Tether’s been under some regulatory heat after the reports of how useful USDT is for financing terrorists and other sanctioned entities. Even Cynthia Lummis, the crypto-pumping senator from Wyoming, loudly declared that Tether had to be dealt with.
The US government isn’t entirely happy with Tether’s financial shenanigans. But they’re really unhappy about sanctions violations, especially with what’s going on now in the Middle East.
So Tether has announced that it will now be freezing OFAC-sanctioned blockchain addresses — and it’s onboarded the US Secret Service and FBI onto Tether! [Tether, archive; letter, PDF, archive]
Tether doesn’t do anything voluntarily. We expect they were told that they would allow this or an extremely large hammer would come down upon them.
There’s more to Tether’s criminal use case than sanctions violation. The most jaw-dropping chapter in Zeke Faux’s excellent book Number Go Up (US, UK) is when he traced a direct message scammer to a human trafficking operation in Cambodia that favored tethers as its currency. South China Morning Post follows up on this with an in-depth report on how Cambodian organized crime uses tethers. [SCMP]
Credit rating firm S&P Global rated eight stablecoins for risk. Tether and Dai got the lowest marks. S&P notes in particular the lack of information on Tether’s reserves. [press release; S&P; Tether report, PDF]
At least some of the claimed Tether backing in treasuries is held in the US with Cantor Fitzgerald — exposing Tether to US touchability. This has been known since February 2023, and was proudly confirmed in December 2023 by Cantor CEO Howard Lutnick: “I hold their Treasuries, and they have a lot of Treasuries. I’m a big fan of Tethers.” [Ledger Insights; Forbes]
Cointelegraph had a fascinating story on a company called Exved using tethers for cross-border payments from Russia! Then they deleted it, for some reason. Exved was founded by Sergey Mendeleev, who also founded the OFAC-sanctioned crypto exchange Garantex, which was kicked out of Estonia. Exved is working with InDeFi Bank, another Mendeleev venture. We’re not so sure the new OFAC-compliant Tether will be 100% on board with this. [Cointelegraph, archive; Telegram, in Russian; Protos]
SEC answers Coinbase’s prayers: “No.”
In July 2022 — just after crypto crashed — Coinbase wrote to the SEC proposing new regulatory carveouts for crypto.
The SEC took its sweet time responding. Eventually, Coinbase sued in April 2023 with a writ of mandamus, demanding a bureaucratic response. The court told the SEC to get on with it, or at least supply a date by which it would answer.
Finally, the SEC has responded: “the Commission concludes that the requested rulemaking is currently unwarranted and denies the Petition.” The SEC thinks existing securities regulations cover crypto securities just fine, and there’s no reason for special rules for Coinbase. [SEC rejection, PDF; Coinbase letter to court, PDF; Gensler statement]
Coinbase general counsel Paul Grewal welcomed the opportunity to challenge Coinbase’s dumb and bad proposal being turned down. [Twitter, archive]
4 (continued)
Binance founder and former CEO Changpeng Zhao will not be returning home to Dubai anytime soon. US District Judge Richard Jones ordered CZ to remain in the US until his sentencing on February 24. He can travel within the US, but he cannot leave. [Order, PDF]
After being busted hard, Binance is still behaving weird. At the FT Crypto and Digital Assets Summit in London, the exchange’s new CEO Richard Teng refused to answer even basic questions, like where Binance is headquartered and whether it’s had an audit. “Why do you feel so entitled to those answers?” Teng said when pushed. “Is there a need for us to share all of this information publicly? No.” [FT]
CZ and Binance have been trying to dismiss the SEC charges against them. This is mostly loud table pounding, wherein Binance claims that what the SEC argued were securities are not really securities. [Doc 190, PDF, Doc 191, PDF]
France was the first country in Europe to grant Binance regulatory approval. State-endorsed blockchain courses for the unemployed and NFT diplomas helped push the country’s most vulnerable into crypto. Since the collapse of FTX and Binance’s $4.3 billion fine for money laundering, French President Emmanuel Macron’s relationship with CZ has fallen under scrutiny. [FT, archive]
London law firm Slateford helped to cover up Binance’s crimes and attempted to intimidate media outlet Disruption Banking from writing about Binance’s sloppy compliance hiring practices. (Disruption Banking told Slateford to get knotted and didn’t hear from them again.) [Disruption Banking]
Binance is finally removing all trading pairs against Great British pounds. [Binance, archive]
FTX: The IRS wants its money
FTX filed a reorganization plan in mid-December. The plan is 80 pages and the disclosure statement is 138 pages, but there’s a notable lack of detail on what happens next. None of the talk of starting a new exchange has made it into the current plan — this appears to just be a liquidation.
The plan treats crypto claims as their value in cash at the time of the bankruptcy filing on November 11, 2022, back when bitcoin was at $17,000 — less than half of what it is now.
