and thus there’s really no protection around fraud or manipulation.” (Coindesk)

Bitfinex shareholder formally charged

Zhao Dong has reportedly pled guilty to the Chinese equivalent of money laundering. He is looking at three years behind bars.

In addition to being a Tether/Bitfinex shareholder, Zhao is the ousted founder of RenrenBit, a popular OTC desk in China. (People in China rely on OTC desks as a way to buy and sell tether and bitcoin with yuan, after the country banned centralized cryptocurrency exchanges in 2017.)

Zhao was the guy pushing the LEO token in 2019. He also helped create Tether’s yuan-pegged stablecoin in 2019.

Last year, RenrenBit denied reports that its leader had been arrested and detained.

China has been cracking down on illegal gambling in the country, which is where Zhao ran aground. He was connected to a company called Tian Tian—a platform for exchanging crypto into fiat currency. He also ran an app called “Everyday Up,” which settled crypto for overseas gambling sites. 

It was through Tian Tian and Everyday Up that Zhao allegedly washed 3.1 billion RMB ($480 million) for online casinos. (Protos)

Elon Karen Musk, your new manager

Elon Musk hinted on Twitter Sunday night in a reply to @CryptoWhale that Tesla had either dumped or was about to dump its bitcoin. His off-cuff remarks sent BTC sliding 9% to under $43,000, before recovering to ~$45,000. 

Prices stabilized later in the evening when Musk clarified: “Tesla has not sold any bitcoin.” (That’s not entirely accurate. Tesla sold 10% of its $1.5 billion BTC holdings in Q1, shortly after buying them.)

All this came days after Musk announced that Tesla reversed its policy on accepting bitcoin for payment, citing environmental concerns. (NYT)

Naturally, bitcoiners are irate—their general response to anyone who tries to leave the cult. They’ve been lashing out at Musk, which is probably not a great idea. (FT)

He’s not the alone one they’re lashing out at. After Musk replied to his tweet, @CryptoWhale was besieged by angry bitcoiners, sending him death threats and spreading rumors that he is a scammer.

Meanwhile, Musk has shifted his alliances to dogecoin.

Dogecoin has been pumping ever since Musk started tweeting about it in December. At the beginning of the year, it started off at a penny. Now it’s around 50 cents. At one point, it was up over 70 cents. Thanks to Musk, this degenerate gambler invested his entire life savings and is now a dogecoin millionaire, on paper.

Musk’s insatiable need for attention led him to SNL, where he hosted the show on May 8. Dogecoin investors were waiting for him to pump their favorite coin. DOGE dropped 30% during the show. Later, it went back up again. (FT) 

Turns out, Musk, who refers to himself as “dogefather,” has been working with dogecoin developers since 2019, all the while tweeting about DOGE to pump up the price. He says he wants to create a cheaper, greener alternative to bitcoin. Sure you do, Elon. (Decrypt)

Jackson Palmer, who created dogecoin in 2013 along with Billy Markus, but left in 2015, returned to Twitter briefly to call Musk a “self-absorbed grifter,” before he deleted his tweet and vanished again.

Other dogecoin news

Rumor has it Ryan Kennedy, the convicted rapist who ruined dogecoin in 2014 and drove the founders out, is out of jail on parole and apparently getting back into crypto. Watch out for this guy. David Gerard wrote about him here.

@idleoctoput did some sleuthing on the mysterious “DH5” dogecoin address, which hold 30% of all DOGE. He also thinks it’s controlled by Robinhood Crypto—not Elon, as some folks were thinking. This backs up Redditor AndreiFromAlbera’s findings as well. (Twitter thread)

Colonial Pipeline hit by ransomware attack

Russia-based cybercrime group DarkSide attacked the Colonial Pipeline, leading to a six-day shutdown that ended May 12. Colonial, which supplies fuel to the East Coast of the US, paid the hackers 75 bitcoin, worth $5 million.

Blockchain analytics firm Elliptic tracked down the DarkSide wallet and says the funds arrived on May 8. The same wallet has received $17 million in BTC since March, so they’ve clearly been running a profitable business. (Elliptic)

A day after President Biden said the US would go after the group, unknown actors took control of the ransomware gang’s servers and ransom payment funds, which the DarkSide gang was supposed to divvy up between itself and affiliates. DarkSide also said they were releasing decryption tools for all of the companies that have been ransomed but which haven’t yet paid. (Brian Krebs)

Bitcoin is the lifeblood of ransomware, and this is the sort of event to spur regulators into taking action against crypto exchanges, especially those that enable hackers to cash out of their crypto. The US government knows it can’t have hackers going after critical infrastructure. 

Stephen Deihl wrote a post about the oncoming ransomware storm—what will happen if regulators don’t take strong action. “Cryptocurrency exchanges are the channel by which all the illicit funds in this epidemic flow. And it is the one channel that the US government has complete power to rein in and regulate. The free flow of money from US banks to cryptocurrency exchanges is the root cause of this pandemic and needs to halt.(Stephen Diehl)

Other newsworthy stuff

Between January and April, $156 million was stolen from DeFi-related hacks—more than was stolen from DeFi protocols in all of 2020. And that doesn’t include an additional $83.4 million stolen via “DeFi-related fraud,” mainly the infamous “rug pull,” which involves token holders making off with investors’ money. (Decrypt)

Brian Armstrong, the CEO of Coinbase, went to Washington, D.C., to lobby. He posted a lengthy Twitter thread on the entire event along with “fun photos.” He says he hopes to get more “regulatory clarity” for crypto in the US. After the Colonial Pipeline ransomware incident, I’m sure we’ll be seeing plenty more “regulatory clarity” (Decrypt)

In addition to his ransomware post, Stephen Deihl also wrote up a thread explaining the Tether scandal. “Every Tether is backed by a giant pile of IOUs to strangers. And that’s worth exactly what you think it is.” (Twitter)

Caitlin Long is warning of a doomsday for bitcoin heralded by fraudulent Tethers. She claims she has long suspected it is coming. Then why bring it up now? The laws she spearheaded for Wyoming helped Tether exchanges like Kraken. If the doomsday is on its way, it is using the roads that Long built. (Her lengthy tweet thread)

The DoJ have a wallet holding 69,000 BTC, originating from the Silk Road. Nicolas Weaver suggests they dump it on the market at 1% per day, mess up the price of bitcoin, and reveal the Ponzi scheme for what it is. (Tweet)

Christie’s sold a lot of nine CryptoPunk NFTs for $17 million—we still don’t know who the buyer is, and whether they paid in crypto, which I’m sure they did. (I wrote to Christie’s but no response.) (Coindesk)

I visited the CryptoPunks Discord group recently and asked them why there were more male CryptoPunks than female CryptoPunks, only to get attacked. No misogyny in that group.

Me, in the news

I wrote a story about CryptPunks for Artnet titled “12 Questions the Art Market Should Have About CryptoPunks, the NFT Avatars Set to Sell for Millions at Christie’s, Answered by an Actual Expert.” (Artnet, paywalled)

“Dead Man’s Switch,” a documentary on QuadrigaCX, will soon be available to watch for free in Canada. (CBC)

“Exit Scam,” is an 8-part podcast series on QuadrigaCX by Aaron Lammer and Lane Brown. Episode 1 is now available.

“Death in Cryptoland” is a CBC podcast on QuadrigaCX debuting on March 25. (CBC press release)

Update: Ryan Kennedy is a convicted rapist—not a convicted scammer. I updated this post to make the correction. Also, the DOJ control a wallet with 69,000 BTC, not 69 BTC, as I wrote earlier. (Had to add some more zeros.)

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Tether’s first breakdown of reserves consists of two silly pie charts

Tether, the world’s most popular stablecoin issuer, released a breakdown of the composition of its reserves backing tethers on May 13. 

The breakdown is no surprise to Tether followers: Two lame pie charts showing, at best, only a fraction of assets are in cash, and the rest are in risky assets.

Specifically, this is a breakdown of the composition of Tether’s reserves on March 31, 2021, when Tether had roughly 41.7 billion tethers in circulation. (As of this writing, Tether now has nearly 58 billion tethers in circulation.) 

According to its settlement agreement with the NY AG, Tether must issue these breakdowns quarterly for two years—though it may have to provide more detail to the NY AG, in addition to what it has made public today. 

Let’s take a closer look at the two pie charts. (This information may be updated, as I get more feedback.)

The blue pie chart

According to the first pie chart—the blue one—the majority of Tether’s assets (nearly 76%) are socked away in cash and cash equivalents. (Tether breaks all this down in a second chart, which I’ll get to in a moment. Hint: these can barely be considered cash equivalents.)

But first, let’s look at what else is here:

12.55% is in secured loans — Loans to who, secured by what? We have no idea. These could well be loans to large tether customers backed by shitcoins, other worthless assets, or promissory notes.

9.96% is in corporate bonds, funds, and precious metals — A corporate bond is a bond issued by a corporation in order to raise financing. The question is, who is issuing these bonds? If it is a blue chip company, great. But if it’s some dodgy crypto start-up, these are likely worthless.

1.64% is in other investments, including digital currency — Tether wants us to believe that only a fraction of Tether’s reserves are in bitcoin. (Tether/Bitfinex general counsel Stuart Hoegner told The Block that “digital tokens” refers exclusively to bitcoin.) I have a funny feeling Tether will get into a great deal of trouble if it admits to using tethers to purchase bitcoin en masse. (Recall this interview, where Hoegner completely avoids the question pertaining to, are you using tethers to buy bitcoin?”)

The orange pie chart

Tether further breaks down the largest slice of its blue pie chart—which shows that more than three-quarters of its reserves are in cash and cash equivalents. Just a tiny bit is in cash and there’s a big question as to whether any of the non-cash items are cash equivalents at all. 

Here’s how Tether divvies it up: 

65.39% is commercial paper — Commercial paper refers to a short-term loan for up to 12 months. It is similar to a bond in that you have the ability to transfer and trade it. The problem is we don’t know who the issuer of the commercial paper is. If it’s IBM or Amazon, that’s as good as cash. But if Tether is giving tethers away to their largest customers (FTX, Binance) and counting that as loans, this is meaningless rubbish.

Frances Coppola, an economist and bitcoin skeptic, suggests Tether’s commercial paper is probably unsecured. “In which case it is NOT a ‘cash equivalent’ as the analysis says. It’s a current asset with significant credit risk.”   

25.2% is fiduciary deposits — These are deposits placed by a customer with a third bank (recipient bank) through an agent bank. Who are the holders of these fiduciary deposits? We have no idea. 

