Tag: tether

Reggie Fowler, Bitfinex/Tether money mule, sentenced to 6 years in prison 

  • By Amy Castor and David Gerard
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Arizona businessman and sports investor Reggie Fowler spent decades talking himself out of sticky situations. But in a Manhattan courtroom on June 5, reality finally caught up to him.

US District Judge Andrew Carter sentenced Fowler, who is 64 years old, to 6 years and 3 months in prison for his role in hiding cryptocurrency transactions on behalf of shadow banking operation Crypto Capital and the disappearance of hundreds of millions of dollars. Fowler will surrender in Phoenix at 10 a.m. on June 30, giving him three weeks to get his affairs in order and rehome his dog.

Inner City Press attended the sentencing. [Twitter; Inner City Press; SDNY press release]

Fowler has agreed to pay $53 million in restitution to the defunct Alliance of American Football (AAF), an alternative football league that he defrauded as one of its investors. Inner City Press tells us that the judge also ordered Fowler to forfeit the full $740 million prosecutors had asked for, dismissing Fowler’s argument that this was so high as to violate the 8th Amendment. [Order of restitution, PDF]

Fowler’s crypto frauds were the beginning of the more recent frauds in the crypto space, and the failures of the Silvergate and Signature banks, prosecutors said in court.

“I have harmed the people of the AAF and my family,” sobbed Fowler. “I am embarrassed and ashamed.” Poor fellow.

Just a little off the top

Crypto Capital was a Panama-incorporated money transmitter that served as a shadow bank for many US and Canadian crypto exchanges, including Bitfinex and the failed QuadrigaCX — because they had enormous trouble getting proper banks to talk to them.

Throughout 2018, Fowler was Crypto Capital’s US contact. He set up a network of bank accounts in the US and abroad so that Crypto Capital could process payments for its customers without worrying about all those tedious anti-money-laundering laws. 

Fowler lied to the banks, telling them that the accounts were for his real estate business. His scheme ran internationally and received over $740 million just in 2018. Most of this was Bitfinex customer money. A “Master US Workbook” listed more than 60 bank accounts around the world, which totaled over $345 million by January 2019. [Decrypt]

Fowler didn’t worry too much about separating Crypto Capital or Bitfinex money from his own funds. He and his co-conspirators set up a “10% Fund,” skimming from client deposits for themselves.

In the original indictment, and again at today’s sentencing, prosecutors detailed “additional criminal conduct” Fowler seemed to be involved in — though he wasn’t charged on these.

Fowler allegedly tried many times to get bank loans using fraudulent bond certificates, valued in the billions, as collateral. He tried to use funds from the Crypto Capital scheme as collateral for loans. He was caught with $14,000 in sheets of counterfeit $100 notes right there in his office.

Fowler was arrested in Chandler, Arizona, on April 19, 2019.

Prosecutors piled on more charges in a superseding indictment in February 2020 after they discovered Fowler had been using Crypto Capital money to fund the AAF. That funding fell through after the Department of Justice seized $68 million from Fowler’s bank accounts at HSBC in late 2018.

Fowler, who had fumbled an opportunity for a plea deal in January 2020, pleaded guilty to all five counts against him in April 2022, throwing himself at the mercy of the court. He has remained out of jail since his initial arrest on $5 million bail. 

A respectable businessman of flawless repute

Fowler’s lawyer Ed Sapone wrote a letter to the judge on April 10 asking for clemency for his client — that is, no jail time at all.

Sapone argued that Fowler had lived a hard life, growing up in the South without parental support, and had never broken the law before. At least not in any way that landed him behind bars. [Doc 124, PDF]

Never mind that Fowler was a fully-grown 59-year-old man at the time of his crimes with a long career as a (cough) sharp businessman behind him.

Sapone also neglected to mention that Fowler had been sued 36 times in the past, mainly for just not paying people — and had even stiffed his previous lawyers in this very case for $600,000. [ESPN, 2005] 

In a sentencing submission, prosecutors said that they didn’t appreciate that Fowler had blown $200,000 gambling in casinos since his guilty plea, rather than using those funds to pay back his victims. [Doc 125, PDF]

Prosecutors also noted that in December 2016, Fowler was stopped at the Canadian border with items associated with a “black money scam” — a scheme where a con artist claims to have stacks of US bills dyed black to avoid detection. The bills will come clean if you just purchase this expensive “special chemical.”

Hard work and perseverance

Fowler’s story reads like an episode of American Greed — where money seduces and power corrupts.

Before his path crossed that of Crypto Capital, Fowler’s main business was Spiral Inc. — a holding company for about a hundred different businesses, including ice rinks, car washes, and a foam food tray manufacturer company. Most of the businesses were located between Arizona and Colorado.   

Fowler was also a pilot and owned two jets — a Cessna Citation CJ2 and a CJ3, which he flew for business and loaned out.

He touched many lives including friends in the sports world and those who depended on him for their livelihood. Because Amy wrote about Fowler regularly, people who knew him contacted her. Sources described Fowler as well-read, charming, and a “fantastic salesperson, overbearing and confident.” He was not a gambler, at least not before his indictment, said a source. He never drank and worked out at the gym religiously.

What Fowler was not good at, however, was shedding businesses that were dogs — like his “Shammy Man” carwashes in Arizona, which he co-owned with a partner who served time in federal prison — or putting money into the ones that were doing well.

His firm Styro-Tech in Denver was making money hand over fist, but Fowler couldn’t seem to invest in better equipment and he was always hiring illegal immigrants cheap. “He could never pay anybody what they were worth,” said one source. “I don’t know how many times he got caught hiring illegals.”

Football obsessed

Fowler was a football player in his youth and remained an obsessive fan. His obsession with the game played no small part in his downfall.

He kept a Cincinnati Bengals helmet in his office and gave people the impression that he had played professionally for the Bengals — though he had only attended training camp.

In 2005, Fowler tried to purchase the Minnesota Vikings from Red McCombs in a $600 million deal. “He was 100 percent committed to getting it done,” McCombs said. “He was very straightforward. He said, ‘I am going to buy your football team.’” Fowler would have been the NFL’s first Black owner. [LA Times, 2005]

But the deal led to financial scrutiny, and the Star Tribune uncovered several outright lies in Fowler’s resume, so Fowler pursued a limited partnership instead. The cash he put up for the 3% ownership in the Vikings got him into financial trouble. [Minnesota Public Radio, 2005]

Things went from bad to worse, and Fowler went deeper into debt. He refinanced Spiral in 2006, landing him $65 million in debt. The credit crisis followed in 2008, and Spiral never recovered. By 2013, the company was in receivership, and Fowler lost control of all his businesses. By October 2014, Fowler no longer had a stake in the Vikings. [Resolute, 2022; Star Tribune, 2014]

At some point over the following years, a debt-saddled Fowler crossed paths with the people at Crypto Capital — Oz Yosef and his sister Ravid. The Yosefs were both later indicted for their part in Fowler’s fraud, but remain at large.

Crypto had an interesting year in 2017. Bitfinex, the largest crypto exchange at the time, lost its ties to the traditional banking system when its Taiwanese banks were cut off from correspondent banking by Wells Fargo. Short of real dollars, and trying to recover from a $72 million hack in 2016, Bitfinex and its sister company, stablecoin issuer Tether, began pumping out tethers at a pace unlike anything before — frequently with no dollars backing them at all. (Just like the salty nocoiners told you at the time.)

Fueled by these unbacked fake dollars pouring into the crypto markets, the price of bitcoin climbed to new highs. A year later, Fowler found himself in control of bank accounts with hundreds of millions of dollars flowing through them. And then football called to him again. 

AAF: the Fyre Festival of football

Alternative football leagues have a long history of dismal failure. In 2017, TV producer Charles Ebersol came up with an idea for a springtime football league that would be a feeder for the National Football League.

Somehow “millions” of fans would have an interest in watching football after the Super Bowl. The Alliance of American Football would even come with a killer app that promised to change sports gambling as we know it.

Ebersol and AAF co-founder Bill Polian, an NFL executive, attracted some seed capital. In June 2018, Willie Lanier, a former Super Bowl champion, introduced Ebersol to Fowler. Fowler offered to be a lead investor, committing $170 million — a $50 million line of equity and a $120 million line of credit. Prosecutors wrote in their letter to the court:

During a June 2018 meeting with AAF executives, including AAF co-founder Charlie Ebersol, Fowler showed the AAF corporate team printouts of bank account information purporting to show that Fowler had hundreds of millions of dollars in foreign bank accounts. Fowler would not let anyone take the printouts after the meeting. Fowler told Ebersol that Fowler’s wealth, which he said was largely in cash, came from real estate holdings and an aviation business that built drones in Germany for U.S. Government contracts. During an October 2018 meeting, one of Ebersol’s associates took a picture of a bank account printout that Fowler presented. That printout showed roughly $60 million in an HSBC account. 

That HSBC account would be one of the accounts that was frozen by the Department of Justice in that very month.

Ebersol claims in an affidavit that he did his due diligence on Fowler — though clearly he did not. All Eberson would have had to do was look up all the multiple lawsuits against Fowler. Peter Thiel also invested in AAF through his Founders Fund.

