News: EY goes after Quadriga’s payment processors, more exchange hacks, and the SEC tells us what we already know

I had to take my website offline for a few hours Tuesday, so if you were searching for one of my stories and got a weird message, my apologies. I asked WordPress to downgrade my site from a business plan to a premium plan, and when they did, a bunch of my content disappeared, so I had to put Humpty-Dumpty back together again.

Big thanks to my now 18 patrons, who are making it easier for me to focus on writing about crypto. If you like my work, please consider supporting me on Patreon, so I can keep doing what I am doing.  

Now onto the news, starting with Quadriga, the defunct Canadian crypto exchange that I won’t shut up about. (Read my timeline to get up to speed.)

Ernst & Young (EY), the court-appointed monitor charged with tracking down Quadriga’s lost funds, released its fourth monitor report, which reveals more money going out then coming in. The closing cash balance for March was CA$23,268,411. Incoming cash for the month was CA$4,232, and total disbursements was CA$1,463,860—most of which was paid to professionals. A full half of that (CA$721,579) went to EY and its legal team.

EY is trying to chase down money held by Quadriga’s payment processors. It has drafted a “Third Party Payment Processor Order” for the court to approve on Monday. If that goes through as is, several payment processors, including WB21, will have five business days to handover funds and/or Quadriga documents and transaction data. If they don’t comply, they will be in contempt of court. A shift from CCAA to bankruptcy proceedings will also give EY more power to go after funds as a trustee

Christine Duhaime, a financial crimes lawyer who worked for Quadriga for six months in 2015 to early 2016, wrote “From Law to Lawlessness: Bits of the Untold QuadrigaCX” for CoinDesk, where she talks about how Quadriga went off the rails following its failed efforts to become a public company.

In the article, Duhaime—who in February called for a government bailout of Quadriga’s creditors (archive)—openly admits to having lost CA$100,000 in funds on the exchange. She claims her involvement with the exchange stopped in early 2016. “I’m glad we were let go by QuadrigaCX for being one of the ‘law and order’ folks,” she said.  

I have been corrected on detail here:

She does not mention this in her article, but in 2015, she also owned 20,000 shares of Quadriga stock. It is possible she has since sold the holdings.

Preston Byrne, an attorney at Byrne & Storm, PC, tweeted, “No offense to @ahcastor but this claim that @cduhaime may have owned shares in Quadriga looks to be incorrect. She’s listed as the principal contact for an SPV, and the SPV is the named purchaser. A retraction is in order.”

SPV stands for special purpose vehicle, typically used by firms to isolate them from financial risk. I’ve reworded the paragraph as follows:

This 2015 British Columbia Report of Exempt Distribution, a document of Quadriga Financial Solutions’ ownership, lists Duhaime as the contact for 1207649 B.C. Ltd, which owns—or owned—20,000 shares of Quadriga. I was unable to find the corporate files for 1207649 B.C. The address in the report matches that of Duhaime’s office.  

Update (April 9): I found the corporate files. The actual company name appears to be 1027649 B.C. Ltd.—with the numbers “2” and “0” transposed. The company was founded on February 16, 2015 and dissolved on August 1, 2017. The sole director is “Anne Ellis,” and the registered office is Duhaime Law.

According to court documents, Cotten and Quadriga co-founder Michael Patryn had been seeking to buy back shareholdings after Quadriga’s public listing failed, so it is possible one of them may have bought back those shares as well. I reached out to Duhaime for comment a few times, but she has not responded. 

Duhaime may have left Quadriga behind, but she continued to have business dealings with Patryn, who we now know is convicted felon Omar Dhanani

She and Patryn co-founded Fintech Ventures Group, which calls itself “an investment bank focused on digital currency, blockchain, and AI-focused technology.” According to a January 2016 archive of the company’s site, Duhaime was Fintech Venture’s “Digital Finance Maven & Co-Founder.” (Interestingly, former Quadriga director Anthony Milewski worked there, too, as the company’s “Investment Relations Extraordinaire.”) 

Duhaime and Patryn were also both advisors at Canadian crypto exchange Taurus Crypto Services, according to this June 2016 archive. (Milewski shows up here again, this time as an advisor.) The exchange was founded in 2014 and shut down in January 2017, when the business shifted to over-the-counter trades.  

Like Duhaime, Patryn also claims his involvement with Quadriga ended in early 2016. Although the Globe and Mail said that in October 2018, “it received an e-mail pitch from an ‘executive concierge’ company called the Windsor Group offering up Mr. Patryn for interviews to discuss virtual currencies and describing him as a Quadriga director.” Patryn told the Globe he did not know what the Windsor Group was, nor had he authorized anyone to pitch him as a Quadriga director, as he never served on the board.