The IRS is demanding $24 billion in unpaid taxes from the corpse of FTX. John Jay Ray wants to know how the IRS came up with that ludicrous number — the exchange never earned anything near those amounts. The IRS originally wanted $44 billion, but brought the number down. Judge John Dorsey has told the IRS to show its working. [Doc 4588, PDF; Bloomberg, paywalled]
Three Arrows Capital
Three Arrows Capital was the overleveraged crypto hedge fund that blew up in 2022 and took out everyone else in crypto who hadn’t already been wrecked by Terra-Luna. After months of dodging culpability, co-founder Zhu Su was finally arrested in Singapore in September as he was trying to skip the country.
Zhu was released from jail and appeared before the Singapore High Court on December 13, where he had to explain to lawyers for the liquidator Teneo what happened when 3AC went broke. The information will be shared with creditors. [Bloomberg, archive]
A British Virgin Islands court froze $1.1 billion in assets of Zhu and his co-founder Kyle Davies and Davies’ wife Kelly Chen. [The Block]
Teneo expects a 46% recovery rate for 3AC creditors on $2.7 billion in claims. [The Block]
Crypto media in the new Ice Age
Crypto news outlet Decrypt has merged with “decentralized media firm” Rug Radio. No, we’d never heard of them either. The two firms will form a new holding company chaired by Josh Quittner. Decrypt had spun out from Consensys in May 2022, just before everything crashed. It’s reportedly been profitable since then — though crypto sites always say that. [Axios; Axios, 2022]
Forkast News in Hong Kong has merged with NFT data provider CryptoSlam and fired most of its staff. Forkast was founded in 2018 by former Bloomberg News anchor Angie Lau; it shut down editorial operations on November 30. [The Block]
Crypto news outlets ran seriously low on cash in 2019 and 2020, just before the crypto bubble, and they’re struggling again. We expect more merges and buyouts of top-tier (such as that is in crypto) and mid-tier crypto outlets. We predict news quality will decline further.
Amy recalls the old-style crypto media gravy train and eating in five-star restaurants every night in Scotland and London while embedded with Cardano in 2017. Thanks, Charles! Nocoining doesn’t pay nearly as well, but these days crypto media doesn’t either. There’s probably a book in those Cardano stories that nobody would ever read.
Regulatory clarity
The Financial Stability Oversight Council, which monitors domestic and international regulatory proposals, wants more US legislation to control crypto. FSOC’s 2023 annual report warns of dangers from:
crypto-asset price volatility, the market’s high use of leverage, the level of interconnectedness within the industry, operational risks, and the risk of runs on crypto-asset platforms and stablecoins. Vulnerabilities may also arise from token ownership concentration, cybersecurity risks, and the proliferation of platforms acting outside of or out of compliance with applicable laws and regulations.
Yeah, that about covers it. FSOC recommends (again) that “Congress pass legislation to provide for the regulation of stablecoins and of the spot market for crypto-assets that are not securities.” [Press release; annual report, PDF]
IOSCO, the body of international securities regulators, released its final report on how to regulate DeFi, to go with its November recommendations on crypto markets in general. IOSCO’s nine recommendations for DeFi haven’t changed from the draft version — treat these like the instruments they appear to be, and pay attention to the man behind the curtain. These are recommendations for national regulators, not rules, but look at the DeFi task force — this was led by the US SEC. [IOSCO press release, PDF; IOSCO report, PDF]
London-based neobank Revolut is suspending UK crypto services — you can no longer buy crypto with the app — citing a new raft of FCA regulations, which go into force on January 8. [CityAM; CoinDesk]
Crypto exchange KuCoin has settled with New York. The NY Attorney General charged KuCoin in March for violating securities laws by offering security tokens — including tether — while not registering with NYAG. KuCoin has agreed to pay a $22 million fine — $5.3 million going to the NYAG and $16.77 million to refund New York customers. KuCoin will also leave the state. [Stipulation and consent order, PDF; Twitter, archive]
Montenegro plans to extradite Terraform Labs cofounder Do Kwon to either the US or South Korea, where he is wanted on charges related to the collapse of Terra’s stablecoin. Kwon was arrested in Montenegro in March. Originally it looked like Montenegro was going to pass him off to the US, but the case has been handed back to the High Court for review. [Bloomberg, archive; Sudovi, in Montenegrin]
Anatoly Legkodymov of the Bitzlato crypto exchange, a favorite of the darknet markets, has pleaded guilty in the US to unlicensed money transmission. Legkodymov was arrested in Miami back in January. He has agreed to shut down the exchange. [Press release]
The SEC posted a new investor alert on crypto securities with a very lengthy section on claims of proof of reserves and how misleading these can be. [Investor.gov; Twitter, archive]
Santa Tibanne
It’s been nearly ten years, but Mt. Gox creditors are reportedly starting to receive repayments — small amounts in Japanese yen via PayPal. [Cointelegraph; Twitter, archive]
Some payouts are apparently bitcoin payouts — with the creditors not receiving a proportionate share of the remaining bitcoins, but instead the yen value of the bitcoins when Mt. Gox collapsed in February 2014. This means a 100% recovery for creditors! — but much less actual money.