The league kicked off in February 2019 — with eight teams and more than 400 players — but after eight weeks of play, the dream unraveled when Fowler missed a $28 million payment  because all his money had been frozen. [Affidavit, PDF; CNBC, 2018]

The AAF disintegrated into the football version of the Fyre Festival. They missed payroll in the first week one, blaming it on a computer glitch. Players had been booted out of their hotels and had to pay cash for their flights back home.

Another investor, Tom Dundon, took over the league, but he soon gave up throwing money into the pit as well. The AAF declared bankruptcy on April 17, 2019 — and multiple lawsuits against its founders ensued. [Twitter, archive; Twitter, archive; Sports Illustrated]

End of the linebacker

What can we learn from Reggie Fowler? Mostly that pigs get fat, but hogs get slaughtered.

Fowler spent decades doing sharp business that didn’t quite get him in trouble with the law. Then he got in a bind and let his hubris do the thinking for him. Like so many in crypto, he found out that this works until it doesn’t.

By the time he gets out of jail, Fowler will be 70. In the four years between his arrest and today’s sentencing, he spent his time just going to work every day. We predict he’ll get out of jail and just get back into running businesses until the day he drops. Hopefully less flagrantly illegal ones.

Posted on by Amy Castor 1

Crypto collapse: Treasury comes after DeFi, SEC comes after crypto exchanges, stablecoin bill, FTX first interim report

  • By Amy Castor and David Gerard

“Please god let FTX go back into business, take a lot of money from crypto rubes, then collapse and lose everything again. Please let there be people who lost money in two separate FTX collapses.”

– Ariong

The Treasury brings good news for DeFi

The US Treasury released its “Illicit Finance Risk Assessment of Decentralized Finance.” The 42-page report examines DeFi from the perspective of anti-money laundering and sanctions laws. [Press release; Report, PDF] 

This report is not about consumer protection — it’s about national security, sanctions busting, and terrorist financing. The Treasury is not happy:

“The assessment finds that illicit actors, including ransomware cybercriminals, thieves, scammers, and Democratic People’s Republic of Korea (DPRK) cyber actors, are using DeFi services in the process of transferring and laundering their illicit proceeds.

… In particular, this assessment finds that the most significant current illicit finance risk in this domain is from DeFi services that are not compliant with existing AML/CFT obligations.”

The report makes clear: blockchain analysis is not sufficient for KYC/AML. Calling something “decentralized” or a “DAO” doesn’t absolve you of responsibility. And almost everything in DeFi falls squarely in the ambit of existing regulation.

How’s regulatory clarity for crypto? Just fine, thank you:

“Through public statements, guidance, and enforcement actions, these agencies have made clear that the automation of certain functions through smart contracts or computer code does not affect the obligations of financial institutions offering covered services.”

The report recommends “strengthening U.S. AML/CFT supervision and, when relevant, enforcement of virtual asset activities, including DeFi services, to increase compliance by virtual asset firms with BSA obligations” and “enhancing the U.S. AML/CFT regulatory regime by closing any identified gaps in the BSA to the extent that they allow certain DeFi services to fall outside of the BSA’s definition of financial institution.”

Nicholas Weaver tells us the report “should be thought of as being as serious as a heart attack to the DeFi community, as this represents the US government regulation at its most serious. Indeed, the report can be summarized in a sentence: ‘If you want to continue to OFAC around, you are going to find out.’”

The SEC brings good news for Coinbase and DeFi

SEC chair Gary Gensler is fed up with Coinbase blatantly trading unregistered securities and not registering with the SEC as a proper securities exchange. So he’s going to update the rules.

The SEC has reopened the comment period for a proposal, initially issued in January 2022, that would update the definition of an “exchange” in Rule 3b-16 of the Exchange Act. [SEC press release; Fact sheet, PDF; Gensler statements]

Gensler’s comments are laser-targeted at Coinbase — and also DeFi:

“Make no mistake: many crypto trading platforms already come under the current definition of an exchange and thus have an existing duty to comply with the securities laws.”

He reiterates that “the vast majority of crypto tokens are securities” — the SEC’s position since 2017 — so “most crypto platforms today” meet the definition of a securities exchange. He adds:  

“Yet these platforms are acting as if they have a choice to comply with our laws. They don’t. Congress gave the Commission a mandate to protect investors, regardless of the labels or technology used. Investors in the crypto markets must receive the same time-tested protections that the securities laws provide in all other markets.”

A regulatory framework for casino chips

On Saturday, The US House Financial Services Committee published an as-yet-untitled discussion draft bill for regulating stablecoins a few days before a hearing on the topic on Wednesday, April 19. [Discussion draft, PDF; hearing agenda]

The bill refers to stablecoins as “payment stablecoins.” This is utterly hypothetical. Nobody uses stablecoins to buy things. They’re chips for gambling on speculative assets in the crypto casinos.

This bill was a sudden surprise for a lot of people — but it appears to be a version of a draft bill that Senate Banking Committee Ranking Member Pat Toomey (R-PA) was circulating last year. [Stablecoin TRUST Act, 2022]

The bill divides stablecoin issuers into banks and nonbanks. Credit unions and banks that want to issue stablecoins would need approval from the financial regulator they fall under‚ the National Credit Union Administration, the FDIC, or the OCC. Non-bank stablecoin issuers would fall under the Federal Reserve.

For this bill, USDC or Pax Dollars, under the Fed, might pass muster. But Tether would be kicked out of anything touching the US because they wouldn’t be able to meet the transparency or liquidity requirements.  

All stablecoins that circulate in the US would need to be backed by highly liquid assets — actual dollars and short-term treasuries — and redeemable within one day. That doesn’t leave much room for the issuers to turn a profit by putting the deposits in longer-term investments.

Custodia is not a bank under the Bank Holding Act, so for this bill, it would also be considered a non-bank. This bill would derail Custodia’s lawsuit against the Federal Reserve and the Federal Reserve Bank of Kansas City to try to force a Fed master account out of them.

The bill also calls for a moratorium on new algorithmic stablecoins until a study can be conducted.

Finally, the bill includes a request for federal regulators to study a central bank digital currency (CBDC) issued by the Fed. As we noted previously, FedNow would make a CBDC completely superfluous.

Hilary Allen, a professor of law at American University Washington College of Law, points out important shortcomings in the stablecoin bill. She argues that the bill is stacked in favor of stablecoins, and notes that the bill’s payment stablecoin definition could be a way of avoiding SEC jurisdiction. And while the bill calls for monthly attestations, it doesn’t say anything about full audits for stablecoin reserves. [Twitter]

FTX’s first interim report reads like Quadriga

John Jay Ray III, FTX’s CEO in bankruptcy, released his first interim report on the control failures at FTX and its businesses. Ray documents a shocking level of negligence, lack of record keeping, and complete disregard for cybersecurity at FTX. [Doc 1242, PDF]

The report confirms what we’ve been saying all along: all crypto exchanges behave as much like Quadriga as they can get away with. A few highlights:

  • FTX Group was managed almost exclusively by Sam Bankman-Fried, Nishad Singh, and Gary Wang. The trio had “no experience in risk management or running a business,” and SBF had final say in everything.
  • SBF openly joked about his company’s reckless accounting. In internal docs, he described Alameda as “hilariously beyond any threshold of any auditor being able to even get partially through an audit,” and how “we sometimes find $50m of assets lying around that we lost track of; such is life.”
  • FTX kept virtually all of its assets in hot wallets, live on the internet, as opposed to offline cold wallets, where they would be safe from hackers. 
  • FTX and Alameda also kept private keys to billions of dollars in crypto-assets sitting in AWS’s cloud computing platform.
  • SBF stifled dissent with an iron fist. Ex-FTX US president Brett Harrison quit after a “protracted argument” with Sam over how FTX US was run. Sam cut Harrison’s bonuses, and when “senior internal counsel instructed him to apologize to Bankman-Fried for raising the concerns,” Harrison refused.

Ray and his team have so far recovered $1.4 billion in digital assets and have identified an additional $1.7 billion they are in the process of recovering. (We’re still waiting for him to ask for money back from The Block, but maybe that’s coming.)

In other FTX news, Voyager and FTX and their respective Unsecured Creditors’ Committees have reached an agreement on the money FTX paid to Voyager before FTX filed bankruptcy that FTX wants to claw back now — $445 million in cash will go into escrow while things are sorted out. [Doc 1266, PDF]

Terraform Labs did nothing* wrong

South Korean prosecutors have seized 414.5 billion won ($312 million) in illegal assets linked to nine Terraform Labs execs. None of the assets tied to Do Kwon have been recovered. Kwon converted everything to BTC and moved the funds — worth an estimated 91.4 billion won ($69 million) — to offshore exchanges. [KBS, Korean]  

Who crashed UST in May 2022? Terraform Labs seems to have played no small part. In the three weeks leading up to the collapse, Terraform dumped over 450 million UST on the open market. [Cointelegraph]

Crypto mining: the free lunch is over

A bill limiting benefits and tax incentives for crypto miners in Texas unanimously passed a Senate committee vote and now it’s in the chamber. The bill was sponsored by three Republican state senators. Even they’re sick of the bitcoin miners. [SB 1751, PDF; CoinDesk; Fastdemocracy]

Bitcoin mining doesn’t create jobs — so Sweden has ended the 98% tax relief it gave data centers, including crypto miners. Crypto is outraged. [CoinDesk]

More good news for exchanges

The downfall of peer-to-peer bitcoin exchange Paxful is a comedy goldmine. Paxful cofounders Ray Youssef and Artur Schaback originally blamed Paxful’s closure on staff departures and regulatory challenges — but now they’re turning against each other in court.