3.87% is cash — This is such a tiny bit of cash. What happened to all the cash backing tethers? Recall that up until a few years ago, Tether maintained tethers were fully backed by cash. 

3.6% is reverse repo notes — This appears to be a made-up term. Martin Walker, a director for banking and finance at the Center for Evidence-Based Management, isn’t familiar with the term either. “I’ve never heard of a Reverse Repo Note before, and I am the product manager for a couple of repo trading systems and used to run repo technology at an investment bank,” he said in a private chat.

2.94% is treasury bills — T-bills are a short-term financial instrument issued by the U.S. Treasury with maturity periods from a few days up to 52 weeks. These are as good as cash. In fact, this is the only slice of pie, other than cash, that can be considered cash.

If we do the math, we can see what percentage of the total each asset represents. Commercial paper is nearly half. Image courtesy of @MelchettsBeard

The bottom line 

For a company with nearly $60 billion in assets, these pie charts are pathetic. I’m sure the folks at the Office of the NY AG are rolling their eyes. The only thing backing tethers is once again, smoke and mirrors. 

To be clear, Tether has no obligation to redeem any money in the Tether bank accounts. Per its terms of service:

“Tether reserves the right to delay the redemption or withdrawal of Tether Tokens if such delay is necessitated by the illiquidity or unavailability or loss of any Reserves held by Tether to back the Tether Tokens, and Tether reserves the right to redeem Tether Tokens by in-kind redemptions of securities and other assets held in the Reserves. Tether makes no representations or warranties about whether Tether Tokens that may be traded on the Site may be traded on the Site at any point in the future, if at all.” 

With that in mind, we may as well consider these pie charts a window into the personal bank accounts of the Tether/Bitfinex triad. The crumbs of remaining cash? It is just their “bonus” money that they haven’t withdrawn yet.   

Jorge Stolfi, a computer scientist from Brazil, quoted privately: “If someday [Tether/Bitfinex] get tired of making real money with their sucker mining machine, they can just close Tether Inc and divide its assets among them. They won’t even have to leave the traditional crypto good-bye word on their website.”

David Gerard offers further analysis of Tether’s pie charts.

Related stories:
The curious case of Tether—a complete timeline of events

Updates on March 13— Added quote from Martin C. Walker on Reverse repo notes, as even he is not familiar with the term. Defined treasury bills, and noted they are the only cash equivalent in the mix, and added Trolly’s brilliant tweet. Also, added a link to Gerard’s post and later, the graph.

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Coinbase lists tether, the world’s dodgiest stablecoin

Coinbase, the largest crypto exchange in the U.S., just announced it is listing tether (USDT), the world’s dodgiest stablecoin. 

Tethers, for the uninitiated, are a stand-in for real dollars, used mainly on offshore crypto exchanges that can’t get proper banking. Now tethers can be found on Coinbase, a banked exchange—overseen by the SEC.

The timing of this is incredible, only a week after Coinbase debuted on Wall Street. 

Nobody knows for sure what is backing the nearly 50 billion tethers sloshing around in the bitcoin markets—maybe cash, maybe third-party loans, maybe hot air. But the price of Coinbase shares (COIN) is slipping, and so is the price of bitcoin. Desperate times call for desperate measures, so what can Coinbase do?

Why not list tether? That way, Tether (the company that issues tethers) looks legit, and more people can pile into bitcoin without worry. When BTC goes up, demand for $COIN follows. Problem solved!

Starting immediately, you can now send your dubiously backed tethers to Coinbase Pro—Coinbase’s online platform for professional traders. (Coinbase has a separate platform for casual traders called simply “Coinbase,” but tether is limited to Coinbase Pro for now.)

You will be allowed to trade tethers in every jurisdiction that Coinbase supports except for New York state, which Tether was recently hoisted out of by the NY attorney general.  

Coinbase only supports ERC-20 USDT, a reference to the nearly 24 billion tethers that live on the Ethereum blockchain. (Another 26 billion are on Tron, with a smattering on Omni, Algorand, EOS, Liquid, SLP, and Solana.)

Trading begins on April 26 at 6 p.m. Pacific Time—if liquidity conditions are met, meaning if someone is on-hand and willing to sell their bitcoin or ether to you for tethers, as opposed to real money. [Update: Coinbase has delayed USDT trading twice, first to April 27, now to May 3.]

Coinbase Pro will list the following trading pairs: 

  • BTC/USDT
  • ETH/USDT
  • USDT/EUR
  • USDT/GBP
  • USDT/USD
  • USDT/USDC

At the moment, you can only transfer USDT onto Coinbase Pro; you cannot move tethers off the exchange—although there is some expectation that could change once trading is established. 

What does this mean?

This is a terrible, dumb, bad move for Coinbase. 

The exchange clearly wants to rake in as much business as possible before the regulators step in and throttle its trading. (Regulatory ambiguity is written into the company’s S1 risk factors.) And right now, business is slipping.

Coinbase started selling its shares on Nasdaq on April 14. Its stock has since taken a dip, going from $381 at opening (and as high as $429 in the first few minutes of trading) to $293 when markets closed on April 22. 

At the same time, BTC has also taken a hit. Just ahead of Coinbase’s direct listing, BTC reached an all-time high of $63,700. Now it’s below $50,000. 

Tether has been trying to lift up the price of BTC with larger and larger issuances of tethers—prints of 2 billion at a time, bigger than anything we’ve seen before—but nothing seems to be working.  

At some point, it won’t matter how much USDT Tether prints. It won’t be enough to make up for all the real money that is exiting the bitcoin ecosystem on a daily basis. (The real money that investors put into the system, goes to pay the bitcoin miners who are selling 900 newly minted BTC per day for cash.)

Legitimizing Tether?

Bitcoiners are ecstatic over Coinbase’s listing of USDT. They say the move legitimizes Tether.

This is absolute madness. How do you legitimize a company that has been full of shenanigans since day one? The reverse is true: Tether is delegitimizing Coinbase.

Here is the irony: Coinbase—an exchange that has a BitLicense (issued by the New York Department of Financial Services) to operate in the state of New York—is listing a token sanctioned by the New York attorney general. 

The NYAG began investigating Tether for fraud in late 2018, claiming that Tether and its sister company Bitfinex, a crypto exchange, lied to customers in saying that tethers were fully backed, when in fact, they were not. 

“Bitfinex and Tether recklessly and unlawfully covered-up massive financial losses to keep their scheme going and protect their bottom lines,” the NYAG said.

The companies settled with the NYAG in February. Under the terms of the settlement, starting in May, Tether has to publish the categories of assets backing tethers. It also has to specify the percentages of each category, and spell out whether a category constitutes a loan or receivable.

This is a level of transparency that Tether has never lived up to before, and it could spell disaster for the BVI-registered company, if it’s revealed that Tether is simply printing money out of thin air.

If the Department of Justice decides to shut down Tether like it did Liberty Reserve in May 2013—which is what several nocoiner luminaries predicted will happen this year—what does that say about Coinbase listing this coin?

Three other U.S. crypto exchanges—Kraken, Binance.US, and Bittrex*—also list tether, but Coinbase’s public listing means the SEC is watching a lot more closely. Coinbase CEO Brian Armstrong is well aware of this.

“We’re going to increasingly be having scrutiny about what we’re doing,” he told CNBC. 

Based on that reasoning alone, Coinbase’s listing of tether seems shortsighted at best, but maybe that’s the plan? If COIN crashes, Armstrong—along with Coinbase backers like Andreessen Horowitz, Union Square, and Ribbit Capital—will have made their riches, while retailers will be stuck holding the bag.

(*Updated to include Bittrex as another US exchange that lists USDT.)

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News: Coinbase set to go public, Tether releases meaningless attestation, are NFT sales slipping? 

Happy Easter! NFTs of this disturbing Easter bunny series are available on OpenSea. I was looking for more NFT bunnies but couldn’t find too many. Maybe I wasn’t looking hard enough.

In any case, Bitcoin is now at $58,000 and Tether has more than 42 billion tethers in circulation. Here’s the news:

Coinbase set to go public

Coinbase, the largest crypto exchange in the U.S., will start selling shares on Nasdaq on April 14. The company will trade under the ticker symbol “COIN” and offer 114.9 million shares as part of its direct listing. Share price will be determined by orders coming into the stock exchange. 

Currently valued at $100 billion, Coinbase is going public during the biggest Bitcoin bubble yet. The event will make Coinbase CEO Brian Armstrong—who owns 39.6 million of the company’s shares—a very wealthy man indeed. And the VCs backing the company will realize huge profits, as they all dump their shares on retailers.

On April 6, the exchange is expected to reveal its first quarter financial results and full year outlook. (CNBC) (Coinbase statement)

Tether’s meaningless attestation

In its latest PR move, Tether published an attestation verifying that it had $35 billion in assets backing a similar amount of tether for a blink in time on Feb. 28. The attestation was produced by accounting firm Moore Cayman, based in the Cayman Islands.

Bitcoiners are head over heels about this, but the report is meaningless. The document explicitly states that this does not mean tethers were fully backed at any other time—or are now. And the report doesn’t fit what the NYAG required Tether to publish by mid-May, because it doesn’t break out each category of backing asset by percentage. What’s backing tethers could be mainly bitcoin and toxic assets, for all we know. (David Gerard)

Days after Tether produced the attestation, it printed 1.2 billion tethers—one of its largest issuances ever. What’s a few billion more when bitcoiners think you are legit?

The wonderful world of NFTs

Are NFT sales slipping? Average prices for NFTs have fallen almost 70% from a peak in February to about $1,400, according to Nonfungilble.com, which tracks NFT marketplaces.

The NFT bubble hit its all-time high around the time Metakovan bought Beeple’s “Everydays—The first 5000 days” for $63.9 million on Christie’s. (Bloomberg) 

Cointelegraph also reports that the NFT market is experiencing a silent crash. While we can always see what the price of bitcoin is up to, tracking the movements of illiquid markets is trickier. When it comes to NFTs, buyers simply evaporate and sellers fail to move their wares. 

What is causing the drop in prices? “I suspect it is because the secondary sales have evaporated, so the dream of ‘greater sucker’ has gone away in about the same timeframe as the Crypto Kitties NFT bubble,” Nicholas Weaver said.