There are still 140,000 bitcoins from Mt. Gox waiting to be released. If payouts are made in bitcoins and not just yen, we expect that claimants will want to cash out as soon as possible. This could have adverse effects on the bitcoin price.
Trouble down t’ pit
In the Celsius Network bankruptcy, Judge Martin Glenn has approved the plan to start a “MiningCo” bitcoin miner with some of the bankruptcy estate. He says that “the MiningCo Transaction falls squarely within the terms of the confirmed Plan and does not constitute a modification.” [Doc 4171, PDF]
Bitcoin miners are racing to buy up more mining equipment before bitcoin issuance halves in April or May 2024. Here’s to the miners sending each other broke as fast as possible [FT, archive]
Riot Platforms subsidiary Whinstone sent its private security to Rhodium Enterprise’s plant in Rockdale, Texas, to remove Rhodium employees and shut down their 125MW bitcoin mining facility. The two mining companies have been brawling over an energy agreement they had made before prices went up. [Bitcoin Magazine]
More good news for bitcoin
The UK is setting up a crypto hub! ’Cos that’s definitely what the UK needs, and not a working economy or something. [CoinDesk]
Liquid is a bitcoin sidechain set up by Blockstream at the end of 2018. It was intended for crypto exchange settlement, to work around the blockchain being unusably slow. It sees very little use — “On a typical day, there are more tweets about Liquid than there are transactions on its network.” [Protos]
A16z, Coinbase, and the Winklevoss twins say they’ve raised $78 million as part of a new push to influence the 2024 elections. [Politico]
Little-known fact: coiners can donate to the PAC in tethers. All they have to do is send them via an opaque Nevada trust structure to hide the origins of the funds. And this is perfectly legal! [FPPC, PDF, p. 85, “nonmonetary items”]
Ahead of the SEC’s deadline to rule on a bitcoin ETF, Barry Silbert, CEO of Digital Currency, has quietly stepped down from the board of DCG subsidiary and ETF applicant Grayscale and is no longer chairman, according to a recent SEC filing. Silbert will be replaced by Mark Shifke, the current DCG senior vice president of operations. US regulators are suing DCG over the Gemini Earn program co-run by its subsidiary Genesis. [Form 8-K]
Ordinals are an exciting new way to create NFTs on bitcoin! ’Cos who doesn’t want that? The bitcoin blockchain immediately clogged when it was actually used for stuff. Now TON, the blockchain that is totally not Telegram’s, no, no no, has ordinals — and it’s getting clogged too. [The Block]
Image: Mark Karpeles with aggrieved bitcoin trader outside Mt. Gox in Tokyo in 2014.
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The New York Attorney General is suing crypto investment fund Genesis, its parent company Digital Currency Group (DCG), and the Gemini crypto exchange for defrauding customers of Gemini’s Earn investment product. [Press release; complaint, PDF]
Earn put investors’ money into Genesis — where it evaporated.
The lawsuit also charges former Genesis CEO Soichiro (a.k.a. Michael) Moro and DCG founder and CEO Barry Silbert for trying to conceal $1.1 billion in crypto losses with an incredibly dubious promissory note.
New York is asking the court to stop all three companies’ business in “securities or commodities” in the state. That’s all but a death sentence — bitcoin is a commodity in the US.
The NYAG says that Genesis and Gemini defrauded more than 230,000 Earn investors of more than $1 billion total, including at least 29,000 New Yorkers. New York says that thousands more lost money because of DCG’s actions.
The NYAG claims that:
Genesis and Gemini lied to investors about Earn and Genesis’ credit-worthiness;
Genesis lied to Gemini that it was solvent;
DCG and Gemini lied to the public, including investors, about the promissory note;
Earn is an unregistered security under New York’s Martin Act.
This is a complaint we recommend you read. We all knew some of what went on between Genesis, DCG, and Gemini, but this suit goes into great detail about what happened behind the scenes.
This is a civil complaint, not a criminal indictment — but the NYAG describes several crimes being committed, particularly by DCG, Genesis, Moro, and Silbert.
How Earn worked
Gemini, owned by Tyler and Cameron Winklevoss, and Genesis Capital, a subsidiary of DCG, partnered to launch the Gemini Earn program in February 2021 — just as bitcoin’s number was going up really fast. Crypto was a hot product!
Gemini and Genesis marketed Earn to the public as a “high-yield investment program” — which is just coincidentally a common marketing term used by Ponzi schemes.
Earn promised to pay up to 8% yield. Ordinary investors could deposit their crypto via the Gemini exchange. You could get your money back anytime!
Earn was a pass-through fund to Genesis. Retailers put their crypto in Earn. Gemini then handed the funds off to Genesis, who then lent the money to institutional investors, notably crypto hedge fund 3AC in Singapore. Genesis was substantially a 3AC feeder fund — of which there were many.
When Earn investors wanted to withdraw their funds, Genesis had five days to return the principal and the interest, minus Gemini’s agent fee.