As an example of their good judgment, in 2016, the pair drew police attention when they were spotted in Miami aiming an A15 rifle off their penthouse balcony for photo purposes. Former employees allege “favoritism, erratic dismissals, lavish spending on travel and reports of routine cannabis usage on the job by Youssef himself.”

Paxful’s business model was based on price-gouging fees on gift cards, according to one former employee. You want 10 euros worth of bitcoin? That’ll be 20 euros worth of gift cards. Coincidentally, money launderers are usually quite happy to pay fees on the order of 50%. Schaback thinks Paxful is still a viable enterprise. [CBS, 2016; CoinDesk]

As you might expect, OPNX, the new exchange for tokenized crypto debt run by the founders of the failed Three Arrows Capital and CoinFLEX, has gotten off to a feeble start. Trading volume in the first 24 hours was $13.64. [The Block]

The Winklevoss twins made a $100 million loan to Gemini. The move came after Gemini had informally sought funding from outside investors in recent months without coming to any agreements. We can’t find if the loan was in actual dollars or in crypto — or if it was just an IOU. [Bloomberg] 

Binance relinquished the financial services license for its Australian derivatives business, Oztures Trading, after the Australian Securities and Investments Commission said they were likely to suspend it. Customers have until April 21 to close their accounts. [ASIC] 

Who were the unnamed “VIP” traders on Binance mentioned in the CFTC suit? Jane Street, Tower, and Radix. [Bloomberg] 

The Mt. Gox payout window has opened! Slowly. [Mt Gox, PDF; The Block]

Cryptadamus thinks that Crypto.com’s Canadian bank accounts are frozen. [Mastodon]  

Good news for bitcoin

The Ethereum Shanghai upgrade went through on April 12. You can now withdraw your staked ether! As we predicted, there wasn’t a rush for the exits. [CoinDesk]

Bitfinex money mule Reggie Fowler will be sentenced on April 20. His lawyer wrote a lengthy letter to the judge asking for clemency — no jail time — because Fowler lived a hard life and never did anything wrong before. Nothing he was busted in court for, anyway. [Letter, PDF]

Michael Saylor’s MicroStrategy has bought yet more bitcoin, digging itself ever deeper. The company purchased an additional 1,045 BTC for $23.9 million, or an average price of $28,016, between March 23 and April 4. [8-K filing]

Tether got its tendrils into the US dollar system via Signet — former Signature Bank’s real-time payments system. Tether instructed crypto firms to send dollars to its Bahamas-based banking partner Capital Union Bank via Signet. We’re not clear on whether this violated the New York settlement — though if they lied about who they were, it broke banking law. [Bloomberg] 

Cross River Bank, the banking partner of Coinbase and Circle, built its business on buy-now-pay-later (BNPL) and pandemic loans. What could go wrong? [Dirty Bubble] 

With its firm commitment to quality cryptocurrency journalism, CoinDesk is hot on getting into generating its hopium space-filler using AI text generators. [CoinDesk] 

Media stardom

“Ukraine wants to fund its post-war future with crypto” — with quotes from David. [Techmonitor]

“A lot of ordinary people who got into crypto just lost everything in various ways or lost chunks of it,” Gerard said. “And this is a lot of  why I think retail investors should just keep the hell away from crypto.” [Business Insider]  

Posted on by Amy Castor 0

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

  • By Amy Castor and David Gerard

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

— HappyHippo

Media stardom

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

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

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

Silvergate’s goose continues cooking

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

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

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

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

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

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

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

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

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

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

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

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

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

Signature Bank, crypto’s tiny lifeboat 

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

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

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

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

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

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

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

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

Tether (again)

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

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

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

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

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

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

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

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

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

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

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

AUM Letter PRIVATE & CONFIDENTIAL

Three Arrows Capital Ltd. (the “Company”)

1-January-2022

To Whom It May Concern,

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

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

[signed]

Kyle Davies

Director

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

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

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

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

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

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

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

Celsius Network

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

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

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

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

Posted on by Amy Castor 0

FTX Bahamas vs. John Jay Ray, Bankman-Fried pleads not guilty, DoJ seizes FTX assets

  • By Amy Castor and David Gerard

i wonder how many times someone’s managed to hack in to a bitcoin exchange and found there wasn’t any money there and just left

— Boxturret, SomethingAwful

FTX vs the Bahamas

There’s a turf war going on between the FTX Digital Markets (FTX DM) liquidation in the Bahamas and the FTX Trading Ltd bankruptcy proceedings in the U.S. We wrote about it earlier, along with some of the fishy stuff going on in the Bahamas.  

The Securities Commission of the Bahamas (SCB) filed their liquidation for FTX DM, a small subsidiary of FTX Trading, just one day before John Jay Ray III filed for Chapter 11 on behalf of FTX. Sam Bankman-Fried helped the SCB get in before Ray by waiting until the wee hours of November 11 to hand control over to Ray. Now the SCB feels it is entitled to FTX assets so that the liquidators can distribute them to creditors of FTX DM — whoever those might eventually turn out to be. [PwC]

The Bahamas side seems to be working on the theory that FTX DM was the operating center of the FTX companies. But FTX DM wasn’t even incorporated until July 22, 2021. It lay dormant for nearly a year and didn’t start operating in any manner until May 13, 2022. Note that’s a few days after the Terra-Luna collapse — FTX and Alameda were already utterly screwed by the time FTX DM was used for anything, suggesting that that may have been part of SBF’s reason to activate it.

The SCB pissed off Ray even further when, on December 29, they valued the FTX funds they seized late in the night on November 11 — in violation of the Chapter 11 stay — at $3.5 billion. This is mostly a pile of FTT tokens, whose market value is way less than $3.5 billion. FTX says the assets were worth just $296 million — “assuming the entire amount of FTT could be sold at spot prices at the time.” [SCB press release, PDF; FTX press release]

Christina Rolle, SCB executive director, said the Commission sought control of the crypto held by FTX after SBF and FTX cofounder Gary Wang told them about “hacking attempts overnight” — a perfect justification to seize the assets. Her affidavit, filed with the Supreme Court of the Bahamas, confirmed that SBF and Wang were behind the transfers on November 11 and 12. [Affidavit of Christina R. Rolle, PDF]

U.S. Federal prosecutors are looking into the $370 million hack — or “hack.” [Bloomberg]

Rolle also said that Tether gave the SCB 46 million tethers (USDT). SCB had asked Tether to freeze some USDT held by FTX DM or FTX Trading Ltd (it’s not clear which entity), then create 46 million fresh USDT and send it to SCB: 

76. Additionally, the Commission sent instructions for the transfer of approximately US $46 million Tether tokens to a secured wallet under the control of the Commission. These Tether tokens were not transferred to the Commission’s wallet but, after a meeting with Tether representatives, the Commission agreed that Tether, in light of the Chapter 11 proceedings, would maintain a freeze over the Tether tokens until ownership of the tokens is resolved.

This sounded odd to us — a “meeting with Tether representatives”? Coincidentally, the Bahamas Attorney General, Ryan Pinder, used to work for Deltec Bank, the bank associated with Tether.

The SCB then put out a press release on January 3 accusing Ray of “material misstatements” and having a “cavalier attitude to the truth.” They claim Ray is “promoting mistrust of public institutions in the Bahamas.” Well, yes, he is. [LinkedIn]

The joint provisional liquidators (JPLs) handling the FTX DM liquidation in the Bahamas have been pushing for access to substantial amounts of FTX data. Ray and his lawyers are working to make sure that never happens. Ray’s team has submitted piles of evidence pointing to the Bahamas government acting in bad faith.

FTX has filed an incendiary objection to the JPLs’ motion to compel the turnover of electronic records. This is a 37-page must-read rant: [FTX objection, PDF]

10. Finally, the stunning press release issued late yesterday, on December 29, 2022, by the Commission, along with certain related materials, is a game changer. The press release (and the supporting affidavit of the Executive Director of the Commission) boldly admits that the Commission violated the automatic stay in taking certain of the Debtors’ digital assets and then recklessly values the assets taken at $3.5 billion. As described in more detail below, yesterday’s disclosures demonstrate conclusively that the JPLs and the Commission are cooperating closely to do an end run around this Court and chapter 11. In a situation where maximizing recoveries for creditors should be the primary goal of all concerned, one can only wonder why.

We expect Ray isn’t wondering at all. He believes that “an elaborate and intentional game is being played” by the JPLs, the SCB, and the Bahamas government. As FTX says in their objection: “The fact that the founders left the Debtors more closely resembling a crime scene than an operating business cannot be ignored.”