Meanwhile, Shares of Funko, a toymaker in Washington, are rising after the company acquired a majority stake in TokenWave, a developer of TokenHead, a mobile app for showing NFT holdings. Funko plans to launch its own NFT offerings this summer. (CNBC)

Other companies are jumping into the space. NFT platform Recur announced a $5 million seed round led by the DeFi Alliance, Delphi Digital, Ethereum co-founder Joe Lubin, and Gemini, among others. (Cointelegraph)

Justin Sun, the CEO of Tron, is now buying serious high art. He bought a Picasso for $20 million at Christie’s in London on March 23, where he also picked up an Andy Warhol for $2 million.

Sun, if you recall, was the second highest bidder for the Beeple “Everydays—the first 5,000 days” piece, driving up the price for Metakovan. Apparently, the Christie’s team in Asia reached out to Sun after the NFT sale to talk him into buying real physical art with all his spare change. (ArtNews)

How does OpenSea, an online market for NFTs, deal with copyright violations? They pocket the buyer’s money and tell them they should have done their own research. Buyer beware! (Vice)

John Cleese’s auction for an NFT of a speedily drawn Brooklyn Bridge ended on April fools’ day. The proud owner is now JeffBezosForeskin who paid $35,000 in ETH for it on Mintable.  

SNL is selling an NFT to their NFT skit an OpenSea. The top bidder gets two tickets to a live taping of the show. This gimmick just does more to promote NFTs, imho. (Decrypt)

Other newsy bits

A DOJ investigation into Representative Matt Gaetz and Joel Greenberg—the former tax collector in Seminole County, Florida—is focused on the pair recruiting women for sex. Greenberg is a bitcoiner. At one time, he wanted to start his own blockchain company, but was accused of dipping into public funds to do so. (The Daily Beast)

Greenberg has made a lot of headlines in recent years.

Terror-linked groups in Syria’s war-torn Idlib are changing their crypto tactics to avoid detection by Western law enforcement. (Wired)

Me, quoted in the news

After I wrote my story revealing the mystery Beeple art buyer, I got a lot of calls from the media asking me for comments about NFTs. 

I am featured in Voice of America: “Cryptocurrency Fuels Digital Art-Buying Frenzy”

Ben Munster quoted me in an article for The Art Newspaper: “NFT art bubble? 2017 crypto bust could spell out the future of current boom”

Kenny Schachter quoted me in an opinion piece for Artnet: “Professor Kenny Schachter Is Here to Teach You More About NFTs (and Put the Crypto Critics in Detention).” David Gerard is quoted in the same story. Kenny refers to us as “curmudgeons.” 

I was also interviewed by the Verge: “NFT mania is here, and so are the scammers.”

(Updated April 4 to add info about Recur.)

Feature image: Scary bunny on OpenSea

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NYAG to crypto companies: ‘Play by the rules or we will shut you down’

The New York attorney general issued a stern warning to crypto companies and crypto investors on Monday. Crypto firms doing business in the state must play by the rules or face consequences, she said. And to investors, she underscored the hazards of dabbling in the crypto markets.

The two-part warning from NY attorney general Letitia James comes on the heels of a settlement agreement with Bitfinex and Tether, wherein the two closely related companies agreed to pay an $18.5 million penalty. And an effort to shut down Coinseed, a crypto-trading app that prosecutors allege ignored securities laws and defrauded thousands of investors. 

An unstable market

In a warning to investors, the NY attorney general underscored the numerous risks of investing in bitcoin. Namely, volatility, difficulty in cashing out, conflicts of interest, market manipulation and limited protection from fraud.

“I’m warning New Yorkers and investors across the country that investing in this unstable market is not prudent and could cause devastating losses,” she said in a tweet.

“Many operators of virtual currency trading platforms are themselves heavily invested in virtual currencies, and trade on their own platforms without oversight. The financial interests of these operators may conflict with your interests,” she said.

She went on to add that “even if you purchase a well-established virtual currency from a more reputable trading platform, the price could crash in an instant.”

In effect she appeared to be saying that even if you are buying bitcoin on a regulated exchange, such as Coinbase in the U.S., your money could be here today, gone tomorrow.

Heed the law

In the second part of her warning, an industry alert, the NY attorney general warned crypto firms that deviation from the law will not be tolerated.

“If you don’t play by the rules, we will not hesitate to shut down your operations,” Attorney General James in a tweet.

Commodity broker-dealers, salespersons, and investment advisors in New York need to register with the Office of the Attorney General. And under the law, virtual currencies qualify as commodities—or securities. New York crypto firms that don’t register with the OAG, are in violation of the Martin Act.

Penalties include “permanent injunction from selling, offering to sell, or acting as a broker or investment advisor concerning securities or commodities in New York, as well as disgorgement of profits and restitution to victims.”

What does this mean?

Before the hammer comes down on Tether, which could cause a crash in the price of bitcoin and other cryptocurrencies, we can expect to see more warnings from regulators and prosecutors about the perils of investing in crypto.

If Tether is shut down and the price of bitcoin collapses as a result—regulators want to make sure that investors are well aware of the risks they face in buying bitcoin or any other cryptocurrency.

The NY attorney general isn’t the one done playing around. Treasury Security Janet Yellen issued a warning about bitcoin last week, saying it is inefficient for transactions and often used for “illicit finance.”

And if Gary Gensler is confirmed as the new chair of the SEC,* we may see a slap down on coins that fail the Howey test—including some of those listed on Coinbase, a firm that is planning to go public soon.

Updated March 2, 2021, to clarify that Gensler is Biden’s pick for chair. He still needs to be confirmed.

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News: NY gives Tether the boot, Tether leaks, Coinbase financials, MoneyGram dumps Ripple

February is coming to an end. I’m waiting to get vaccinated, so I can travel without worry again. Maybe I’ll go to some crypto conferences later this year? I still have fond memories of Coindesk’s Consensus in May 2018—when you could hear the rumble of lambos coming through midtown Manhattan—and sitting in a coatroom with scant Wifi and a broken water cooler. (It was a big coatroom, but a coatroom nonetheless, and that’s where non-Coindesk journalists were put.)

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So, what’s new? Tether now has close to 35 billion tethers in circulation—the last print was on Feb. 21 and nothing since. Also, the price of bitcoin is $46,300. That’s down 18% from last week. I’m not sure we will ever see bitcoin reach $57,000 again. The nonsense could ebb and flow for a while, but I do think the end is nigh for Tether.

NY shuns Bitfinex/Tether

Last week I said likely nothing earthmoving would happen in the NY attorney general’s probe of Bitfinex and Tether this month, other than maybe a status update, according to what Bitfinex said in its January letter to the court. I was wrong.

In an unexpected turn of events, Tether and Bitfinex reached a settlement with the NY AG.

According to the terms of the settlement, the sister companies agreed to a penalty of $18.5 million—without admitting guilt. They are also banned from doing business in New York, and they have agreed to an impossible level of transparency.

I wrote two stories on this—an overall story covering the details of the agreement and deeper observations. You should read both and also the settlement agreement, which is very readable. 

The bitcoiners are jumping for joy over the settlement because they interpret this to mean that Tether is liberated and we’re back to business as usual. This could not be further from the truth.  

The NY AG has given Tether enough rope to hang itself—with Tether agreeing to publish quarterly updates on what’s backing tethers. I mean, how crazy is this: Bitfinex and Tether are also supposed to reveal who their payment processors are. These payment processors are called shadow banks for a reason.

But the real punishment is not the fine imposed on Tether. The real punishment is that Tether and Bitfinex are banned from doing business in New York—the beating heart of finance and banking in the U.S.

They are prohibited from serving any person or entity in the state—defined as “any person known or believed to reside in or regularly conduct trading activity from New York,” and any business “that is incorporated in, has its headquarters in, regularly conducts trading activity in, or is directed or controlled from, New York.”

If the CFTC and the DoJ follow up—and you can bet they will—then Tether could soon be banned from the entire U.S.—a penalty much more significant than an $18.5 million fine.

In the meantime, the Tether printer has mysteriously paused. The settlement agreement was signed on Feb. 18, and the last Tether print was on Feb. 21 for 800 million USDT.

Why has Tether stopped printing? It may be that providing the transparency reports is proving more onerous than they expected. If they pop out another billion tethers, they have to show what is behind those—cash, a loan, crypto, or whatnot. 

But this is a problem. Tethers are the main source of liquidity on unbanked exchanges where the price of BTC is largely determined. If Tether stops printing tethers—or otherwise ceases to function—the price of bitcoin could take a serious dive.

Tether Leaks

Recently, a Twitter profile called @deltecleaks emerged and posted what looked like evidence of a database dump from Deltec, the Bahamian bank that Bitfinex and Tether have been using since 2018. That Twitter account was quickly suspended.

Then @LeaksTether appeared and posted several presumably leaked emails—conversations between Deltec and Tether execs.

These leaks are unverified. I am not completely convinced they are real, but I am also not convinced they are fake either.

Some of the alleged emails look interesting. Trolly wrote up a thread on one—in an email (archive) from Tether to Deltec, dated May 28, 2020, Tether asks for help in “presenting their reserves in the best possible light.” Their reserves, according to the email, are crypto and stakes in other crypto companies. Trolly calls this email a “crucial piece of the puzzle.”

Around the same time that the email was sent, crypto exchange Binance—one of Tether’s biggest customers—switched from BTC to USDT as collateral for leveraged trading. In return, Trolly believes Tether got a stake in Binance.

This could explain why USDT’s 1:1 peg never falters. Tether is in cahoots with the exchanges, who are in charge of maintaining the peg, Trolly believes.

In another allegedly leaked email, Tether talked about allowing the exchanges to “ignore the peg and move the price upwards.” If this is real, it means Tether is getting ever desperate to find ways to make money out of thin air.

Oddly, Deltec has removed the bios from their About Us page. (This is silly, because we have the archive.) And Tether has released its official word on the leaks, calling the leaks “bogus” and implying it is an extortion attempt.

Tether adds that “those seeking to harm Tether are getting increasingly desperate.” This is typical of Tether and Bitfinex. They blame “Tether FUDers” for all their problems—as opposed to being upfront and honest about their dealings.

David Gerard wrote a blog post, going into detail on the alleged leaks.

Coinbase releases financials

Coinbase is going public via a direct listing on Nasdaq under the symbol COIN. The San Francisco-based company published its  S-1 filing on Thursday, after confidentially submitting the filing to the SEC in December.

The filing lays out Coinbase’s finances, including a profitable 2020 driven by a huge surge in the price of bitcoin. Coinbase brought in $1.2 billion in revenue in FY2020 for a profit of $322 million—the first time it has turned an annual profit.

In 2019, Coinbase incurred a net loss of $30 million.  