Patryn had a personal website michaelpatryn.com, but it got taken down. Here is a 2011 archive and here is a 2014 archive. From 2016 on, the archives point to his LinkedIn profile, where he now goes by “Michael P.” having dropped all but the first initial of his last name. According to his LinkedIn, he has been an advisor for numerous cryptocurrency platforms going back to November 1999. I guess that means his work at Shadowcrew in 2004 and the 18 months he spent in jail for conspiracy to commit credit and bank card fraud and ID document fraud qualifies as advisory services.

Patryn appears to enjoy the limelight. Several reporters told me they had no trouble reaching him. At one point, Patryn even went into the “Quadriga Uncovered” Telegram group—basically, the lion’s den, where hundreds of pissed off Quadriga creditors sat waiting on their haunches —where I am told he calmly deflected accusations.

Meanwhile, I’ve been practicing my authoritative stare and baritone.

Other exchanges

Elsewhere in cryptoland, there have been a number of exchanges hacks. Singapore-based exchange DragonEx was hacked on March 24 for an undisclosed amount of crypto.

Blockchain data firm Elementus suspects that Coinbene, another Singapore exchange, was also hacked. On March 25, Elementus noted that $105 million worth of crypto was on the move out of the exchange. Coinbene totally denies it’s been hacked, claiming that delays in deposits and withdrawals are due to maintenance issues. 

A third exchange, Bithumb was hacked on March 30. The South Korean crypto exchange lost 3.07 million EOS and 20.2 million XRP, worth around $19 million. Bithumb thinks it was an insider job.

Helsinki-based LocalBitcoins, a once go-to for anonymous bitcoin transactions, has added know-your-customer (KYC) identity checks to comply with new laws in Finland. The change goes into effect in November. Per the company’s announcement, this is actually good news for bitcoin, because it will create a “legal status for crypto assets, which should improve significantly Bitcoin’s standing as a viable and legit financial network.”  

A study by reg-tech startup Coinfirm found that 69 percent of crypto exchanges don’t have “complete and transparent” KYC procedures. And only 26 percent of exchanges had a “high” level of anti-money-laundering procedures.

With crypto markets in the dumps, exchanges are looking for new ways to attract volume. To that end, San Francisco-based Coinbase is launching a staking service to lure in institutional investors. The service, which starts with Tezos (XTZ), will pay investors to park their money in XTZ. The coins are kept in offline cold wallets. The catch is that the interest will be paid XTZ, and of course, crypto is highly volatile. 

The price of XTZ went up 70 percent on the news.

Cryptocurrency exchange Binance is launching a new fiat-to-crypto exchange in Singapore later this month. (It’s been launching these crypto onramps all over the word.)

Binance also says it’s planning to launch its decentralized exchange (DEX) later this month. The DEX is built on a public blockchain, Binance Chain. Basically, Binance is looking to create an economy for binance coin (BNB), which is totally not a security.

Other interesting news bits 

Screen Shot 2019-04-05 at 11.03.29 AMThe the U.S. Securities and Exchange Commission issued a “Framework for ‘Investment Contract’ Analysis of Digital Assets.” There is not a lot new to see here. A footnote in the document makes clear this is “not a rule, regulation, or statement of the Commission,” just some thoughts from the SEC’s staff about how they interpret existing securities laws. 

Stephen Palley, partner at law firm Anderson Kill, appeared on Bloomberg sporting a beard to explain the framework—definitely worth five minutes of your time to listen to.

Justin Sun, the founder of blockchain project Tron, bungled a Tesla promotional giveaway. After a widespread cry of foul play, he decided to make it up to everyone by giving away—two Teslas. This wasn’t the first time a Tron promotion raised eyebrows.

Nocoiner David Gerard wrote a Foreign Policy piece on “How Neo-Nazis Bet Big on Bitcoin (and Lost)” that was translated for Newsweek Japan.

The ever outspoken Jackson Palmer did a good interview with Epicenter Blockchain Podcast on the history of Dogecoin and the state of cryptocurrency in 2019.

Nicholas Weaver, who gave the “Burn it with Fire” talk at Enigma, spoke to Breaker about why cryptocurrencies don’t really work as currencies.

Finally, Dream Market, the last standing marketplace from the once infamous “big four” sites that dominated dark web trading in the mid-2010s, announced plans to shut down.

 

 

News: Radio silence from QuadrigaCX, wash trading doesn’t pay, and KYC data turning up on the dark web

screen shot 2019-01-26 at 11.46.22 pmQuadrigaCX customers are still waiting to get their funds. The Canada-based crypto exchange has been eerily quiet since reporting on January 14 that its CEO Gerald Cotten died in India—a month earlier. 