FTX lawyer James Bromely filed a 675-page declaration, presenting exhibits to support their case. FTX financial advisor Edgar Mosley at Alvarez & Marsal also filed a 185-page declaration loaded with exhibits. [Bromely declaration, PDF; Mosley declaration, PDF]

The Mosley declaration details what business FTX Digital Markets actually did. FTX DM seems to have been Sam’s local partying fund:

17. The Debtors’ records reflect that $15.4 million for “Hotels & Accommodation” was paid primarily to three hotels in The Bahamas: the Albany ($5.8 million), the Grand Hyatt ($3.6 million), and the Rosewood ($807,000). The $6.9 million for “Meals & Entertainment” was paid primarily to Hyatt Services Caribbean ($1.4 million), Six Stars Catering ($974,000), and to three other catering and delivery services ($2.3 million in total).

18. The Debtors’ records reflect that in the first three quarters of 2022, FTX DM had total operating expenses of approximately $73 million, including over $40 million labeled “other expenses.”

19. The Debtors’ records reflect that FTX DM’s 2022 income statements show that FTX DM made no disbursements in connection with transaction, engineering or product expenses.

The newly formed Unsecured Creditors’ Committee in the U.S. chapter 11 also objects to the Bahamas motion. “These requests are sweeping and appear to be based on the faulty theory advanced by the JPLs that FTX DM was actually the nerve center of the FTX enterprise.” [Committee objection, PDF]

Just seizing some assets, don’t mind us

There was a scheduling conference in the Delaware FTX bankruptcy hearing on January 4. This wasn’t expected to be interesting — but Department of Justice Attorney Seth Shapiro made a surprise appearance over Zoom to let Judge Michael Dorsey know that the DoJ has been seizing assets.

SBF held a 7.6% stake in day trading brokerage Robinhood. He admitted to borrowing from Alameda in April and May to purchase the shares, in an Antigua court affidavit shortly before his arrest. [CoinDesk; affidavit, PDF]

SBF pledged the Robinhood shares to multiple companies as loan collateral. Who was getting the shares in the bankruptcy was a point of some contention. Now the DoJ has seized the shares.

Various bank accounts connected to the FTX Digital Markets (Bahamas) case and the JPLs motions for provisional relief, and the money in them, have also been seized. “We didn’t just want the court to read that in the papers filed by Silvergate and Moonstone” (FTX’s banks), said Shapiro. The DoJ also seized some cryptocurrency, though Shapiro didn’t say who from — the banks? The DoJ is working things out with the parties.

Shapiro told Judge Dorsey that the bank accounts had been seized with a view to “a criminal or asset forfeiture proceeding at some point down the line, in the Southern District of New York, to which entities could file claims.”

Shapiro said: “We either believe that these assets are not the property of the bankruptcy estate or that they fall within the exceptions under sections 362(b)(1) and/or (b)(4) of the bankruptcy code.” 362(b) is about criminal proceedings. [LII]

The Bahamas JPLs, who were also hoping for the contents of these bank accounts, are in touch with the DoJ.

Sam did nothing* wrong

Sam Bankman-Fried stood before U.S. District Judge Lewis A. Kaplan on January 3 and pleaded not guilty to all eight counts against him. SBF actually flew to New York for his arraignment and had to squeeze through a mob of reporters to enter the courthouse. The judge set a tentative trial date of October 2. [Twitter; Twitter thread; NYT]

Sam thinks he’s too smart, rich, and pretty to go to jail. He just needs to explain things properly to the people in charge, and it’ll all be fine. 

SBF’s not-guilty plea doesn’t necessarily mean a trial will happen. SBF and his lawyer Mark Cohen are likely just buying time so they can negotiate a better deal with the prosecutors. We very much doubt the case will go to trial, or that Sam’s parents would be able to foot the legal bill if it did.

More funds mysteriously moved out of Alameda wallets on December 27, mainly illiquid altcoins being swapped for ETH and BTC. Over $1 million in funds were sent through crypto mixers, according to crypto intelligence firm Arkham. [Twitter; Decrypt]

This isn’t the work of a liquidator. Sam says it wasn’t him, even though Sam, FTX co-founder Gary Wang, and FTX director of engineering Nishad Singh were the only ones who had access to the keys. Reddit user Settless notes that SBF had previously claimed to own these addresses: “The pattern is similar — the wallet receives funds and swaps them via no-KYC exchange to launder the funds.” [Twitter; Reddit]

The U.S. isn’t happy about this movement of crypto. During SBF’s arraignment in Manhattan, the prosecutors asked the court to add a new condition to the bond: that Sam be prohibited from accessing or transferring any FTX or Alameda assets. Judge Kaplan agreed. 

Molly Crane-Newman from the NY Daily News said: “SBF became animated when prosecutors successfully requested that the judge prohibit him from accessing or transferring FTX assets — furiously writing notes to his attorneys on a legal pad and pointing to them with a biro.” [Twitter]

The judge also agreed to the redaction of names and addresses of Sam’s two additional bail signers — who he may not have actually found yet. The press has until January 12 to file any objections to this. Matthew Russell Lee of Inner City Press has already filed an application to unseal the names. [Motion, PDF; Twitter; Application to Unseal]

Two of SBF’s associates, Caroline Ellison and Gary Wang, have already pleaded guilty in the hopes of getting a lesser sentence. John Reed Stark ordered and posted their plea agreements and hearing transcripts. [LinkedIn; Ellison plea, PDF; Ellison agreement, PDF; Wang plea, PDF; Wang agreement, PDF]

* except all the things he may possibly, hypothetically, have done wrong

Other perfectly normal happenings in FTX

North Dimension, the company that FTX customers were unknowingly sending their actual U.S. dollars to, was a fake online electronics retailer. North Dimension has two accounts at Silvergate Bank. [archived website; NBC News]

The assorted shenanigans with FTX likely explain why Silvergate Bank (NASDAQ: SI) has 54% of its shares sold short. Smart investors know how this will end. [Fintel]

John Reed Stark discusses FTX investors getting hosed on CNBC Squawkbox. [YouTube]

“Beyond Blame: The philosophy of personal responsibility has ruined criminal justice and economic policy. It’s time to move past blame” — by Barbara H. Fried. Now, you might say that if Sam’s circumstances are to blame for his apparent crimes, then Barbara happens to be one of those circumstances. [Boston Review, 2013]

Someone made an NFT with actual artistic value. We’ve used it as the feature image for this article. [OpenSea]

Posted on by Amy Castor 0

Crypto collapse: Binance is not so fine, FTX Delaware vs FTX Bahamas, Celsius, Voyager, Gemini, Tether

due to a mistake in the internal reporting system, it didn’t tell him that he’d taken all the customers’ money and given it to his hedge fund to gamble with

— Qwertycoatl on SomethingAwful

When your auditor quits, that’s bad

Binance is broke. It’s got the same problem as the rest of crypto — the assets are imaginary, but the liabilities are real.

Remember the 2 billion BUSD bailout fund for distressed crypto enterprises that Binance announced in November? Bitfinex’ed suggested it was for a hole in Binance’s accounts — and now we’re seeing that Binance is sure behaving like there’s a huge hole in their books.

But Binance got an audit! Well, not an audit as such. But it was done by accountants who sometimes audit other things!

The “proof of reserves,” issued by Paris-based accounting firm Mazars, specifically disclaims being anything meaningful. But it makes sure to use the word “proof.”

The report didn’t address any of the tricky bits — it didn’t include non-crypto liabilities, it didn’t assess the effectiveness of internal financial controls, and it didn’t actually vouch for the numbers. Michael Burry: “The audit is essentially meaningless.” [Mazars, archive; WSJ; Twitter, archive] 

Mazars has been issuing these “proofs of reserves” for Crypto.com and Kucoin as well. But now Mazars has abruptly halted all work for crypto firms — and scrubbed all mention of such work from its website. This is Mazars running like hell to get as far away from the bomb as possible before it goes off. [Bloomberg]

Meanwhile, users have been taking their cryptos off Binance and going home. Binance outflows hit $6 billion in the week Mazars halted its work for crypto. [FT]

Binance cut off USDC withdrawals again, claiming a “wallet upgrade.” It just looks a bit like a “wallet inspector.” [Twitter] 

CZ went on CNBC Squawk Box to reassure everyone that everything is fine … though he didn’t seem as at ease as he usually does:

CZ: “We are financially okay.”

Rebecca Quick: “Can you have a 2.1 billion withdrawal?”

CZ: “We will let our lawyers handle that.”

CZ was asked why he wouldn’t engage a Big Four auditor to pick up where Mazars left off. CZ said most of these big firms “don’t even know how to audit crypto exchanges.” Andrew Ross Sorkin then pointed out that Coinbase has a Big Four auditor, Deloitte. Quick rolls her eyes at the end of CZ’s stumbling explanation (0:26 in the Twitter link). [YouTube; Twitter]

Why Binance may not have as much money as they want you to think

When FTX bought out Binance’s share in the company, Binance got paid $2.1 billion in funny money. CZ told Squawk Box that “it was all in FTT tokens, which are now worthless.” [Twitter]

70% of Binance’s reserves are in BUSD, Tether, and BNB — the last of which is their internal exchange token, akin to supermarket loyalty card points, in the style of FTX’s FTT.

The BNB token has crashed in the past week, from $290 to $240, according to Coingecko. 

Keep in mind that BUSD on Binance is internal magic beans, and absolutely not the same as Paxos dollar-backed BUSD. If Binance thinks it could get away with cashing in the bridged BUSD at Paxos, that’s $2 billion of actual US dollars Binance could secure for itself.