Brian Armstrong, Coinbase CEO, also did well last year, taking home $60 million in salary, stock options and “all other compensation.” He also received $1.78 million to cover “costs related to personal security measures.”

There is no doubt that the skyrocketing price of bitcoin—boosted by 17 billion tethers issued in 2020 alone—helped Coinbase’s profits. But there are many unknowns ahead.

If the price of BTC continues to drop, if Tether gets taken out by the DoJ, or if the SEC cracks down on some of the coins Coinbase lists—many of which appear like they may not pass the Howey test—Coinbase profits could take a hit.

No doubt, Coinbase is timing its listing carefully. The exchange has received more than $500 million in funding, with backers including Andreessen Horowitz, Y Combinator and Greylock Partners. And the VCs will want to dump their Coinbase shares on retail suckers before the bitcoin market collapses.

MoneyGram dumps Ripple

MoneyGram was supposed to have been a big success story for Ripple. Now, it’s just another sign of Ripple’s failures.

Ripple agreed to invest up to $50 million in the money transfers business. In return, MoneyGram was shilling Ripple by saying it would use the startup’s XRP currency and platform in its back office for moving funds across borders.

MoneyGram was essential because it gave XRP a supposed use case, so Ripple execs could argue their business was legit and not simply a way for them to line their own personal pockets with $600 million.

Last year, MoneyGram received $38 million from Ripple, representing about 15% of its adjusted earnings. But after the SEC announced it was suing Ripple, charging that XRP was an unlawful securities offering, MoneyGram stepped back, saying it faced logistical challenges in using the platform—as well as legal risks.

Now MoneyGram is putting its Ripple partnership on hold. That means MoneyGram, which saw declining revenues from 2015 to 2018, is losing a key income stream. (WSJ, MoneyGram PR)

Other newsy bits

After stiffing his previous defense team, Reginald Fowler still appears to have no defense team. He was given until Feb. 25 to line up a new law firm, but so far, no attorney has filed a notice of appearance with the court. (Court filing)

A rumor is afoot that the SEC is investigating Elon Musk for his dogecoin tweets that helped pump the market. Musk says a probe would be “awesome.” More lulz for Musk. (Teslarati)

Fedwire, the system that allows banks to send money back and forth, went down for several hours on Wednesday. Bitcoiners thought this was marvelous, because bitcoin is decentralized, see? How quickly they forget bitcoin is valued in USD. (CNBC)

Grayscale’s GBTC premium went negative for the first time in years. (It was close to 40% at one point in December.) When the premium is down, the arbitrage opportunity for institutions in buying bitcoin dries up—and that means less real money flowing into the system. (Hedge funder Harris Kupperman wrote a blog post last year explaining how the arb works.) (Decrypt)

FT poked fun of Anthony Pompliano, cofounder of Morgan Creek. Pomp is forever shilling bitcoin but his tweets have been inconsistent. At one time he called Tether “the biggest racket ever.” Now he has changed his tune. Apparently, he’ll say whatever to make “number go up.” (FT)

Treasury Secretary Janet Yellen is warning people about bitcoin. She doesn’t think it’s used widely as a payment system. “To the extent it is used, I fear it’s often for illicit finance. It’s an extremely inefficient way of conducting transactions, and the amount of energy that’s consumed in processing those transactions is staggering.” (CNBC)

Jack Dorsey’s Square purchased another 3,318 bitcoins for $170 million. This adds to Square’s October purchase of 4,709 bitcoins. The company has already lost $10 million on its latest investment. (Coindesk, Square press release)

The Securities and Exchange Board of India tells company owners: before you IPO, sell your crypto. (Economic Times India)

Kraken is reportedly in talks to raise new capital. (Coindesk)

NYAG/Tether, Bitfinex settlement reveals commingling of funds, years of shenanigans

I wrote a quick article this morning about the New York attorney general settlement, wherein Bitfinex and Tether agreed to pay $18.5 million in penalties, stop servicing New York customers, and submit quarterly transparency reports. 

But there are more details to highlight. Namely, the settlement agreement reveals the games Bitfinex and Tether have played over the years—games they will keep on playing until someone puts an end to their shenanigans. 

It also reveals how the firms have long misled the public about Tether’s reserves. From 2014 until late February 2019, Tether advertised that tethers were fully backed 1:1 by cash in some bank accounts somewhere—but that was not true. 

Tether now has 34 billion tethers in circulation—a number that is growing by leaps and bounds every day.

Here are my random thoughts and notes from the 17-page agreement.

Phil Potter

In the agreement, the office of the NY attorney general writes: “During the time period relevant to the OAG’s investigation, and as late as early-to-mid 2018, one of Bitfinex and Tether’s senior executives lived in, and conducted his work from, New York.”   

I’m assuming this is Phil Potter, Bitfinex and Tether’s chief strategy officer, and one of its three top execs. Potter allegedly stepped away from the company in mid-2018, about the time the NY attorney general started its investigation. Though the public did not learn of the investigation until April 2019.

The fact that Bitfinex and Tether had one executive and large customers in the state—and no BitLicense—opened the door to the NY attorney general’s probe. Per the terms of the settlement, Bitfinex and Tether can no longer do any business in the state, which means New York crypto firms can no longer use tethers. 

Previously, although Bitfinex and Tether claim to have barred New York residents (retail investors) in January 2017, they still served eligible contract participants, meaning individuals or trading firms with assets in the millions.

Commingled funds

Tether and Bitfinex lost their banking in March 2017 when they were cut off by Wells Fargo, a correspondent bank. Subsequently, their banks in Taiwan also dumped them.  

Two months later, when Tether had 108 million tethers in circulation, Bitfinex opened an account at Noble Bank in Puerto Rico. (Noble Bank, by the way, was co-founded by Brock Pierce, the child star who also created Tether.)

Tether, however, did not open an account at Noble—or at any bank—until September 2017, according to the office of the NY attorney general’s findings.

Instead, Tether deposited the “vast majority” of its cash into a trust account held by its general counsel, Stuart Hoegner, at the Bank of Montreal in Canada. The account never held more than $61.5 million dollars.

The rest of Tether’s money was mixed in with Bitfinex customer money at Bitfinex accounts at Noble Bank. Between June 1 and September 2017—Bitfinex held hundreds of millions of dollars in Tether’s funds in its accounts, the prosecutor said.

Commingling of funds is a terrible idea—legally and logistically. (Failed crypto exchange QuadrigaCX also commingled funds. And its now-allegedly-deceased CEO used customer money like his own personal slush fund.) 

Mystery NY trading firm

Because Tether had no bank account between March and September 2017, it could not directly take money for tethers. At the same time, according to the NY attorney general, “neither the Tether website or Bitfinex allowed for the direct purchase or exchange of tethers in exchange for any other virtual currency, including the two most popular virtual currencies, bitcoin and ether.”

Between June and September 2017, “Bitfinex’s Noble Bank account received USD deposits from only two institutional trading firms, one of which was located in New York. Neither of those firms purchased tethers directly from Bitfinex or Tether during this time period.”

This part of the NY attorney general’s findings puzzles. Why were these trading firms sending money to Bitfinex if they were not getting tethers in exchange? What were they getting instead? And who was the New York firm?

Mike Novogratz’s Galaxy Digital is based in New York. And we know it was onboarding as a Bitfinex customer in October 2018, based on court documents that point to letters Galaxy sent to Bitfinex. But it is not clear if Galaxy was a customer of Bitfinex or Tether in 2017. (In April 2019, Novogratz claimed Galaxy had “zero exposure” to Bitfinex and Tether.)

Staging the Friedman audit

According to the office of the NY attorney general, until September 15, 2017, the only U.S. dollars held by Tether backing 442 million tethers in circulation was $61 million at the Bank of Montreal. 

Whatever other money Tether had was held in Bitfinex accounts.

In the summer of 2017, rumors were afoot that tethers were not fully backed. To quash those rumors, Tether and Bitfinex arranged for accounting firm Friedman LLP to perform an attestation on September 15, 2017.

They had to move quickly to set things up though.

On that morning, Tether opened an account at Noble Bank. And Bitfinex transferred $382 million from Bitfinex’s account at Noble Bank into Tether’s account at Noble Bank. Friedman conducted its verification of Tether’s assets that evening.

“No one reviewing Tether’s representations would have reasonably understood that the $382,064,782 listed as cash reserves for tethers had only been placed in Tether’s account as of the very morning that Friedman verified the bank balance,” the NY attorney general wrote. The attestation included the money at the Bank of Montreal as well. 

Friedman’s relationship with Bitfinex ended a few months later. 

It’s never a good sign when your auditor quits. Worse, there was no official announcement—Friedman simply deleted all mention of Bitfinex from its website, including past press releases.

Massive loss of funds

In 2017 and 2018, Bitfinex began to increasingly rely on Crypto Capital to handle its customer deposits and withdrawals. Oz Yosef, was Bitfinex’s contact at the Panamanian payment processor.

By 2018, Crypto Capital held over $1 billion of Bitfinex funds. That’s when the real trouble started.

In April 2018, the government of Poland froze a Crypto Capital bank account holding $340 million. Adding to that, Oz told Bitfinex that a Crypto Capital account in Portugal containing $150 million of Bitfinex client funds also had been frozen. 

These events threw Bitfinex into a liquidity crisis. And in the summer of 2018, Bitfinex began dipping into Tether’s cash reserves to fund customer withdrawals. Bitfinex told customers that rumors of its insolvency were false, but behind the scenes, the crypto exchange was pleading with Oz to release the money. 

(Later we learn that another $350 million in missing Crypto Capital funds were linked to 60 accounts held by Arizona businessman Reginald Fowler, who was indicted in April 2019 for bank fraud. Some of these accounts were frozen in 2018. Oz’s sister, Ravid Yosef, was also indicted for her role in assisting Fowler set up those accounts. She is still at large.)

(And in October 2019, Crypto Capital President Molina Lee was arrested by Polish authorities in connection with laundering money for Columbian drug cartels via Bitfinex.)

Deltec Bank & Trust

In October 2018, Bitfinex and Tether ended their relationship with Noble bank. Soon after, they announced they were banking with Deltec in the Bahamas. 

In a letter dated Nov. 1, 2018, Deltec said Tether’s account held $1.8 billion, enough to back the tethers in circulation at the time. The letter was signed but had no name under the signature. The signature itself was illegible.

The following day, Tether began moving hundreds of millions of dollars out of its bank account at Deltec to Bitfinex’s bank account at Deltec. And as part of a “loan arrangement,” between the two closely related firms, Tether assumed Bitfinex’s losses on its own balance sheet. (We can’t be sure of the total loan amount, but an estimate is $750 million.) 