Gemini earned more than $22 million in agent fees for running Earn, plus more than $10 million in commissions when investors bought crypto on Gemini to put into Earn.
Paper thin
3AC was Genesis’ second largest borrower. 3AC had borrowed $1 billion of crypto at 8% to 15% interest, secured by $500 million of illiquid crypto tokens.
Genesis hadn’t received audited financial statements from 3AC since July 2020. But with interest rates like that, why worry — it’ll be fine, right?
It wasn’t fine. 3AC fell over on June 13, 2022, losing Genesis $1 billion. Babel Finance, another Genesis borrower, fell over on June 17, losing Genesis another $100 million — because in June 2022, everyone was falling over.
Genesis was $1.1 billion in the red — it didn’t have the funds to pay back Earn investors. Between mid-June and July 2022, Silbert and other DCG officers met with Genesis management to work out how to fill the hole in Genesis’ balance sheets — and what to tell counterparties such as Gemini.
One problem was that some of the collateral for 3AC’s loan was GBTC shares, issued by another DCG subsidiary, Grayscale — which Genesis couldn’t sell, due to restrictions on sales of stock by “affiliates” of the issuing company.
Silbert told the board of DCG that Genesis was anticipating a run on the bank if word got out. So DCG began casting about for financing. Silbert also suggested to the DCG board on June 14, 2022, that they “jettison” Genesis.
But DCG and Genesis decided instead to act like everything was fine. On June 15, Genesis told everyone its “business is operating normally.” Two days later, Genesis CEO Michael Moro posted in a tweet reviewed and edited by DCG: “We have shed the risk and moved on.” [Twitter, archive; Twitter, archive]
Everything was not fine. The 3AC hole meant that Genesis’ loss exceeded its total equity, and Genesis couldn’t pay out Earn investors. Genesis hadn’t “shed the risk and moved on” — it still had the gaping hole in its balance sheet. It was not “operating normally” — it was floundering in a panic.
Genesis was unable to find anyone to lend them the money they needed, so they had to find a way to paper the hole before the end of the quarter.
The solution: DCG would make a loan from its right pocket to its left pocket and count the loan as an asset.
So on June 30 — the last day of Q2 2022 — DCG gave its wholly-owned subsidiary Genesis a promissory note for $1.1 billion. DCG would pay it back in ten years at 1% interest.
Both Silbert and Moro signed off on the IOU. The note was, of course, not secured by anything.
DCG never sent Genesis a penny — the note was only ever meant to be a $1.1 billion accounting entry so that Genesis and DCG could tell the world that Genesis was “well-capitalized” and that DCG had “absorbed the losses” and “assumed certain liabilities of Genesis.”
None of this was true. DCG wasn’t obligated to pay anything on the note for 10 years. And Genesis was still out $1.1 billion of actual funds.
Michael Patchen, Genesis’ newly appointed chief risk officer, said in internal documents that the promissory note “wreaks havoc on our balance sheet impacting everything we do.”
Genesis directed staff not to disclose the promissory note to Genesis’ creditors, such as Gemini. Many Genesis staff didn’t even know about the promissory note until months later.
DCG’s piggy bank
DCG made Genesis’ problems even worse by treating Genesis like its own personal piggy bank.
In early 2022, DCG “borrowed” more than $800 million from Genesis in four separate loans. When $100 million of this came due in July, DCG forced Genesis to extend the maturity date — and DCG still hasn’t paid a penny of it to date.
A DCG executive told a Genesis managing director on July 25, 2022, that DCG “literally [did not] have the money right now” to repay the loan. Genesis had no choice — the managing director replied: “it sounds like we don’t have much room to push back, so we will do what DCG needs us to do.” DCG also dictated the interest rate for this loan.
Around June 18, 2022, DCG borrowed 18,697 BTC (worth $355 million at the time) from Genesis. It partially paid this back on November 10, 2022 — with $250 million worth of GBTC! — but this still left Genesis with no cash to pay back its own creditors. And it still couldn’t liquidate the GBTC.
It’s hard to consider the deals between Genesis, DCG, and Grayscale as anything like arm’s length — it was a single conglomerate’s internal paper-shuffling.
On November 2, CoinDesk reported that FTX, one of the largest crypto exchanges, was inflating its balance sheet with worthless FTT tokens. The report brought FTX tumbling down, and FTX filed for bankruptcy on November 11, 2022.
Around November 12, 2022, Genesis sought an emergency loan of $750 million to $1 billion from a third party due to a “liquidity crunch.” Its efforts were unsuccessful. On November 16, Genesis halted redemptions.
If you owe Gemini a billion dollars, then Gemini has a problem
Gemini Earn investors were supposed to be able to get their funds back at any time. This meant that those funds had to be highly liquid. Gemini told investors it was monitoring the financial situation at Genesis.
Gemini absolutely failed to do this. They lied to investors, and they hid material information.