BUSD on Binance is on their own BNB blockchain, formerly known as Binance Smart Chain — a very hacked-up fork of the Geth software for Ethereum. The idea is to have a platform that runs the Ethereum Virtual Machine, lets you rug pull, and so on. This “blockchain” features transactions that seem to parachute assets into the system from space with no verifiable history. Data Finnovation digs into the weird bits. “It’s probably not fair to call this a ‘blockchain’ anymore.” [Twitter, archive]

And there’s still no verifiable evidence that tethers can actually be cashed in for dollars — even if you’re Binance.

Sounding smart doesn’t mean you are smart

Confidence men are called that because they can say the most outlandish things and not bat an eye. CZ has mostly come across in media as fundamentally being on the ball.

But remember that Sam Bankman-Fried projected being smart as well — until we got a look inside FTX, and saw how incredibly stupid every single smart guy in FTX really was. 

After Reuters published multiple reports of money laundering at Binance — including Binance letting Iran cash out bitcoins in violation of international sanctions — the U.S. Justice Department is “split” over charging Binance with money laundering. The split seems to be whether to charge them now or later: “Some of the at least half dozen federal prosecutors involved in the case believe the evidence already gathered justifies moving aggressively against the exchange and filing criminal charges against individual executives including founder Changpeng Zhao, said two sources.” The DoJ has discussed various plea deals with Binance’s lawyers. The investigation has been going on since 2018. [Reuters]

Binance was also slashing staff in late November. [Twitter, archive]

It’s only a matter of time before Binance starts freezing withdrawals — just like FTX, Voyager, Celsius, and so many other crypto exchanges in the last seven months.

Who can bail out Binance? Only Tether is left. Perhaps some new crypto exchange will pop up and achieve improbable volumes in a remarkably short time. There should be some Jane Street wunderkind on hand to front the operation.

Strange things in the Bahamas 

The FTX liquidation proceedings in the Bahamas are distinctly odd and in direct conflict with FTX’s Chapter 11 proceedings in the U.S. [Bloomberg]

FTX froze withdrawals on November 8. The Bahamas government placed FTX Digital Markets, FTX’s Bahamas subsidiary, into liquidation on November 10. And John Jay Ray III, who took over as CEO of FTX Trading, filed for Chapter 11 in the US on November 11.

The joint provisional liquidators (JPLs), the three men in charge of liquidating FTX Digital Market’s assets, now want dynamic access to FTX systems — they don’t want just lists of specific data, they want to be able to go fishing through the system themselves.

Ray, who cut the JPLs off from the system on November 12, is saying “no way.” He and his team are pissed because of all the pillaging of FTX that occurred after FTX froze withdrawals.

FTX objected to the Bahamas motion saying there was no urgency and the other side was being utterly uncooperative: [Objection, PDF]

“Debtors have made repeated overtures to JPLs and Commission to meet and those overtures were met with avoidance and obfuscation. The JPLs and the Commission have refused to provide responses to Debtors’ questions about the assets ‘secured’ by the Commission. Instead, the JPLs file baseless motions seeking extraordinary relief on an unnecessarily truncated timeframe.”

Ray thinks FTX cofounders Bankman-Fried and Gary Wang, the JPLs, and the Bahamas Securities Commission are all in cahoots. He told Congress: [Twitter, archive]

“The process in the Bahamian islands is not a transparent process. We have opened up the ability to share everything we have with the Bahamian government, similar to how we share with other liquidators around the world not only in this case but in other cases. It’s meant to be a very cooperative situation. The pushback that we’ve gotten is sort of extraordinary in the context of bankruptcy. It raises questions, it seems irregular to me, there are lots of questions on our part, and obviously, we’re investigating.”

James Bromley, one of FTX’s attorneys in the bankruptcy, has filed a declaration with rancorous correspondence between FTX and the Bahamas liquidators attached as exhibits. [Declaration, PDF]

Judge Michael Dorsey, who is presiding over the Chapter 11 proceedings in Delaware, told lawyers for the JPLs and Ray to try to find a middle ground. (His job is to be a referee, after all.) If they can’t work things out, they’ll be facing off in an evidentiary hearing tentatively scheduled for January 6, 2023. [Doc 197, PDF; Doc 203, PDF] 

So that you can understand FTX’s concerns, here’s a rundown of all the questionable stuff that’s happened so far:

On November 9, the day after FTX froze withdrawals, SBF told Bahamas attorney general Ryan Pinder that he would open withdrawals for Bahamian customers. Pinder previously worked at Deltec Bank — Tether’s banker since 2018 — but we’re sure that hasn’t influenced his decision-making, probably. [Doc 203, PDF]

From November 10 to 11, roughly 1,500 individuals, who claimed to be Bahamian residents, withdrew $100 million in crypto from FTX. Every other FTX customer in the world remained locked out of the system.

SBF said the Bahamas Securities Commission had told him to let the local customers in. The BSC denied this. [Twitter, archive]

SBF later told Tiffany Fong that he let the locals get their cryptos out because “you do not want to be in a country with a lot of angry people in it.” Could he have had in mind, not a mob, but particular individuals who might have had very robust opinions about not getting their cryptos back? [YouTube]

Separately from these withdrawals, at least two actors accessed FTX systems and withdrew another $477 million — hours after Ray filed for Chapter 11 on November 11. They also minted new FTT tokens. [Elliptic]

Ray and his lawyers say that SBF and Wang, who, acting on orders from the Bahamas Security Commission, minted FTT and transferred funds to a cold wallet under the control of the Commission. Ray still hasn’t figured out who the other actor was, but he’s working on it.

The JPLs have been tight-lipped as to what assets the Commission seized or how the assets were transferred.

There’s also the issue of the $256 million that FTX spent on 35 properties in the Bahamas — including land for a massive headquarters that never got built. The Bahamas regulators want to claim the properties back and they want the sale of the properties administered locally. Ray is likely to push back on this as well. [CNBC]

It’s hard to say for sure what’s going on here. We are beginning to suspect that FTX was a money-laundering chop shop, with some crypto businesses on the side. This would further suggest possible bribery of some local authorities. But the dots aren’t yet joined up.

Rats turn on each other

After four days, SBF has decided that Bahamas prisons aren’t so great, and he would rather be in a nice U.S. jail instead. [Reuters] 

Ryan Salame, co-chief executive of FTX Digital Markets, is the first FTX insider on record as spilling the beans on SBF. He told the Bahamas Security Commission on November 9 that FTX customer funds had been used to cover losses at Alameda Research. [Doc 225, PDF, page 34; FT, archive]

In 2021, Salame was a budding megadonor to U.S. Republican Party candidates — in step with SBF donating to Democratic candidates. Salame took out a $55 million loan from FTX, paid cash for a $4 million home in Maryland, and was buying up restaurants in Lenox, a town in Western Massachusetts. [NYT]

We’re not saying that’s what he used it for — but restaurants are notorious as a vehicle for laundering dubious cash.

Total donations by FTX to US politicians seem to be about $89 million when you trace all the darkish money as best as possible. [Institute for New Economic Thinking] 

$73 million of those political donations are at risk of being clawed back in the bankruptcy proceedings. [Bloomberg]

The correct regulator for crypto is the Department of Justice

Molly White live-tooted the Senate hearing on FTX and summarized it in her newsletter. [Mastodon; Substack] 

Here are all of the written testimonies. [Senate Housing Committee, PDFs] 

John Jay Ray III wants to sell FTX subsidiaries, starting with LedgerX, FTX Japan, and FTX Europe AG. [Doc 233, PDF]

FTX now has an official creditors’ committee of nine firms or individual investors, including crypto trading firm Wintermute. They still need to pick counsel, which should happen any day now. One of the first matters they will be weighing in on is a proposal to redact personal information rather than publishing a full list of creditors. [Doc 231, PDF]

When the Ontario Teachers’ Pension Plan invested in FTX, it asked the company a slew of questions related to their financial affairs — but received answers only to a few of them. OTPP put in $95 million anyway. [Globe and Mail, archive] 

How a crypto exchange can inveigle itself into the banking system — and how FTX seems to have done this with its Farmington equity purchase. Buy a bank, convert to a Federal Reserve member bank, notify the Fed that you’re going into digital assets and you’ve determined it’ll all be fine and you’re totally going to set up risk management. “If you’re lucky, your bank won’t be examined for a year or two. By then, you might have cranked up quite a dumpster fire.” [American Banker; Wall Street on Parade]

Canada has tightened crypto regulation even further in the wake of FTX. Client cryptos must be stored with a custodian and have no margin or leverage for Canadian customers. Non-Canadian platforms with Canadian customers will also be required to follow these rules. The Ontario Securities Commission had already refused FTX permission to operate in the province, but other provinces didn’t — and many Canadian FTX customers got caught up in the bankruptcy. [Leader Post]

Eliezer Yudkowsky, the AI risk guy who named “Effective Altruism,” advises his fellow Effective Altruists to take the FTX money and run. For the sake of charity, you understand. Others mention that clawbacks in bankruptcy exist — but ehh, it’ll probably be fine, right? [Effective Altruism forum, archive]

David spoke on CBC on Tuesday about FTX. It went pretty well. “TWO AND TWO MAKES FOUR! GRAVITY WORKS! MAGIC DOESN’T HAPPEN!” [Twitter; Yahoo News]

Celsius and Voyager

There’s no interesting news in the Celsius Network or Voyager Digital bankruptcies. Looking through the filings, it’s all procedural sports ball and not matters of real import. Everyone’s on holiday and nothing is going to happen until January. Perhaps Celsius won’t have run out of cash by then.