Tether’s misrepresentation that tethers were fully backed continued to Feb. 2019 when it updated its terms of service to say that tethers are backed by “traditional currency and cash equivalents and, from time to time, may include other assets and receivables from loans made by Tether to third parties, which may include affiliated entities.”

Bitfinex says it paid off the loan to Tether in January, and the firms now claim tethers are fully backed—but the question is, backed by what? Loans? Bitcoins? We’ll find out in 90 days when Tether and Bitfinex publish their first transparency report. Per the terms of the settlement agreement, the firms will need to publish these reports quarterly for two years.

Also, $18.5 million—the amount of the settlement—is no small number. We have no idea how much cash Tether and Bitfinex actually have on hand.

The bitcoin community is calling the settlement a win for Tether and Bitfinex. They say the fine is nothing but a slap on the wrist. In reality, it’s another way for Tether and Bitfinex to buy time. The NY attorney general has set its trap; now we wait.

Updated Feb. 24 to note that Novogratz claimed zero exposure to Bitfinex and Tether in 2019.

Also read: NYAG to crypto companies: ‘Play by the rules or we will shut you down’

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Tether, Bitfinex to pay $18.5M to NYAG, cease trading in New York

Bitfinex and Tether have settled with the office of the New York attorney general in an investigation that began two years ago. 

The sister companies will pay $18.5 million in penalties to the state for violations of the Martin Act, according to a statement issued by the NY attorney general. Per the terms of the settlement agreement, Bitfinex and Tether are banned from trading in the state and must submit quarterly reports to ensure they are complying with the prohibition.

Tether claimed that tethers were backed by real dollars, when they were not backed by real dollars, the NY attorney general alleges.

“Bitfinex and Tether recklessly and unlawfully covered-up massive financial losses to keep their scheme going and protect their bottom lines,” NY Attorney General Letitia James said in a statement. “Tether’s claims that its virtual currency was fully backed by U.S. dollars at all times was a lie. These companies obscured the true risk investors faced and were operated by unlicensed and unregulated individuals and entities dealing in the darkest corners of the financial system.”

The investigation was made public in April 2019, when the NY attorney general revealed that Bitfinex, an unregulated crypto exchange, dipped into Tether’s cash reserves to cover up the fact that it had lost access to $850 million held by its Panamanian payment processor Crypto Capital. Having lost access to those funds, Bitfinex struggled to meet customer withdrawal requests. 

Tether and Bitfinex neither admit or deny the findings in the settlement. And their attitude is one of “We have put this matter behind us now.” Here is their official statement, which emphasizes that they have repaid their loan to Tether—an estimated $750 million—though they still won’t say how much they “borrowed” exactly. 

Per the terms of the settlement, the office of the NY attorney general cannot bring any claims or lawsuits against Tether or Bitfinex for matters relating to findings in the petition. However, it still has the right to enforce the settlement, if the companies fall short.

And falling short is something that could well happen.

If you read closely, these provisions are a big ask from two companies that have been highly secretive about their financial dealings from the get-go. To continue on, they will need to submit to an impossible level of transparency.

For the next two years, Tether and Bitfinex will have to show proof that they segregate client, reserve, and operational accounts. The NY attorney general claims the firms have commingled funds in the past—and at one point, $61.5 million of Tether’s reserves were kept in a trust account held by its general counsel at the Bank of Montreal.

On a quarterly basis, the two firms have to publish the categories of assets backing tethers—e.g., cash, loans, securities, etc. They will also need to specify the percentages of each category, and spell out whether a category constitutes a loan or receivable.

This is something Tether has never done before. It has never been clear about what is backing tethers, whether those are third-party loans, cryptocurrencies—such as bitcoin—shares in a Bahamian bank, or whatever.

Tether and Bitfinex also need to provide the office of the NY attorney general a list of their payment processors, along with location and contact information for those entities, and information regarding what due diligence procedures they are putting in place to ensure the payment processors don’t leave them high and dry as before. They will also need to provide that same information to their customers upon request when associated with a deposit or withdrawal. 

Crypto payment processors run shadowy operations, and this stipulation is going to make Tether and Bitfinex a difficult client. Recall, the firms had no formal agreement with Crypto Capital when they handed over $1 billion for safekeeping.

Crypto media outlets and bitcoiners are painting the Tether and Bitfinex settlement like it is a big win and $18.5 million is pennies for a company that has so far issued $34 billion worth of tethers—but I could not disagree more.

The NY attorney general is effectively saying, pay the fine and go right ahead with your legitimate business. The problem is, Tether and Bitfinex may have no legitimate business—and fulfilling these obligations may turn out to be impossible.

Related stories:

NYAG/Tether, Bitfinex settlement reveals commingling of funds, years of shenanigans

NYAG to crypto companies: ‘Play by the rules or we will shut you down’

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News: MicroStrategy needs more cowbell, Tether surpasses $34B, those laser eyes, Tether collapse doomsday scenario

I nearly ventured to Austin Wednesday, but my flight was canceled due to the storm, havoc, and general disaster in the area. I found another flight later in the day and was headed out the door, when I thought, nah. Turned out to be a good decision, since I probably wouldn’t have survived more than a day without wifi.

Last week, Tether issued another 2.2 billion tethers, so you can buy bitcoin with real cash at a higher price. As of today, Feb. 21, there are now $34 billion worth of tethers in circulation—all backed by Tether’s good word. Oh, and they just printed another 800 million this morning.

More lulz for Mr. Musk—this time a double entendre.

Bitcoin is over $57,000. Why? Because it is a Ponzi scheme, and people who put their money into a Ponzi or MLM scheme get excited when numbers go up because they think they are getting hilariously rich. When bitcoin reached $1 trillion market cap earlier this week, it was an occasion for celebration in the bitcoin world. All of the bitcoiners on Twitter gave themselves laser eyes—in the hopes of pushing bitcoin to $100,000—and posted pictures of raw, juicy steaks.

Market cap, as I have explained, is a delusional number when it comes to crypto. A trillion-dollar market cap assumes everyone who owns bitcoin bought it for $55,000 and could sell it for that. That is nowhere near the truth. Many bitcoiners bought bitcoin for a fraction of what it is today. And if everyone sold at once, the market would collapse. It’s all fantasy.

My weekly reminder that I have a Patreon account. Thank you to my new patrons, who pushed me up over $600 last week. You can subscribe for as little as $5 a month. It’s like buying me a beer or a latte every four weeks.

Okay, let’s talk about bitcoin’s newest crazy god, who also has laser eyes on his Twitter profile.

MicroStrategy: More cowbell

Every single day, MicroStrategy chief Michael Saylor is on Twitter—or elsewhere—shilling bitcoin. This has literally been his new day job since he staked the future of his entire company and his reputation on “number go up.” His tweets are bizarre and often make no sense. Lately, he has been taking random quotes from famous people and attributing them to bitcoin.

In his latest move, Saylor has taken MicroStrategy deeper down the debt hole. Last week, the company sold $1.05 billion in convertible senior notes, which it plans to invest in more bitcoin. The notes mature in February 2027. (Decrypt, MicroStrategy PR)

This is on top of the firm’s $650 million bond offering in December, which MicroStrategy also used to buy bitcoin. Those notes mature in December 2025. The company owns 72,000 bitcoin per a February regulatory filing. And don’t forget, Saylor has his own personal stash of bitcoin, though we don’t know how much he still has—or if he was selling when MicroStrategy was buying.

If the price of bitcoin collapses, MicroStrategy could literally go bankrupt. But remember, Saylor owns 70% of the company’s voting stock, so he calls the shots. The other MicroStrategy board members can only sit back and watch in horror.

Big companies buying bitcoin and putting them into cold storage means more bitcoin getting pulled out of circulation so that the already small supply of circulating bitcoin grows smaller and the market becomes easier for whales to manipulate—even if those whales bought their hoards of BTC via alias accounts funded with tethers.

So what if MicroStrategy puts another $1 billion into bitcoin and Tesla buys $1.5 billion worth? Tether issues that much fake money in a week. Meanwhile, all the real cash in bitcoin goes out the door as miners sell their 900 newly-minted bitcoin per day for fiat. Bitcoin itself generates no revenue. It’s simply investor money going in one end and out the other.

Jorge Stolfi, a Brazilian computer scientist, estimates that the accumulative amount that bitcoin investors have lost so far is at least $15 billion. When you invest in bitcoin, you immediately lose money, just like all those who invested in Bernie Madoff’s fund, though they went on for years thinking they were making money.

NYAG / Bitfinex—status update

We should be hearing something soon on the New York attorney general’s investigation into Bitfinex/Tether, but probably nothing big, or earth moving—not yet at least.

Bitfinex’s law firm Steptoe filed a letter on Jan. 19, saying Bitfinex/Tether needed more time to send in their documents. Here is what they said exactly: “We will plan to next contact the Court in approximately 30 days to either provide a final status update or to schedule a conference with the Court to discuss any open items.”

The office of the attorney general still has to take a position on the material it receives, and Bitfinex boasted that it had spammed them with some 2.5 million documents. My guess is that Bitfinex, like failed Canadian crypto exchange QuadrigaCX, hasn’t kept accurate records of their financial dealings and they are flying by the seat of their pants. Quadriga operator Gerald Cotten kept no books, commingled funds, and viewed customer money as his personal slush fund.

Tether doomsday scenario

Some people—Nouriel Roubini in particular—have predicted that Tether will get taken down this year, though it will take a much larger effort than the NY AG alone. Still, what will happen if Tether’s operators are arrested and its bank accounts seized? If Tether collapses, we may see something like the following unfold:

  • Panic ensues on offshore exchanges, like Binance and Huobi, as traders begin dumping USDT and buying up BTC at any price.
  • The price of BTC on banked vs. unbanked exchanges begins to diverge. BTC goes up on unbanked exchanges and drops on banked exchanges, like Coinbase, as people start selling their BTC for cash en masse.
  • Banked exchanges face liquidity crises as they can’t keep up with withdrawals. We start to see system outages and paused trading—similar to what happened with Robinhood on Jan. 28.
  • The price of BTC collapses to the point where bitcoin miners cannot pay their monstrous power bills.
  • At some point, the bitcoin hash rate will drop, and bitcoin will go into a death spiral. When miners can’t pay their electric bills, they unplug from the network. This leaves bitcoin vulnerable to attacks, and the virtual currency becomes worthless.

Mind you, bitcoin will never die off completely. Unlike other Ponzi schemes, which disappear when they collapse, bitcoin will spring back to life from time to time. This is the fourth—and by far the biggest—bitcoin bubble since 2009.