Gemini got regular financial reports from Genesis. Gemini’s internal risk analyses showed that Genesis’ loan book was undercollateralized for Earn’s entire operating existence. But Gemini told Earn customers that Genesis had more than enough money to cover their loans.
Starting in 2021, Genesis’ financial situation went from bad to worse. In February 2022, after analyzing Genesis’ Q3 2021 financials, Gemini internally rated Genesis capital as CCC-grade — speculative junk — with a high chance of default.
Gemini also found out that Genesis had a massive loan to Alameda — secured by FTT tokens! The same illiquid FTX internal supermarket loyalty card points that were discovered by Ian Allison at CoinDesk to make up about one-third of Alameda’s alleged reserves.
Even after Genesis recalled $2 billion in loans from Alameda, the crypto lender was still full of loans to affiliates, including its own parent company DCG.
In June 2022, the crypto markets crashed and burned. But Gemini continued to reassure investors that it was safe to feed money to Genesis via Earn.
This was apparently fine when it came to someone else’s money, but according to the complaint:
During this same period, Gemini risk management personnel withdrew their own investments from Earn. A Gemini Senior Risk Associate working on Earn withdrew his entire remaining Earn investment — totaling over $4,000 — between June 26, 2022, and September 5, 2022.
Likewise, Gemini’s Chief Operations Officer [Noah Perlman], who also sat on Gemini’s Enterprise Risk Management Committee, withdrew his entire remaining Earn investment — totaling more than $100,000 — on June 16 and June 17, 2022.
This was when DCG tried to paper over the hole in Genesis’ balance sheet with a $1.1 billion IOU.
Gemini realized things weren’t good at Genesis, but it’s not clear that they realized how bad they were — not helped by Genesis lying to Gemini about their true condition.
From June to November 2022, Genesis would send Gemini false statements on their financial condition — for instance, saying that the DCG promissory note could be converted to actual cash within a year, when in fact, it was a 10-year note.
Gemini didn’t tell investors that Genesis was in trouble. Instead, they thought they’d “educate clients on the potential losses” and “properly set clients’ expectations.”
When the Gemini board was advised of Genesis’ financial state in July 2022, one board member compared Genesis debt-to-equity ratio to Lehman Brothers before it collapsed.
Gemini tried and failed to extricate itself from Genesis. They just could not get the funds back. But they knew that Genesis operated as a closely controlled sockpuppet of DCG, and they wanted Silbert to make good on Genesis’ debt.
As things at Genesis got worse, Gemini worked out how to break the news to Earn creditors.
On September 2, 2022, Gemini finally decided to terminate Earn. On October 13, Genesis formally terminated the Earn agreements and demanded the return of all investor funds.
On October 20, 2022, Silbert met with Cameron Winklevoss of Gemini. Silbert said that Gemini was Genesis’ largest and most important source of capital — meaning that Genesis could not redeem Earn investors’ funds without Genesis declaring bankruptcy.
Gemini quietly granted Genesis multiple extensions to return investor funds.
On October 28, 2022, Silbert finally let Genesis tell Gemini the true terms of the promissory note — just two weeks before Gemini cut off withdrawals.
For some reason neither we nor the NYAG can fathom, Gemini cointinued to take investors’ money and put it into Earn right up to the end!
Customer service
Gemini didn’t do anything so upsetting for Earn investors as to tell them about Genesis’ unfortunate condition — even as Gemini’s own staff closed out their positions in Earn.
One customer wrote to Gemini on June 16, 2022, three days after 3AC collapsed, asking if any of their funds were with 3AC. Gemini didn’t answer the question, but replied with vague reassurances about Genesis’ trustworthiness.
Another wrote on June 27, 2022: “with other exchanges like Celsius and Blockfi I am concerned about Gemini. Does Gemini have any similar vulnerabilities? … liquidity vulnerabilities? … risky investments/loans that would risk my assets or cause Gemini to halt withdrawals?”
Gemini responded: “Gemini is partnering with accredited third party borrowers including Genesis, who are vetted through a risk management framework which reviews our partners’ collateralization management process.”
This investor was sufficiently reassured to send in another $1,000.
A third customer wrote on July 24, 2022, asking specifically if Gemini was involved in any of the “drama” around 3AC and if it impacted Earn. Gemini said they weren’t involved in anything regarding 3AC — even as the 3AC crash had in fact blown out Earn.
The consequences
The NYAG is asking the court that all three companies be permanently banned from dealing in “securities or commodities” in New York — e.g., bitcoin.
Some of the press coverage noted this provision — but didn’t notice that it would be a near death sentence for a crypto business. DCG’s profitable Grayscale business would have to leave New York or be sold off. Gemini would be kicked out of the state.
New York is also seeking restitution for the victims and disgorgement of ill-gotten gains.
Also, they all get fined $2,000 each. It’s possible that bit of the General Business Law could do with an update.
“My survey of three card monte tables suggests they’ve always got at least one patron but you won’t see anyone playing at the big casinos which just shows the system is rigged.”