The next report of the examiner on Celsius was supposed to be out in December — but the court still hasn’t resolved the question of who investigates whether Celsius was Ponziing, which is the big bomb here.

Voyager is just sitting around and giving money to expensive bankruptcy professionals. Binance was talking about buying Voyager’s assets — but frankly, that’s a deal we suggest the creditors not take. They only just escaped being caught up in FTX’s bankruptcy.

Celsius has filed a motion to commence a $7.7 million clawback action against Voyager, as well as an extension of time to file a claim against Voyager’s estate. The Voyager Unsecured Creditors’ Committee is reviewing Celsius’ motion with the intention to object. [Twitter, archive]

Bankruptcy professionals will cost Celsius $115 million in the three months leading up to mid-February. [Doc 1676, PDF] 

Gemini

Crypto broker Genesis owes the Gemini exchange $900 million. Gemini has now formed a creditors’ committee to recoup the funds from Genesis and its parent DCG. [FT]

Did you know that 80% of the current market cap (613 million) of Gemini’s dollar stablecoin GUSD was printed in the weeks before the FTX collapse? Even odder, one unlabeled wallet appears to have minted 460 million GUSD. [Twitter, archive] 

On September 30, 2022, Gemini sought to incentivize GUSD adoption by increasing GUSD deposits to MakerDAO’s PSM (peg stability mechanism). MakerDAO was unimpressed. [The Defiant] 

Tether

Tether’s accountant, BDO Italia, is reconsidering whether it wants to do crypto attestations. “In common with several other professional service firms, we are currently evaluating our approach to this sector and the work we undertake for our clients.” Tether only hired them in August. [WSJ, paywalled]

In the lead-up to FTX going down, CZ from Binance was very upset that SBF appeared to be destabilizing Tether’s peg with … a mere $250,000 trade. We know this because there’s a secret chat group for the exchanges to conspire, er, sort out issues. SBF also put screenshots from these chats into the Congressional Record in his bizarre written testimony before the hearing, which he didn’t manage to attend. [WSJ; Forbes]

The secret ingredient is still crime. Police in China have arrested a gang who laundered $1.7 billion via crypto, including Tether — even after Beijing’s crackdown on crypto. [CNBC]

Other crypto firms who are fine

Three Arrows Capital (3AC)’s liquidator Teneo estimates 3AC’s assets at $1 billion as of July. That’s $37 million of actual money, $238 million in cryptos, $22 million in NFTs, and $502 million in venture and other investments. A lot of those “assets” are obviously imaginary. 3AC’s liabilities, which are extremely real, are over $3 billion. [The Block]

Grayscale wanted to turn GBTC into an exchange-traded bitcoin fund. The SEC said “LOL, no.” Grayscale sued claiming unequal treatment compared to the bitcoin futures ETFs, and even questioning whether the SEC had the right to decide against its ETF proposal. Now the SEC has written a 73-page response to Grayscale’s dumb lawsuit. [SEC, PDF]

Argo Blockchain Plc, a UK-incorporated bitcoin miner, has had trading in its shares suspended by the Financial Conduct Authority. The company is planning to file for bankruptcy. [Twitter; Bloomberg]

MicroStrategy is still going down the toilet. Bitcoin prices fell well below the “low watermark” for carrying value in Q3 2022. The company will likely face a new record digital-asset impairment charge in Q4. [Marketwatch] 

Dump on retail managed: Coinbase founder Brian Armstrong no longer holds any Coinbase stock. But he’s very bullish on crypto, he wants to make clear! [Protos] 

Image: Robyn Damianos for the Wall Street Journal

Posted on by Amy Castor 7

Celsius hearings, December 5: Whose stablecoins are these? KERP bonuses, new deadline for restructuring plan

  • By Amy Castor and David Gerard
  • Send us money! Our work is funded via our Patreons — here’s Amy’s, and here’s David’s. Your monthly contributions help greatly!

The Celsius Network bankruptcy held two hearings on Monday, December 5. The first was to establish ownership of Earn accounts and see if Celsius can sell $18 million in stablecoins. The second was an omnibus hearing, dealing with multiple motions. Amy sat through six tedious hours of this, so you wouldn’t have to. [Agenda, PDF; Agenda, PDF]

A Chapter 11 bankruptcy generally has two outcomes: a bankruptcy sale (known as a “363 sale”) and the confirmation of a plan of reorganization. Celsius wants to find a buyer for this ransacked corpse. But first, they have to decide who owns what. They can only sell what’s theirs to sell. The morning hearing was bitter arguments about the spare change in the stiff’s pockets.

Celsius is burning cash at a furious rate. They have no idea how to even coherently propose an ongoing business. So they need to keep finding new ways to keep up the farce and pay tens of millions in advisor and professional fees per month.

The word “liquidation” came up a few times in the first hearing. This ice cube is melting fast.

Whose are the stablecoins?

Celsius wants permission to sell $18 million in stablecoins to pay for ongoing business operations. The stablecoins are held in Earn accounts — Celsius’ main product. You would deposit cryptos and be paid interest on them.

But do the stablecoins belong to the bankruptcy estate or do they belong to the individual Earn account holders? This is what Judge Martin Glenn needs to decide.

Celsius will be out of cash to pay ongoing bills — payroll, vendors, and expensive professionals for the bankruptcy — by late February or early March. The burn rate for Chapter 11 legal costs and professional fees is $15 million to $20 million per month. Celsius needs a cash injection by January or March 2023 the latest. [Doc 1328, PDF]

Interim CEO Chris Ferraro says that right now, the bitcoin mining business is cash positive (which surprises us) — but that too will need a cash infusion by March 2023. 

Celsius (the debtors) and the Unsecured Creditors’ Committee (UCC) think the stablecoins belong to the bankruptcy estate, which would give them the right to sell the coins for cash. But the account holders want their personal money back.

The stablecoins that Celsius wants to sell add up to $18,111,551. That’s 16,549,259 USDT, 1,119,089 NCDAI, 360,743 BUSD, and some shrapnel. Alvarez & Marsal’s Robert Campagna, Celsius’ restructuring advisor, admitted that the stablecoins buy them just a month of continued operations.

“If we sell $18 million now and have access to cash, we can always buy stablecoins again later,” said Campagna. LOL, like Celsius is going to have cash later. But anyway.

If Celsius is allowed to sell the stablecoins, the funds will not be used to cover the bitcoin mining operations. [Doc 1325, PDF]

So what happens after they burn through their stablecoins? Other sources of money include the settlement with Prime Trust, worth around $17 million — but Prime Trust will refund in crypto, not cash. Celsius also hopes for $44 million from the potential sale of Celsius’ custody solution GK8 to Galaxy Digital. GK8 is an Israeli firm that Celsius bought in November 2021 for $115 million. So they’ll take a 60% loss.

Other options to keep the business afloat include intercompany loans and debtor-in-possession financing — but those carry their own risks, Ferraro said. “They require us to post collateral and risk that coins would not be returned if the coins drop in value.” 

What company is going to lend money to Celsius? What collateral? What bank? What?

What did I just sign?

The terms of service for the Earn product changed a lot — in ways that contradicted what Celsius founder Alex Mashinsky had told customers.

Celsius updated its terms eight times between 2018 and September 2022, asking customers to accept changes each time by clicking a box. If they didn’t click on the box, they couldn’t access their coins.

Later versions of the terms, such as version six, more clearly asserted that Celsius owned the deposited cryptos — as is normal with any bank or investment firm, who then have a liability to the depositors. Even as Mashinsky said things that sounded like the investors owned their deposits.

Many small creditors objected that they weren’t aware of the important changes, or that they didn’t even agree to the changed terms.  

More than 90% of Earn account holders signed off on version six of the terms of service, per court filings. These customers held the majority of the coins in the Earn program.

Oren Blonstein, Celsius’ chief compliance officer, was called to the stand. Here are his original and supplementary declaration. [Doc 1327, PDF; Doc 1584, PDF]

Blonstein spent his time at Celsius administering the company’s compliance with the Bank Secrecy Act — money laundering law.

The state attorneys — Layla Milligan for Texas and Karen Cordry for multiple other states — went in hard on Blonstein.

Blonstein told Milligan that they tracked customer activity including acceptance of the terms of use.

This is an amazing interchange between Milligan and Blonstein (as quickly noted by Amy, please excuse errors):

Milligan: To your knowledge, was the business ever in compliance with money transmission laws? 

Blonstein: My understanding is based on a discussion with money transmission laws. 

Milligan: But you are not aware if the company was in compliance with state or federal securities laws?

Blonstein: Yes, correct. 

Cordry closely questioned Blonstein on how they flagged the change of terms — if the changes were ever called out to the customers. Judge Glenn asked Blonstein if the change of ownership in particular was brought to the customers’ attention.