Bitcoin’s sick energy consumption

After Tesla announced it bought 1.5 billion worth of BTC, bitcoin’s grotesque energy consumption has come under fire. Based on some estimates, the network consumes as much energy as the entire country of Argentina with 45 million people. Christmas lights are literally a more productive use of electricity to bring joy to people’s lives than bitcoin. (This is a joke. In 2018, bitcoiners claimed that Christmas lights consumed more energy than bitcoin.)

Bitcoiners like to argue this is all green energy, but that is simply not true. Two-thirds of bitcoin mining is based in China, a country that relies heavily on coal-fired electricity. Some miners in the Sichuan province get power from hydro, but only during the wet season. The rest of the time, they turn to fossil fuels. (My blog)

And for those still claiming bitcoin uses clean energy, Trolly had a few more points to add: 

  • The Three Gorges Dam—a gargantuan structure straddling the Yangtze River in China’s Hubei province—has long been criticized for its environmental impact and displacement of two million people. The dam generated a record 112 terawatt hours of electricity in 2020. According to Digiconomist, bitcoin consumes 79 TWh of electricity per year—more than half that.
  • You need one million Bitmain’s Antminer 19s Pros to reach the current bitcoin hashrate of 110M TH/s. That means there are at least one million nodes on the bitcoin network—more if miners are using Bitmain’s outdated S17 model. These machines are good for two years max before they get tossed into landfills and replaced with more efficient ASIC rigs.
  • Bitcoin processes 300,000 transactions per day. The all-in cost of a single bitcoin transaction is $20 for infrastructure and $40 for electricity. Miners currently break even when the BTC price is $20,000. (That’s based on energy and other costs.)

Coinbase behind Tesla’s BTC purchase

Coinbase facilitated Tesla’s recent $1.5 billion purchase of bitcoin, according to The Block. An unidentified source told the outlet that the San Francisco-based crypto exchange made the purchase on behalf of Tesla over the course of several days in early February. The price of BTC in the first week of Feb. was around $38,000.

Similar to how it helped MicroStrategy make its big BTC purchase, Coinbase broke up Tesla’s order into small pieces and routed those to over-the-counter trading desks to minimize the impact on the overall bitcoin market.**

Coinbase wrote up a case study on how it bought bitcoin for MicroStrategy.

Motley Fool’s ship of fools

Another ship of fools has headed off to sea.

The Motley Fool is a private financial and investing advice company based in Alexandria, Virginia. It’s been around since 1993, so you would think they actually do their due diligence. Apparently not. Also, regular folks rely on them for sage investment advice, which is why I was shocked to learn Motley Fool was putting $5 million into bitcoin. (Fool announcement)

Motley Fool justified the investment with these three reasons:

  1. We believe it will store value more effectively than gold over the long term.
  2. We believe it may become a medium for transactions, as/if pricing stabilizes in the decade ahead.
  3. We believe it can act as a productive hedge against inflation.

All three reasons are blitheringly stupid. Medium for transactions? If the price stabilizes in the future? Name one time in the past decade where the price of bitcoin has stabilized. As I explained earlier, the more people who hodl bitcoin, the less stable it becomes. It will never be a stable asset. And you can’t call bitcoin a “store of value” if you get only 20% of what you paid for it.

At least one sensible Motley Fool contributor explained why investing in bitcoin is a horrible idea.

GameStop hearing #1

I spent two hours on Thursday watching the first half of a five-hour GameStop House Financial Services Committee hearing. Most of the questions were not that interesting. This is the first of three hearings. I’m not sure I can watch anymore, unless someone from the SEC, such as Gary Gensler, joins in on the questioning.

The nut is that Robinhood CEO Vlad Tenev apologized to his users for stopping customer trading during the peak of the madness, but says he wasn’t colluding with hedge funds. “We don’t answer to hedge funds,” he said. “We serve the millions of small investors who use our platform every day to invest.” (NPR)

He also would not admit there was a liquidity problem when he limited trades in January.

David Portnoy doesn’t like Vlad’s hair. He thinks it makes him look untrustworthy.

And Keith Gill (Roaring Kitty), who made $48 million from a $53,000 investment in GameStop, came off as a likable, honest guy. Although, he may need those profits to defend himself against at least one proposed class-action. (Complaint)

Other newsy bits

Cynthia Lummis (R-WY) added laser eyes to her Twitter profile pic, confounding the political press and turning bitcoiners into a bunch of cooing babies (Slate)

A few years ago, the SEC shut down the entirely fraudulent ICO market. A sudden shutdown of the DeFi money market (DMM) may be the start of the next regulatory wave. (David Gerard)

The U.S. Treasury Department accused crypto payments platform BitPay of facilitating over 2,100 transactions with individuals in sanctioned nations. BitPay will pay $500,000 to settle the charges. (Coindesk, enforcement notice)

JP Morgan calls Tether an unbacked wildcat bank. “A sudden loss of confidence in USDT would likely generate a severe liquidity shock to Bitcoin markets, which could lose access to by far the largest pools of demand and liquidity,” analysts said. (Bloomberg)

FTX, one of Tether’s biggest customers, claims on Twitter that its volume and customer numbers are real. All you need is an email to set up an account—no KYC for tier 0, 1 accounts with up to $9,000 USD daily withdrawal,* which means anyone can set up any number of alias accounts. Trading volume is a meaningless number due to robot trading and probably wash trading.

Stephen Diehl on Bitcoin mining: “The Crypto Chernobyl.” (blog post)

BitMEX’s Arthur Hayes—who was indicted in October and is still at large—has resurfaced to argue the Robinhood shutdown was orchestrated by financial elites. This is a sign that retail investors should buy crypto, he said. (Cointelegraph) (Tweet)

*Updated to note FTX has no KYC on both tier 0, 1 accounts. In an earlier version of this newsletter, I said you did not need KYC to withdraw up to $1,000. But it’s actually up to $9,000 per day for high-volume accounts.

**Updated March 2: An earlier version of this story incorrectly stated that Coinbase routed the Tesla order to OTC desks, so as not to “crash” the price of BTC. This is incorrect. A large order would lift the market. Story has been altered to reflect that.

Feature image: Ship of fools depicted in a 1549 German woodcut

News: Tether prints $1B at a time, Tesla buys bitcoin, Roubini calls Saylor a cokehead, scammers hijack QuadrigaCX website

We are midway through February. Tether has surpassed $32 billion in tethers and appears to be quite proud of the fact. BTC is scratching $49,000 and ETH is over $1,800. There is so much craziness now in the crypto markets with shitcoins pumping galore, and big companies getting in on the bitcoin Ponzi.

In the meantime, I am concerned crypto is going retail again. Friends are calling and asking about bitcoin. One of my friend’s offspring was talking up dogecoin on Facebook. And I am overhearing conversations about crypto in grocery stores and parking lots—flashbacks of 2017, but this is worse. Retailers are going to get hurt all over again.

Another reminder, I have a Patreon account. If you want to support my writing, please consider subscribing. I’m currently making $572 a month on Patreon, which is fantastic because I can now buy decent bottles of wine. But at some point, I would love to bring that up closer to $2,000 or find a way to make a living doing this.

Tether: We’re done with the baby prints

On Thursday and again on Saturday, Tether issued $1 billion in tethers. These are the biggest single prints of USDT ever—and there were two in a row. Previously, the biggest prints were $600 million, which was rare. Normally, bigger prints were $400 million, and if Tether needed more, it would simply issue several in a row. But that’s clearly not enough to feed the monster now. 

By monster, I mean this snowball is getting so big, Tether is struggling to manage it. Seventy percent of bitcoin is traded against tethers, and as real money keeps getting siphoned out of the system, Tether needs to create more and more fake dollars to fill the ever-widening chasm. Tethers are counterfeit. They are not real dollars, but they are treated as such on offshore exchanges.

You can’t have a system built entirely on fake money. Eventually, it will collapse under its own weight. We saw this with QuadrigaCX. As soon as enough people tried to cash out, the exchange’s founder Gerald Cotten flew to India and pulled off what appears to have been one of the most bizarre exit scams in history—unless you believe he is really dead.* I’m still getting calls from reporters and filmmakers wondering what the hell happened.

Tether CTO Paolo Ardoino says the $1 billion prints were for replenishments and chain swaps—wherein a customer sends in tethers and gets them reissued on a different blockchain. If it were a chain swap, you would see a corresponding burn. But we aren’t seeing any burns, meaning those tokens went almost immediately into circulation.

Luca Land tracked the first 1 billion print and found that the entire amount—previously, I said “majority,” but Luca says all of it—went to Bitfinex, Huobi, RenrenBit, Binance, and FTX.** The largest recipient was FTX, followed by Binance. Those of us who follow @whale_alert are accustom to seeing tethers flying off to “unknown wallets.” Luca thinks those unknown wallets serve as intermediate wallets to throw us off the trail.

The Block published a story on Thursday, right after Tether’s first monster print, with lots of quotes from Ardoino, who explains that big companies are buying USDT from over-the-counter desks and high-frequency trading firms. This explains the demand for all these tethers, he claims.

“When clients of these firms want to buy bitcoin, they send USD, and then these firms convert USD to USDT to bitcoin. This method is faster and most convenient,” he told The Block. 

Why would someone go to the trouble of converting cash to USDT to buy BTC when they could simply buy BTC directly with cash on a regulated exchange? That makes no sense—unless it involves money laundering and capital flight. Tether does have a big market in Asia, Ardoino said.

Another explanation is that Tether is printing USDT out of thin air, using those to buy bitcoin with alias accounts on unregulated exchanges and cashing out via banked exchanges and OTC trading desks. Or else, they buy BTC and hold onto it as a way to make the markets more illiquid and easier to manipulate. (If they sold all the bitcoin they were buying with tethers, they would crash the markets, so until a new influx of cash comes into the system, they have to hold onto it.)

Coindesk interviewed Nouriel Roubini on CoindeskTV. Of course, he gave it to them straight, calling Tether a criminal enterprise and Michael Saylor a cokehead. The three reporters broke out into giggles. The questions they asked were naive, for instance, how is Tether printing tethers different from what is going on in Washington with all their dollar printing? Roubini made important points and predicts Tether will be dead within the year—read the transcript on my blog.

NY AG Tether investigation update

Tether has agreed to hand over a slew of documents to the NY attorney general showing how they issue tethers, what’s behind tethers, and so on. The original deadline was Jan. 15, but they needed another 30 days and the NY AG was okay with that. We are looking for another court filing to drop at some point after Feb. 15.