Crypto venture capital investments have gone full crypto collapse, from $21.6 billion in 2022 to just $0.5 billion so far in 2023. This Fortune article includes the funniest graph of the week: [Fortune, archive]
Investors are leaving the crypto sector without any plans to return. [Bloomberg]
Crypto trading is at its lowest level since October 2020. The Block puts the volume for May 2023 at $424 billion. For comparison, May 2021 was $4.25 trillion and May 2022 was $1.4 trillion. [The Block]
Volume numbers are considerably less if you take into account that unregulated crypto exchanges are known for faking their volumes. Crypto trading is all but dead. We know this because exchanges run by normal finance guys don’t see any trading. [Bloomberg]
Traditional finance groups want to start their own crypto exchanges run in a non-clown-shoes manner. A nice ambition — but that was Gemini’s pitch and even they still had to resort to risky garbage. [FT]
The Winklevoss twins marketed Gemini as an exchange that played by the rules — one that serious money people could trust. But after the failure of FTX and the Genesis bankruptcy — in which Gemini is the largest creditor — they lost that trust. Maybe they could pivot to AI? [Bloomberg]
Crypto.com halted services for institutional traders in the US on June 21. The exchange cited “limited demand” as the reason. [news.bitcoin.com]
The rest of crypto is also desperate. Reddit founder Alexis Ohanian is still pushing play-to-earn games and touts Axie Infinity as a huge success. Gamers hate play-to-earn and think it’s vacuous horse hockey. [Twitter, archive]
Universe.xyz is the latest NFT market to shut down, taking all the images on the site with it. As more NFT markets shut down, your apes are in danger of going blank forever. [Twitter, archive]
TechMonitor asks: “Is crypto finally dead?” We should be so lucky. With quotes from David. [TechMonitor]
Coinbase: We didn’t do it, nobody saw us, and it wasn’t even a thing
Coinbase has responded to the SEC’s complaint with 177 pages of chaff. [Doc 22, PDF]
Paragraph 2 makes the claim that in approving Coinbase’s original S-1, the SEC approved Coinbase’s business. Let’s quote again this line from the S-1, signed off by Brian Armstrong: [SEC]
Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.
Coinbase argues that Congress is looking into cryptos, therefore existing laws don’t matter. Paul Grewal, Coinbase’s general counsel, has told Bloomberg how Coinbase’s big hope is that new laws will save their backsides. This is correct — Rep McHenry’s new crypto markets bill is indeed Coinbase’s only hope. [Bloomberg]
Coinbase claims that with this complaint, the SEC is working well outside its remit and that its ideas about whether crypto tokens are securities are entirely novel. Never mind the SEC’s repeated wins in court whenever a crypto issuer is dumb enough to take the matter that far. [Doc 23, PDF; CoinDesk]
Earlier, Coinbase filed a writ of mandamus demanding that the SEC consider its proposal for new crypto regulations. The SEC says it’ll have something to report within 120 days. Judge Cheryl Ann Krause expects a decision on Coinbase’s proposal from the regulator by October 11. [Doc 30, PDF; Doc 32, PDF]
Tether: Yes! We have no Chinese commercial paper
CoinDesk finally got access to documents from the New York Attorney General related to Tether’s reserves from March 31, 2021. [CoinDesk; CoinDesk, PDF; CoinDesk, PDF; CoinDesk, PDF; CoinDesk, PDF; Bloomberg]
The NYAG claimed that Tether had been lying about its reserves — which it had been. Tether and Bitfinex settled with New York for $18.5 million in February 2021.
The settlement required Tether to publish a breakdown of its reserves quarterly for two years. But what the public got to see in May 2021 were two skimpy pie charts, showing where Tether had parked its alleged $41 billion in backing reserves at the time. [Tether, archive]
CoinDesk then filed a Freedom of Information request for the fully detailed version of Tether’s report to the NYAG on its reserves.
Tether fought the release of the documents for two years. In February, they lost in court and decided not to go ahead with an appeal. So the NYAG sent Coindesk the documents on June 15. New York also sent the same documents to Bloomberg and Decrypt.
In June and July 2022, Tether vigorously denied that it held money in Chinese commercial paper — loans to Chinese companies which most money market funds avoid. It also said in September 2021 that it had no debt or securities linked to Evergrande, a cash-strapped Chinese real estate company. [Tether, 2022; Tether, 2022; CoinDesk, 2021]
Bloomberg called out Tether’s wider claims of no involvement in Chinese commercial paper as nonsense. [Bloomberg, 2021]
It turns out that Tether did hold Chinese commercial paper in 2021, and quite a lot of it. It held securities issued from banks around the world — but mainly China, including debt issued by the Industrial & Commercial Bank of China, China Construction Bank, and Agricultural Bank of China. ChainArgos took a close look at the funds and put together a spreadsheet. [Google Docs]
The Tether press releases on the FOIed docs are a hoot. Lots of table pounding. [Tether, archive; Tether, archive]
We give CoinDesk a bit of stick from time to time. But we also read the site every day and follow the livewire feed. They get all the credit for doggedly pursuing this one.