Blonstein admits they didn’t flag the changes, but the customers had to tick the box and agree before they could proceed. Nor was the prior version of the terms available for a customer to compare them.

But Blonstein didn’t think any of this was a substantive issue: “I viewed the wording on the Earn program as you are giving coins to the company to use.”

The stablecoins will likely go to the estate

Despite the arguments over ownership of the stablecoins, Judge Glenn was leaning toward putting them into the bankruptcy estate — because that’s what the terms said, and that’s what you’d expect of an investment product.

Judge Glenn seemed skeptical of the terms meaning anything other than that Celsius owned the coins and had a liability to the depositor. “It was a lending platform, so they had to deploy the assets. There wasn’t a commitment to pay back specific assets.”

It wasn’t like Celsius would use the money to gamble in a “slot machine in Monte Carlo” — they’d use it to pay the bills, noted the judge.

He was also more comfortable if the stablecoins were converted to actual dollars anyway, given how crazy crypto is right now: “The dollars will frankly be safer than crypto.”

Shara Cornell for the US Trustee and Layla Milligan for Texas were not happy. Celsius had not complied with state regulations. The terms of service may have been an illegal contract, and thus void, Milligan argued. 

Judge Glenn responded that ownership of Earn cryptos had been a “gating issue” (an obstacle to recovery) ever since Celsius filed for bankruptcy in July 2022. “They didn’t only just spring this on anyone.”

Celsius had failed hard at compliance, but any buyer would have to comply with regulations — and if Celsius had broken securities laws, “you’ll get your pound of flesh against them,” he told Milligan.

Judge Glenn said that he wouldn’t rule on the stablecoins this week. But we think he’s going to let Celsius sell the coins. Matt Levine at Bloomberg concurred — because not having the money to pay back a liability is what “bankruptcy” means. [Bloomberg]

KERP motion

Celsius employees have been running away screaming. In early 2022, the company had over 900 employees. They are now down to 167 employees. Attrition is a real problem. 

In the afternoon omnibus hearing, Judge Glenn approved Celsius’ Key Employee Retention Plan (KERP) to give out up to $2.8 million in bonuses to 59 key employees, so they don’t quit. Previously, he had denied the motion because Celsius and their lawyers had blacked everything pertinent out. [Doc 1426, PDF; Bloomberg]

You can’t really say no to a KERP if a company is trying to stay a going concern. We know very well that Celsius is a shambling zombie — but while it’s in Chapter 11, the judge probably has to treat it otherwise. 

Celsius lawyers also need to look into who transferred crypto within 90 days of the bankruptcy filing. Those employees will not get bonuses.

Most of the KERP payments will be no more than $75,000. Salaries for the KERP employees range from $25,000 to $425,000.

Celsius will totally come up with a plan, honest

Next, Judge Glenn agreed to grant Celsius’ motion to extend exclusivity  — the exclusive right to come up with a new business plan — until February 15.  

After a Chapter 11 filing, you normally have 120 days to come up with a bankruptcy plan. Celsius still doesn’t have a plan. Judge Glenn said that this is not unusual for large companies. The court can extend the period of exclusivity, though the total period with extensions cannot exceed 18 months.

Once that exclusivity period is up, any party in the bankruptcy can introduce their own reorganization plan. There are already some plans being floated by Celsius creditors. More court time — and bankruptcy estate money — will then be spent discussing all the plans.

Kirkland’s Patrick Nash, appearing for Celsius, wanted to avoid such a free-for-all. Celsius is working to sell the GK8 custody business, and they are working with the UCC on a reorganization they can both agree on. The US Trustee also agreed on extending exclusivity. 

Judge Glenn concurred that lifting exclusivity now would lead to a free-for-all. He worried that a pile of new plans would be “a crushing load on my chambers.” Remember, he has to actually read all these hundreds of pages of legal filings.

The judge can see that Celsius is a melting ice cube and it’s just consuming money. But Celsius has to come up with something. He granted the motion.

For Celsius, this is just a game that they have to play to keep shambling forward and paying themselves from creditor funds. 

Celsius v. Stone et al. 

Jason Stone of KeyFi was Celsius’ DeFi trading guy. Stone is suing Celsius for non-payment. Celsius has countersued, calling Stone incompetent and a thief.

Later in the hearing, Judge Glenn denied a motion by KeyFi and Stone to dismiss Celsius’ counterclaims. [Doc 17, PDF]. 

Stone is being represented by Kyle Roche, formerly of Roche Freedman. He is now in his own practice. Roche is not an eloquent courtroom speaker. He rambles interminably, and Judge Glenn was getting noticeably annoyed at him.

Roche said that Celsius’s claim should be dismissed because the issue is a contractual dispute, and Stone was authorized to transfer the assets in dispute to KeyFi under an asset purchase agreement. Celsius argued that Stone was not a party to the cited APA.

Judge Glenn said he would be denying the motion for now. He told the parties to complete discovery before a scheduled January hearing on Celsius’ motion for a preliminary injunction in the dispute — and he didn’t want them dragging their feet.

Roche said he had collected 150,000 documents as part of discovery. Glenn asked when Roche would produce the documents. Roche said that he had been busy because his grandmother died.

Prime Trust

Judge Glenn approved the settlement with Prime Trust, returning $17 million in cryptos to Celsius that Prime had been holding since the two stopped doing business in June 2021. [Doc 20; PDF]  

Celsius gets cryptos, not the actual dollars it needs to pay the bankruptcy professionals — hence why they want to sell the stablecoins to pay the bills.

Next time

We’ll be writing up the December 7 hearing on who owns the Custody and Withhold accounts and the December 8 hearing on the GK8 sale. Send Amy money for eardrops! [Agenda, PDF; Agenda, PDF]

Posted on by Amy Castor 3

Crypto collapse: BlockFi even deader, crypto miners going broke, Sam will not shut up, Binance and Tether are fine

the wonderful thing about bitcoin is that ‘sorry i was too dumb to do things properly so it all collapsed’ is not only a feasible explanation but historically likely

— Boxturret on SomethingAwful

Shut up, Sam

If you may be in legal trouble, any lawyer has one piece of advice: stop talking. If you’ve just filed a high-profile bankruptcy with maybe billions of dollars missing: stop talking. If you’ve got prosecutors sniffing around your activities: stop talking.

Sam Bankman-Fried never got the memo, or he did and threw it in the trash. In reference to his lawyers, he told Tiffany Fong: “they know what they’re talking about in an extremely narrow domain of litigation. They don’t understand the broader context of the world.” [YouTube; Twitter]

Despite producing reams of potential “evidence” that could one day be used against him, SBF will talk to any reporter, anywhere, any time of day. On Wednesday, November 29 he spoke on an NYT DealBook panel. On Thursday, November 30, he spoke to Good Morning America.

He loves the camera. But he still can’t tell you where the money went.

In the DealBook interview with Andrew Ross Sorkin, SBF said he “never tried to commit fraud,” and he didn’t knowingly commingle $10 billion in customer funds. He frames the whole matter as he seemingly lent Alameda customer funds from FTX as a risk management problem that got out of hand. Well, it sure did that. [Video; Transcript] 

George Stephanopoulos from Good Morning America, who actually flew to the Bahamas to talk to SBF, was a lot tougher on him. SBF again denied “improper use of customer funds,” saying he failed at oversight. “You said one of your great talents in a podcast was managing risk.” “That’s right.” “Well, it’s obviously wrong.” [GMA; Twitter]

As Lying for Money author Dan Davies points out, prosecutors just have to show that SBF intentionally deceived clients as to what was happening to their money. When you tell people their money is segregated and it’s not, that’s fraud. “The offence was committed the minute it went in the wrong account.” [Twitter]

If you ignore your lawyer because you’re smarter than everyone, no lawyer is going to work with you. Martin Flumenbaum at Paul Weiss already dumped SBF. We’re hearing unconfirmed rumors that David Mills, his father’s colleague at Stanford, who was advising SBF, is also refusing to work with him further. [Semafor; Twitter]

A lot of FTX employees bailed after the company filed for bankruptcy. But a few have soldiered on — likely so they can nail SBF, who screwed them over about as much as he screwed over all of his customers and investors. While SBF is telling his side of the story to reporters, FTX employees are leaking emails. NYT wrote about the absolute chaos that FTX lawyers and execs endured in wresting power away from the deluded SBF in the wee hours of November 11. [NYT]

If Sam’s lawyer had jumped in front of the camera and ripped Sam’s larynx out with his bare hands, he could reasonably bill it as extremely valuable and important legal services to his client.

Extremely predictably, there goes BlockFi 

In January, there were three big crypto lenders — Celsius, Voyager, and BlockFi. Now all three are bankrupt, and our emails are clogged with new bankruptcy filings.

After weeks of frozen withdrawals, BlockFi filed for voluntary Chapter 11 on November 28 in New Jersey. [Petition, PDF; bankruptcy docket on Kroll; CNBC; press release]

BlockFi was already a dead firm walking. They were dead after Three Arrows blew up in May. FTX kept BlockFi’s head above water with a $400 million credit facility — but then FTX imploded. [Twitter] 

The New Jersey firm doesn’t just have more liabilities than assets — a lot of the assets are missing too. All of BlockFi’s cryptos were in FTX. They were using FTX as their crypto bank.