Don’t expect miracles anytime soon, though. The NY AG will still need time to take a position on what she has received. I’m sure her office is working with the Department of Justice in their investigation—and passing all the material along to them.

Someone was asking me on Reddit, what can the NY AG actually do to Tether? Answer: She has sweeping investigatory and prosecutorial powers, and she can issue a cease and desist. But ultimately, the U.S. Department of Justice and Homeland Security will be instrumental in taking Bitfinex/Tether down.

To put things in perspective, Tether has been in operation for six years. It took seven years and the coordinated effort of law enforcement in 17 countries to bring down Liberty Reserve. (ABC News)

Tesla buys BTC with clean car credits

The big news of the week was Tesla purchased $1.5 billion of bitcoin, as revealed in its 10-K filing. Here you have a company dedicated to clean energy buying one of the filthiest assets in the world. The bitcoin network requires the energy of a small country like Argentina, Norway or the Netherlands. Musk doesn’t give a hoot about the planet. (My blog)

Just to be clear, $1.5 billion is peanuts. It will support the bitcoin miners for about a month. Of course, on the news of Tesla buying bitcoin, the price of BTC shot up from 39,400 to 48,000 in less than 24 hours. The higher the price of BTC, the faster real money exits the system when the miners sell their 900 newly minted BTC per day.

Michael Burry, the investor from “The Big Short,” said in a series of deleted tweets (apparently, he routinely deletes tweets) that Musk bought BTC to distract from Chinese regulators looking into quality complaints with Tesla vehicles. Burry is shorting Tesla and has called on the electric-vehicle company to issue more stock at its ridiculous price. (Business Insider)

But wait! It’s green energy!

Most of the world doesn’t realize that bitcoin uses a country’s worth of electricity. They think it’s mainly used for ransomware and by criminals to buy drugs and such, so when they learn about bitcoin’s horrendous CO2 production, they become alarmed.

As a result, bitcoiners are desperately scrambling to declare that bitcoin consumes renewable green energy. Most of what they are spouting is blithering nonsense with no facts to support their claims. They are also trying to say that bitcoin consumes less energy than the rest of the financial system, which is simply dumb, as Frances Coppola points out.

Other interesting newsy bits

Gerald Cotten may be dead and buried—or more likely, sipping cocktails on a beach somewhere—but QuadrigaCX sprung to life again! However, it turns out scammers set up an imitation Quadriga website to lure in potential victims. EY, the trustee for the failed exchange, sent out a warning notice. The website has since been taken down. (EasyDNS)

India is set to ban cryptocurrency investments completely. Investors will be given a transition period of three-to-six months after the new law goes into force to liquidate their investments. (Bloomberg Quint)

Crypto Capital money mule Reginald Fowler has three more weeks to find new counsel after he stiffed his previous attorneys. (My blog)

Dogecoin has been pumping thanks to r/wallstreetbets and Musk and others tweeting about it for the lulz. David Gerard wrote a wonderful piece on dogecoin explaining its unique history. (Foreign Policy, paywalled)

Apparently, Elon Musk was tweeting about DOGE for the lulz back in April 2019. (Financial Times)

Dogecoin creator Billy Markus said on Reddit that he sold all his dogecoin in 2015 after he got laid off. He wanted dogecoin to be a force of good, and he is disappointed to see the nonsense “pump and dumping, rampant greed, scamming, bad faith actors.”

The Sydney Morning Herald did a feature on Australian-born-and-raised Greg Dwyer, one of the founders of Bitmex, who was indicted last year for violating anti-money laundering laws, but is still at large. “As recently as July, social media posts suggested Dwyer was in Bermuda, and enjoying all it had to offer.”

Miami Mayor Francis Suarez (R) wants municipal workers to get paid in bitcoin. Aside from the legal and tax ramifications and all the difficulties in setting this up, I’m sure employees will be so happy to wake up and find their paycheck lost 30% of its value whilst they were sleeping. No, this is a terrible idea. (The NY Post)

BNY Mellon, the world’s largest custody bank, said it will hold, transfer and issue bitcoin and other crypto on behalf of its asset-management clients. The bank will begin offering these services later this year. Because they are a state-chartered bank, they can do this in NY without a BitLicense. (WSJ, Coindesk)

Mastercard is planning to support crypto natively on its network. However, it’s only going to support cryptocurrencies that meet certain requirements—including stability, privacy and compliance with anti-money laundering laws. The problem is that no cryptocurrencies meet Mastercard’s criteria. (Arstechnica, Mastercard announcement)

BitPay’s bitcoin cards can be added to Apple Wallet, giving crypto holders a new way to spend via Apple Pay. BitPay converts your bitcoin to cash, so it’s no different than selling your BTC first, and merchants won’t know the difference. (Business Insider)

This Valentines Day, consider giving that special someone a CryptoFlower! It will only set you back 4 ETH ($7,200). Each flower is genetically unique and immutable. And they don’t need water or sunlight because they live on the Ethereum blockchain. (FT)

Last but not least, the CBC QuadrigaCX documentary is coming soon! It was nearly a year ago that David Gerard and I met in Vancouver for the filming. It was also one of the last times I enjoyed a meal inside a restaurant sitting next to people.

*Update, Feb. 14—Someone on Reddit was giving me a hard time, arguing that I can’t say Cotten pulled off an exit scam unless I explain that he might actually be dead. I won’t believe he is dead until someone exhumes the body and proves it’s him. See my Quadriga timeline for details.

**Update, Feb. 15—The unidentified tether customer in Luca Land’s diagram turns out to be FTX.

News: Bitfinex pays off Tether loan, Tether mints $1.8B in a week, Nigerian central bank cuts off BTC services, Elon Musk tweets send DOGE soaring

It’s Feb. 7, a year since the pandemic entered the US, and bored people with lots of stimulus money are gambling it all on crypto casinos and stocks. And to get things extra frothy, Tether spit out more than $1.8 billion in tethers last week—enough to push its market cap over $28 billion.

Amazing how things have evolved. It was big news in December 2017 when Tether reached its first $1 billion in tethers. Now the BVI-registered company is issuing that kind of money every few days. Why? Because they can. So far, nobody has stopped them. Also, because they have to. If they were to stop now, the price of bitcoin would collapse, exposing Tether for what it is—a massive fraud, the likes of which nobody has seen since Madoff. 

The price of bitcoin is now over $40,000, up from $32,800 a week ago. So if you bought bitcoin last week, you made money without ever having to get up off the living room couch. Just remember that you have to actually cash out via a banked exchange like Coinbase to realize those gains.

Bitfinex says it’s paid off Tether ‘loan’

Bitfinex announced on Friday that it’s paid off the remaining $550 million balance of its loan to sister company Tether in one fell swoop—in fiat currency and with interest.

Where did the money come from? Bitfinex won’t tell us. (The announcement was only three sentences long.) They just want us to believe—based on their word alone—that the entire matter is behind them. So I guess the New York attorney general can drop its probe?

That loan was at the center of the NY AG’s investigation into Bitfinex. After losing access to $850 million via its payment processor Crypto Capital, Bitfinex gave itself access to $900 million of Tether’s reserves—without telling its customers. And that’s after years of Tether saying that tethers were backed 1:1 with real dollars.

Nobody knows for sure how much of Tether’s money Bitfinex helped itself to. Bitfinex indicated—here and here—that it had previously paid off $200 million, leaving us to assume that the total loan amount was $750 million. But Bitfinex isn’t being upfront about how much it borrowed. And thus far, we have no audits, loan documents, or other evidence to prove the repayment was anything more than a story-book fantasy.

The fact of the matter is that Bitfinex was insolvent in 2018. Rather than crash and burn, it helped itself to Tether’s customer’s money to cover up for its massive losses. Are we to believe now that those losses magically disappeared? Just as we are to believe that tethers are now fully backed?

Let’s face it, Bitfinex probably started going down the tubes as early as August 2016 after it was hacked to the tune of $72 million worth of BTC and then lost its banking. The company’s operators have been playing a game of cat and mouse ever since. (See my Tether timeline for more details on past shenanigans.)

Mainstream media gets wise to Tether

Tether is getting more coverage in mainstream media. In his WSJ story, “What’s behind the bitcoin bubble,” columnist Andy Kessler covers all the Tether basics, including the NY AG probe and even the “Bit Short” article by Crypto Anonymous. (That story really is getting around, isn’t it?)

Word is getting out. Reporters are asking questions about Tether, and they are starting to document the funny business. Probably as a way to get up to speed on the topic before the shit really hits the fan—a day we all know is coming, wherein Tether gets exposed for what it really is.

In contrast, crypto media is trying desperately to fight the “Tether FUD.” Earlier, we had a reporter from The Block going on a podcast to try and convince us those billions of tethers are all backed with real cash. And I’m seeing nonsensical stories like this one in Bitcoin Magazine on “debunking the Bit Short.” Here’s one in another crypto rag about how the loan repayment will put an end to Tether FUD.

Bitcoiners and many crypto outlets—that are directly funded by the crypto industry—believe that Tether needs to be protected at all costs. How do you defend a company that won’t tell you what tethers are backed by? That refuses to submit to an audit? That is being investigated for fraud by one of the most powerful attorneys in the nation? You can’t, but they do.

I should mention that Jeremy Allaire has also come forward as a Tether apologist. Allaire is the CEO of Circle, which is part of the Centre Consortium, a collaboration with Coinbase that manages the USDC stablecoin.

USDC is growing rapidly. There are now $6.5 billion worth of USDC in circulation. The regulated stablecoin gets monthly attestations—but no full audit. Grant Thornton’s attestations say reserves are in cash and “other approved investments.” We don’t know what those investments are or who approved them. And it’s December attestation is over two weeks late, compared to earlier months. I’m sure it’s nothing to worry about though.

Nigerian banks cut off crypto services

The Central Bank of Nigeria (CBN) ordered banks on Friday to close the accounts of anyone involved in crypto services and to stop facilitating payments for crypto exchanges.

Bitcoin’s popularity in Nigeria was driven largely by a Russian Ponzi scheme called MMM. This connection, along with a few fraud causes, made African governments and regulators leery of crypto. The CBN warned banks in January 2017 that bitcoin and other cryptos were used primarily for money laundering and funding of terrorist activities. And then in February 2018, CBN warned Nigerian citizens they would not be able to get legal help if the crypto markets collapsed.