FTX versus the venture capitalists to the stars
John Jay Ray’s team at FTX seems to have found some more truly fascinating documents. FTX is suing venture capital firm K5 Global, its managers, Michael Kives and Bryan Baum, and various related entities to recover the $700 million that Sam Bankman-Fried put into the firm.
Kives worked at Creative Artists Agency from 2003 to 2018 as a Hollywood talent agent. He left in 2018 to found K5.
In February 2022, SBF attended a dinner party at Kives’ house, with A-list celebrities, billionaires, and politicians. He was deeply impressed with Kives’ “infinite connections” and even contemplated that Kives could work with FTX on “electoral politics.”
Less than three weeks later, SBF signed a “term sheet” agreeing to give Kives and Baum $125 million each personally and to invest billions of dollars into K5 over three years:
The Term Sheet was little more than a cursory list of investment ideas, and repeatedly stated that the actual “mechanics” of these very substantial investments would be later worked out “in the long form documents.”
SBF wired $300 million to K5 the next day. No due diligence was done on any of the deals — including $214.5 million for a 38% stake in MBK Capital LP Series T, whose gross asset value was just $2.94 million as of March 2022.
K5 were very close advisors. Kives and Baum joined FTX’s internal Slack chat. SBF reserved a room for them in his Bahamas luxury apartment. In May, Alameda transferred another $200 million to K5.
Sam didn’t worry too much about the fine details. In an August 2022 internal document, he wrote that “Bryan is ~100% aligned with FTX,” that “FTX is aligned with Bryan too,” and that “if there are significant artificial up-downs between FTX and K5 as entities, I’m happy to just true it up with cash estimates.”
SBF wrote that he was:
… aligned with Bryan and K5, and treats $1 to it as $1 to FTX even though we only own 33%, because whatever, we can always true up cash if needed, but also, who cares … There are logistical, PR, regulatory, etc reasons to not just merge K5 100% into FTX but I and Bryan will both act how we would if they were merged.
… Is Bryan an FTX employee, or a random 3rd party? The answer, really, is neither. The answer is that it’s sorta complicated and liminal and unclear. Bryan lives in the uncanny valley.
FTX and Alameda employees flagged K5’s “pretty bizarre” expenses at the time, such as “over $777k in design expenses” that had been billed to Alameda.
FTX wants the $700 million back as having been avoidable transfers. It may want even more money, as Ray’s team suspects that more interesting details will come out in discovery. FTX also wants K5’s claims in the bankruptcy disallowed until this matter is resolved. [Adversary Case, PDF]
More news from Chapter 11
Cameron Winklevoss tweeted yet another open letter to Barry Silbert of Digital Currency Group on July 4, demanding back Gemini Earn customers’ money. Winklevoss accuses DCG of “fraudulent behavior” and wants them to do the “right thing” and hand over $1.465 billion of dollars, bitcoin, and ether. If Silbert doesn’t pay up, Winklevoss threatens to sue on Friday, July 7. CoinDesk, which is owned by DCG, couldn’t get a comment from their own proprietor on the story. [Twitter, archive; CoinDesk]
After the deal for Binance.US to buy Voyager Digital fell through, Voyager gave up trying to sell itself and is liquidating. Here’s the liquidation notice. [Doc 1459, PDF]
Celsius is finally converting its altcoins to BTC and ETH as it pursues its plan to relaunch with the auction-winning consortium Fahrenheit. [CoinDesk]
If you have vastly too much time on your hands, here’s the full Celsius Network auction transcript — all 256 pages of it. [Doc 2748, PDF]
Customers of the bankrupt US branch of the Bittrex crypto exchange — which is being sued by the SEC — can withdraw those holdings that are clearly theirs … whatever that means. [CoinDesk]
Three Arrows Capital: What Su and Kyle did next
Crypto was taken out in 2022 by a one-two punch of Terra-Luna collapsing in May and then crypto hedge fund Three Arrows Capital collapsing in June.
Other crypto firms had invested in Terra-Luna and 3AC because they paid the highest interest rates! Now, you might think that investment firms would know that high interest means high risk.
What did Zhu and Davies do next? They spent the summer traveling around Asia, went surfing, and played video games. Davies is currently in Dubai and Zhu is back living in Singapore. [NYT]
Zhu and Davies insist they must have done nothing wrong because no government has filed charges yet. Uh huh.