Since then, the only sign of life has been a single tweet warning customers that another twitter account was fake.

Trouble began a year ago when the Canadian Imperial Bank of Commerce froze about $22 million in US dollars in an account opened by QuadrigaCX’s payment processor. The majority of the frozen funds were released in December, but customers still aren’t getting their money. In recent developments, one user on Reddit claims that he received $18,000. But several more of the exchange’s customers are complaining that their fiat withdrawals are being marked as completed with no money coming through.  

Customers are unable to move crypto out of the exchange either. Some report that requests are simply left pending.

According to a petition submitted to the Supreme Court of British Columbia on January 22, QuadrigaCX was to hold a shareholders meeting on January 25 to appoint a new director. When Cotten died on December 9, he left the company with no officers, and no way to carry out its business. Still, it is not clear if that is what is holding up funds or if something nefarious is going on. Two days after the shareholders meeting, the exchange still hasn’t posted an update.  

Crime, or in this case wash trading, doesn’t pay. Two executives at South Korean crypto exchange Komid are heading off to jail for faking volume, according to BlockinPress. Choi, the CEO, was sentenced to three years; Park, another executive, was sentenced to two years. Court documents say the faked volume led Choi and Park to earn $45 million.

Know-your-customer (KYC) data (ID cards, drivers licenses, and more) from several top exchanges, including Binance, Bittrex, Bitfinex, and Poloniex, appears to have surfaced on the dark web. Binance claims the data is not coming from its servers. Bitfinex also claims its databases have not been breached.

Since the markets crashed, crypto exchanges are looking for ways to boost their profits. To that end, Coinbase announced that is expanding its institutional trading services to Asia. The San Francisco-based exchange also now supports SWIFT wire transfers that will allow clients in Asia to fund their accounts from banks based outside the U.S.  

Immutability (aka “be your own bank”) has been a big selling point for blockchain. But it also makes mistakes especially painful. Korean crypto exchange Coinzest (not to be confused with Coinnest, a separate exchange) accidentally airdropped $5.3 million worth of bitcoin and other crypto to its customers. 

Polkadot, a project founded by former Ethereum CTO Gavin Wood, aims to solve the problem of blockchain interability. (If you’re not sure what that means, Wood tries to explain it here.) In October 2017, Polkadot raised $145 million worth of ETH in an ICO. Shortly after, $98 million of those funds became frozen due to a bug in Parity wallets, another Wood project. But that’s okay, because you can always get more funding.

In fact, earlier this month, Ethereum gave Parity Technologies, the umbrella company that Parity and Polkadot fall under, a $5 million grant. (Read this Reddit thread to get a sense of how the community felt about that.) Now Polkadot is reportedly looking to raise $60 million through another ICO, according to the Wall Street Journal. Polkadot still does not have a working product.

After one year of serving as CEO of decentralized media platform po.et, Jarrod Dicker has stepped down and returned to the Washington Post. Po.et allows journalists to create time-stamped titles for their work on a blockchain. The problem is, creating archives of our work is not a problem we journalist have. (I mean, there are lots of services that do that, and most of them are free.) Rather, it appears to be just another thinly veiled excuse for launching an ICO. Po.et raised $10 million in August 2017. 

Crypto lawyer Stephen Palley reports on the latest developments in the Tezos class action suit for The Block. In support of “yeah, this was a securities offering,” plaintiffs in the case cite emails from Tezos CEO Kathleen Breitman with securities-like wording. Oops! Tezos raised $232 million in an uncapped ICO in June 2017. The project has gotten criticism for raising above and beyond what most startups need to launch a business.

Galaxy Digital, the crypto merchant bank launched by former hedge fund manager Michael Novogratz, is reportedly raising $250 million for a credit fund aimed at helping needy crypto firms, according to Business Insider. If you are curious about how Novogratz got into crypto (hint: he was Ethereum co-founder and crypto billionaire Joe Lubin’s roommate at Princeton), read this New Yorker piece from April 2018. 

Bitcoiners don’t like to pay taxes. Some crypto folks are getting riled up about Senator Elizabeth Warren’s proposed wealth tax, calling it “theft.” Warren wants to levy a 2 percent tax on assets over $50 million and a 3 percent tax on assets over $1 billion.

Kyle Gibson, a crypto enthusiast and avid researchers who lives in Boston has pulled together a wealth of information on the Texas Department of Banking Memo 1037 and what it could mean for crypto, beyond stablecoins and their issuers. It is worth a read.