The CBN’s recent move impacts fiat on- and off-ramps, but peer-to-peer platforms like OTC desks remain unaffected. As a result, Binance temporarily suspended deposits in Nigeria naira. (Binance letter, Coindesk)

Musk tweets about DOGE, number go up

Dogecoin—a coin that was designed as a joke—made the WSJ after billionaire Tesla chief Elon Musk kept tweeting about it, causing the price to go parabolic.

Musk is doing this for the lulz. Watching people scramble to buy an asset after he tweets about it is his idea of amusement. Imagine, if you will, a rich guy throwing dollar bills onto the street and watching poor, wretched fools dive for it. This is Musk’s sense of humor.

The SEC has warned him that he can’t tweet things about Tesla for the lulz, so he is now applying the same douchebaggery to something he isn’t interested in simply because he can.

Kiss frontman Gene Simmons (the guy with the tongue) also announced he was stocking up on DOGE because he thinks it will increase in value. Why not? If Musk keeps tweeting about it, certainly number will go up.

Other newsworthy stuff

Trolly wrote a blog post about how the “Bitcoin economy” is just an illegal casino run by the mob. Leverage is the lifeblood of crypto, he says. And regulated exchanges like Coinbase are feeding the monster.

David Gerard wrote a blog post spelling out how Tether works for those who are still getting up to speed.

Yearn DeFi was exploited in the usual manner—smart contracts and not-so-smart people. A hacker made off with $2.8 million after draining $11 million from one of Yearn’s deposit pools. For the uninitiated, Yearn.Finance is a “yield aggregator” where users deposit funds in pools, which are then deployed to other DeFi protocols to generate yields for those depositors. DeFi—or decentralized finance—is based on smart contracts—bits of “unstoppable” code that run on a blockchain. (Cointelegraph)

German prosecutors have confiscated more than $60 million worth of bitcoin from a fraudster. But they can’t access the funds because Mr. Fraudster won’t give them the keys. How do you confiscate bitcoin if you have no access to it? (Reuters)

Miller Value Funds, run by veteran hedge fund manager Bill Miller, may invest up to $337 million in GBTC through its flagship fund, the Miller Opportunity Trust. GBTC’s premium to NAV is currently 6.5% — not the great arb opportunity it once was, so I’m wondering how much they will actually invest. (Decrypt)

Antonije Stojilkovic, a Serbian man, along with his coconspirators allegedly defrauded crypto investors out of more than $70 million. He has been extradited to the US. (DoJ press release)

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

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

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

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

Today Bitcoin is back down to $32,800.

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

Still sore about that Bit Short story?

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

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

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

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

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

Gregory Pepin’s disappearing act

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

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

For the last time, Tether is NOT regulated

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

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

Ripple responds to SEC; the XRP pump

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

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

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

Coinbase going public via direct listing

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

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

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

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

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News: Tether extends doc deadline, resumes printing; GBTC’s premium melts away; Ken Kurson pardoned

We are three-quarters of the way through the first month of the new year. We have a new president in the Whitehouse, and people are getting vaccinated—a glimmer of hope at the end of a long dark tunnel. I’m doing some volunteer work for VaccinateCA, making calls to pharmacies. (I saw @patio11 tweeting about the project and wanted to contribute.)

Maybe toward the end of 2021, we’ll see more in-person crypto conferences, but for now, it looks like Coindesk’s big money-maker Consensus will be virtual again—only $50 to register compared to $2,500 for the real thing in past years. Currently, bitcoin is trading at around $32,000 after climbing to an all-time high of nearly $42,000 earlier this month, and Tether is closing in on $25 billion worth of tethers.

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Tether needs 30 more days, restarts presses

Jan. 15, the big document deadline day for Bitfinex/Tether in the NY AG fraud investigation, came and went. On Tuesday, after a three-day weekend, Tether’s law firm requested a 30-day extension to give them more time to turn over documents. The request was on behalf of all parties, so NYAG was apparently okay with this.

We won’t get another status update until mid-February. Until then, Tether has agreed to maintain the status quo, meaning the injunction is still in effect, and Bitfinex cannot dip into Tether’s reserves. (Court filing)

For now, it’s back to business as usual. After what appeared to be a short reprieve, Tether is once again printing tethers with abandon. (On Jan. 19, Tether printed another 400 million USDT.) They literally can’t stop, won’t stop, because they are too deep into the game.

In lieu of an audit, which would put this whole matter of “Are tethers backed?” to rest, Tether continues to recruit reporters, bank execs, and other gullible parties to profess to the world that tethers are fully backed. Meet the next actor in this ongoing charade: Gregory Pepin, Deltec Bank’s deputy CEO. Deltec is an offshore bank in the Bahamas where Tether has been doing its banking since 2018

“Every tether is backed by a reserve and their reserve is more than what is in circulation,” Pepin told Laura Shin on the Unchained Podcast. “We can see it firsthand, so I can confirm that,” he said, while repeatedly dismissing the anonymous “Bit Short” article,” mentioned in my last newsletter, as FUD.

Tethers are fully backed, but backed with what? Before they were called tethers, realcoins were supported by “one-to-one fully auditable stores of dollars,” according to a July 2014 article in the Independent Investor. “The bearer of these realcoins will have the first right to redeem them for subsequent U.S. currency.”

A reasonable assumption at this juncture is that tethers are backed by loans to third parties, bitcoins, equity in an offshore bank, a pile of shit coins, and increasingly fewer real dollars.

So far, we’ve heard from Stuart Hoegner, Paulo Ardoino, and a reporter from The Block, all talking up Tether lately, while the triad—Phil Potter, J.L. van der Velde, and Giancarlo Devasini—have slid off into the hills. (Granted, Potter claims he stepped down a while back.)

Tether invests in Fleet

Tether has invested $1 million of its customer’s money into an ICO. Game publisher Exordium, the company behind Infinite Fleet—a name perhaps borrowed from a popular saline enema product—has launched a public security token offering. It is unclear if Tether invested USDT or real dollars, but public participants can put in euro, BTC, or USDT, according to a company press release. (Decrypt, Infinite Fleet)

Infinite Fleet is Samson Mow’s blockchain game. Coincidentally, Mow is the chief strategy officer at Blockstream, a company responsible for a huge chunk of Bitcoin’s source code. Bitfinex is also a Blockstream investor. These types of incestuous relationships help explain why so many Bitcoin-related company execs are so fiercely defensive of Tether.

Is Tether partnering with startup exchanges?

There is reason to suspect Tether is partnering with startup exchanges by giving them USDT. Over the past year, all kinds of smaller exchanges have been announcing sizable tether giveaways. Alex Dreyfus, CEO and founder of Chiliz, for instance, said he was preparing for a 100,000 USDT giveaway. He also admitted he is a client of Tether and Deltec Bank.

Do a search for “USDT” and “giveaway” on Twitter and plenty will come up. Kucoin is one example. (Binance, an established Tether customer, is also giving away tethers.)

GBTC’s premium melts away

Here is something that hasn’t gotten enough attention. Grayscale Investments has played a role in fueling the bitcoin bubble. By convincing institutional investors they could buy into GBTC at net asset value and sell on secondary markets at a 20% to 30% premium after a six-month lock-up, it has created a self-reinforcing market dynamic.

Accredited investors looking to take advantage of an arbitrage opportunity, bought into GBTC, pushing up GBTC assets under management, which was then used to promote the idea that institutional investors, dominated by hedge funds, were scooping up bitcoin products. All this, in turn, lured more retail suckers into the market. “Look, all the big companies are rushing in! This must be a safe bet!”

But now that premium has dried up as fewer retailers are showing an interest in bitcoin, given the price has dropped by $10,000 in recent weeks. GBTC was recently trading at just 2.8% over NAV, leaving accredited investors stuck with GBTC in an illiquid market. (Bloomberg, Trolly’s thread)

Meanwhile, it looks like Barry Silbert has left the chatroom. He stepped down as CEO two weeks ago.

Just like that, Kurson off the hook

Surprise, surprise. Former Ripple board member Ken Kurson was one of the 74 people Donald Trump pardoned at the last minute on Jan. 19. Kurson is also the co-founder of crypto rag Modern Consensus, where I worked for an intolerable six weeks. It’s just unbelievable this guy, who was criminally charged with cyberstalking, got a pardon. (Full list of pardons, NBC)

While many of Trump’s pardons went to political pals—including Steve Bannon, another pro-bitcoin guy—Kurson’s was an obvious favor to Jared Kushner, whose father, Charles, also received a pardon. Kurson’s pardon stands out, in part, because of the risk it poses to some of the women he stalked and harassed. (The Daily Beast, paywalled) 

“Suffice it to say, what he was actually arrested for was part of an ongoing pattern of abuse, revenge, & sociopathy,” Deborah Copaken, a contributing writer at the Atlantic, said on Twitter. She worked for Kurson in the past, wrote about the experience, and helped the FBI with their investigation. “All jokes aside, I am worried about my own safety. @FBI – How do you protect those who helped you but who are now totally exposed because of a presidential pardon?”

Other newsworthy bits

“How can $24 billion worth of tethers move a $650 billion bitcoin market cap?” The is an insufferably dumb question, and I explain why in a recent blog post. (My Blog)

David Gerard wrote about the history of wildcat banks and early “stablecoins” with excerpts from an 1839 Michigan Bank Commissioner report. (Gerard’s blog)

Craig Wright is at it again. He is now claiming the Bitcoin white paper and Bitcoin.com are his. He is trying to force Bitcoin.org to take down the white paper, which they now refuse to do. (Coindesk)

Balaji Srinivasan outdid himself on Twitter when he compared bitcoin, one of the world’s biggest energy hogs, to a battery, setting off the “bitcoin is a battery” meme.

Stephen Diehl, a programmer, compares crypto to a “giant smoldering Chernobyl sitting at the heart of Silicon Valley which a lot of investors would prefer you remain quiet about.” His thread went viral.

Gary Gensler is officially named for SEC chair. (NYT) We can expect greater crypto oversight from him. (Bloomberg)

Meanwhile, Allison Herren Lee was sworn in as SEC acting chair until Gensler takes over. (SEC, Decrypt)

MicroStrategy bought another 314 bitcoins for $10 million cash. Saylor’s company now holds 70,784 bitcoins acquired at an aggregate $1.135 billion. (SEC Filing, Coindesk)

Circle has surpassed $5 billion worth of its USDC stablecoin. They produce regular monthly attestations. But as Frances Coppola points out, if Circle/Centre were a bank, they would have to produce actual audited accounts.

Updated on Jan 24 with more info on Kurson’s pardon and a quote from Deborah Copaken. Also added the bit about Craig Wright.