BlockFi has over 100,000 creditors. Assets and liabilities range between $1 billion and $10 billion. There’s $1.3 billion in unsecured loans outstanding and $250 million in customer funds locked on the platform.

BlockFi has $256.5 million cash on hand — after selling their customers’ crypto:

In preparation for these chapter 11 cases, BlockFi took steps to liquidate certain of its owned cryptocurrency to bolster available cash to fund its business and administrative costs. Through the process, BlockFi was able to raise $238.6 million of additional cash, for a total unencumbered cash position as of the Petition date of $256.5 million.

Ankura Trust is BlockFi’s largest unsecured creditor to which it owes $729 million. Ankura is typically brought in to represent the interest of others in bankruptcy. If so, who are those creditors? We’d love to know.

FTX US is BlockFi’s second-largest unsecured creditor, with a $275 million stablecoin loan. This is the credit facility that SBF “bailed out” BlockFi with in June.

BlockFi’s fourth-largest unsecured creditor is the SEC — BlockFi still owes $30 million of its $50 million in penalties from February. The total settlement was $100 million, with half owed to the SEC and half owed to state regulators. [SEC; Twitter]

All the other creditors’ names are redacted. Very crypto.

BlockFi is entangled in FTX in multiple ways. BlockFi had a $680 million loan to SBF’s Alameda Research. This was collateralized by SBF’s personal shareholding in popular day-trading broker Robinhood — just days before FTX filed for bankruptcy. BlockFi is suing SBF for his stake in Robinhood. It doesn’t help that SBF was shopping his Robinhood shares around as collateral after he’d pledged them to the BlockFi loan. [Filing, PDF; Complaint, PDF; Bloomberg] 

Crypto miners — we told you so

We set out in detail in August this year how publicly traded bitcoin mining companies were always going to leave their lenders and investors as the bag holders.

We predicted that the miners would default on billions of dollars in loans, leaving the lenders with worthless mining rigs and unsaleable piles of bitcoins. They would then go bankrupt — with all the paperwork in order.

The miners depreciated their mining rigs over five years — and not the 15 months they should have — to make their companies look like better investments.

And miners are now defaulting on their rig-backed loans. Lenders — New York Digital Investment Group, Celsius, BlockFi, Galaxy Digital, NYDIG, and DCG’s Foundry — are getting stuck with worthless e-waste. [Bloomberg]

Iris Energy (IREN) faced a default claim from its lender NYDIG on $103 million “worth” of mining equipment. The company’s miners aren’t making enough money to service their debt. So Iris defaulted! And NYDIG now owns some obsolete mining rigs. [SEC filing, Global Newswire; Coindesk; CoinTelegraph]

Shares in Argo Blockchain (ARBK) dropped 40% after the firm announced that its plans to raise $27 million by selling shares were no longer happening. [Twitter; Decrypt]

Core Scientific hired law firm Weil, Gotshal & Manges and financial advisors PJT Partners to help figure out ways to stave off bankruptcy. The options include exchanging existing debt for equity or additional debt, asset sales, equity, or debt financing. They’re gonna go bankrupt — because that was always the exit strategy. [The Block]

Binance goes shopping

In the financial crisis of 2008, when banks were dropping like flies, some big banks would buy smaller banks that had healthy books — so they could patch the holes in their own books. Bigger and bigger shells to hide the Ponzi under. 

Crypto is doing the same. FTX was buying up, and planning to buy up, small bankrupt crypto firms to try to hide the hole in its own books. And Binance, the largest crypto exchange, just bought Sakuro Exchange BitCoin (SEBC), a Japanese exchange that is already licensed with the country’s Financial Services Agency. [Binance; Bloomberg]

Japan learned its lesson early. Tokyo-based Mt. Gox, one of the first big bitcoin exchanges, blew up in 2014. Japan went on to become one of the first countries to regulate crypto exchanges with a licensing system. Crypto exchanges in Japan are required to keep customer assets separate, maintain proper bookkeeping, undergo annual audits, file business reports, and comply with strict KYC/AML rules. They are treated almost like banks! [Bitcoin Magazine]

Binance tried to set up operations in Japan in 2018, after getting kicked out of China — but Japan’s FSA told Binance they needed to play by the rules and apply for a license or pack their bags. [Bitcoin Magazine]

Binance’s bogus bailout fund 

Binance announced a $2 billion “industry recovery fund” to prop up all of the other flailing crypto firms that have been struggling since FTX blew up. They claim that 150 crypto firms have applied for a bailout. [Bloomberg] 

Binance has its own stablecoin, BUSD, that it claims is run by Paxos and Binance, “and is one of the few stablecoins that are compliant with the strict regulatory standards of NYDFS.” The crypto bailout fund is $2 billion in BUSD.

BUSD is a Paxos-administered dollar stablecoin. Each BUSD is backed by an alleged actual dollar in Silvergate Bank, and attested by auditors. (If not actually audited as such).

That’s true of BUSD on the Ethereum blockchain. It’s not true of BUSD on Binance.

BUSD on Binance is on their internal BNB (formerly BSC) blockchain, bridged from Ethereum. It’s a stablecoin of a stablecoin. Binance makes a point of noting that Binance-BUSD is not subject to the legal controls that Paxos BUSD is under. We’re sure it’ll all be fine if there are any issues, which there totally won’t be. [Binance] 

Treating FTX’s claims about other crypto firms as confessions would have given you pretty detailed correct answers — it was all projection. FTX was accusing others of what they were doing themselves. You should look at what Binance has been saying the same way.

We’re going to go so far as to assert that Binance is a hollow shell too, and the bailout fund is most likely for a hole in its own books.

Every one of the crypto companies accounts for their value in dollars by calculating their mark-to-market value. “We have a billion dollars of $CONFETTI!” Even if they couldn’t get $10,000 in actual money for it.

All of crypto is bankrupt if you account for the crypto assets at realizable value rather than mark-to-market. Realizable value depends on the inflow of actual dollars into crypto — and that inflow has plummeted because the retail suckers went home. 

All crypto companies are Quadriga. Pull back the curtain and you’ll see Celsius/FTX-style non-accounting, a Google spreadsheet if you’re lucky, and incompetence. Such utter blithering didn’t-understand-the-question incompetence. It’s been this way since 2011.

Tether is fine, you FUDster

Tether has been issuing tethers by lending out its USDT stablecoin, rather than exchanging the USDT one-to-one for dollars (LOL).

As of Tether’s attestation for September 30, 2022, 9% of USDT are loans to Tether customers. Tether claims these are collateralized — but they won’t say who the borrowers are or what the collateral is. [Tether; WSJ, paywalled]

In their long-winded response to the WSJ writeup, Tether blames …. the media. [Tether]

We know from the CFTC settlement in October 2021 that Tether was issuing USDT to its big customers with a kiss and a handshake. Now they’re admitting it publicly.

Other crypto exchanges/firms in trouble

CoinDesk’s report on the hole in Alameda’s balance sheet and Alameda’s close ties to FTX did so much damage to the crypto industry — and to Coindesk’s parent company Digital Currency Group — that the news site has attracted take-over interest. [Semafor] 

CoinDesk did not blow apart the crypto industry. This was an unexploded bomb that was set up in May.

It was all going to explode eventually as soon as someone looked inside the box. As CZ told The Block’s Larry Cermak in 2019: “some things are better left unsaid.” [Twitter] 

Japanese social media company Line is shutting down Bitfront, a US-based crypto exchange that it launched in 2020. They said the closure was unrelated to “certain exchanges that have been accused of misconduct.” [Announcement; Bloomberg]

AAX exit scam completed. Hong Kong-based exchange AAX froze withdrawals on November 13, and its executives quietly slipped away as opposed to filing bankruptcy — social media pages removed, LinkedIn profiles deleted. Sources tell us that employees have been laid off and the founders are nowhere to be found. [Hacker News; AAX]

John Reed Stark: Since the FTX debacle, Big Crypto’s SEC hit pieces and talking points calling for “regulatory clarity” are pure pretense and subterfuge, intended to distract and dissemble the truth — that the crypto-emperor has no clothes. [Duke FinReg Blog] 

Image: Sam talking on GMA

Posted on by Amy Castor 3

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]

Posted on by Amy Castor 0

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.”

Posted on by Amy Castor 1

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.

Posted on by Amy Castor 3

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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Posted on by Amy Castor 2

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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Posted on by Amy Castor 7

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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Posted on by Amy Castor 0

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.

I’m back! And I’m blogging again. If you like my work, please consider supporting my writing by subscribing to my Patreon account for as little as $5 a month. 

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

If you are not signed up for my blog already, sign up! To do this, click the three little lines on the top left of my website, scroll down and enter your email. This way, you’ll be sure to get all my blog posts hot off the press. 

If you want to contribute to my work, please subscribe to my Patreon. I’ve got 86 wonderful patrons at the moment for a total of $866 a month. It’s not a living (yet), but it pays for the extras. I’d love to get that over $1,000 soon!

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.

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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.

If you like my work, please subscribe to my Patreon for as little as $5 a month. Your support keeps me going.

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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 

If you like my work, please subscribe to my Patreon for as little as $5 a month. Your support keeps me going.

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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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Posted on by Amy Castor 2

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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Posted on by Amy Castor 1

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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