3AC’s creditors think Zhu and Davies have done one or two things wrong. Teneo, the liquidator trying to clean up the 3AC mess, wants the pair fined $10,000 a day for contempt, saying that Davies has failed to respond to a subpoena. [CoinDesk]
The pair are suing Mike Dudas, the original founder of crypto media outlet The Block, for defamation. In the US, LOL. They allege Dudas said nasty things about their new crypto venture OPNX, though the suit doesn’t say what allegedly defamatory claims Dudas made. We expect the 3AC boys to have some trouble demonstrating they have a reputation to malign. Stephen Palley is representing Dudas. [CoinDesk]
Regulatory clarity
In the UK, the Financial Services and Markets Bill has passed. One part of this gives the Treasury greater powers to regulate crypto, likely via the Financial Conduct Authority. We should expect more detailed regulations within a year. [CoinDesk]
This comes not before time. UK losses to crypto fraud increased more than 40% to surpass £300 million (USD$373 million), according to Action Fraud, the national reporting center for fraud and cybercrime. [FT]
Europe’s MiCA is now law from the end of June 2023. It goes into application in one year for stablecoins and in 18 months for general crypto assets and virtual asset service providers. [EUR-Lex]
The European Central Bank keeps talking about doing a CBDC. This is good news for crypto! Or maybe it isn’t: [ECB]
Policymakers should be wary of supporting an industry that has so far produced no societal benefits and is increasingly trying to integrate into the traditional financial system, both to acquire legitimacy as part of that system and to piggyback on it.
The CFTC Division of Clearing and Risk sent out a staff advisory to registered derivatives clearing organizations on May 30, reminding them of the risks associated with expanding the scope of their activities. It specifically addressed crypto. [CFTC]
When the CFTC points out that market shenanigans are illegal in crypto just like they are in regular commodities, keep in mind that Avi Eisenberg is finally going to trial for allegedly committing those precise market shenanigans in DeFi. These are real go-to-jail crimes. [Bloomberg; Schedule, PDF; Case docket]
The Thailand SEC has banned crypto lending that pays returns to investors. It now also requires crypto trading firms to post the following warning: “Cryptocurrencies are high risk. Please study and understand the risks of cryptocurrencies thoroughly. because you may lose the entire amount invested.” [SEC Thailand, in Thai]
New York has settled with CoinEx after suing them in February for failing to register as a securities exchange. The company has to stop operating in the US — not just New York — return $1.1 million to investors, and pay $600,000 in penalties. [NYAG; Stipulation and consent, PDF]
The ETF trick will surely work this time
Guys, guys, the Blackrock and Fidelity bitcoin ETFs will change everything! They’re going to get surveillance of trading and market data from somewhere! This will surely answer all of the SEC’s previous objections to bitcoin ETFs! The market will be delighted!
… oh. The SEC has found these applications inadequate. [WSJ]
Blackrock and Fidelity are going to try again with Coinbase as the exchange supplying market surveillance. [CoinDesk]
But the trouble with monitoring at Coinbase is that Coinbase isn’t where the market is — the bitcoin market is at Binance. That’s where price discovery happens.
We expect these ETF applications to go no further than all the previous bitcoin ETF applications.
The good news for bitcoin continues its monotonous patter
Binance senior staff have been jumping ship. General counsel Han Ng, chief strategy officer Patrick Hillmann, and SVP for compliance Steven Christie all resigned this week. They specifically left over CZ’s response to the ongoing Department of Justice investigation. [Fortune]
Binance.US’s market share has dropped to 1%, down from a record 27% in April. Is Binance giving up on its US exchange? The market share nose-dived after the SEC sued Binance in June. [WSJ]
Fortune favors the internal trading desk: Crypto.com has been caught trading directly against its own customers. Dirty Bubble spotted the job ads for a proprietary trading desk at the firm in November 2022, of course. [FT, archive; Twitter, archive]
Russia is giving up on the idea of a unified state-run crypto exchange. Instead, it’s focusing on regulation for multiple exchanges. Russia is continuing to promote crypto as a way to evade sanctions for making international payments. When you’ve devastated your economy by embarking upon a very stupid war, that’s … a strategy? [Izvestia, Russian]
In crypto collapse news from the distant past, something’s happened in Quadriga! The government of British Columbia is seeking forfeiture of $600,000 in cash, gold bars, and Rolex watches that QuadrigaCX cofounder Michael Patryn has in a safe deposit box. The RCMP alleges the items are the proceeds of unlawful activity. [Vancouver Sun]
Bittrex’s US entity, Desolation Holdings LLC, and Bittrex Malta filed for Chapter 11 bankruptcy in Delaware on May 8. The move came just weeks after Bittrex shut down its US operations, which was soon after they were sued by the SEC for trading securities without registering as a securities exchange. [Bloomberg; Bittrex; case docket]
The bankruptcy is apparently the fault of the SEC. The first-day declaration cites several SEC actions against other firms — and harps on about a “lack of regulatory clarity.” [Doc 9, PDF; first day declaration, PDF]
Bittrex says the bankruptcy will totally not impact its non-US operations, and funds are safe! Surely Bittrex didn’t do any commingling of company and customer funds like every other crypto exchange in trouble keeps turning out to have done.
The debts are largely fines levied against Bittrex by US government agencies — who are the only named creditors. OFAC is the largest creditor, owed $24.2 million. FinCEN is also a top 50 creditor with a $3.5 million claim. The SEC is listed with an undetermined amount of claims. [Doc 1, PDF]
Bittrex wishes to avail itself of a debtor-in-possession loan of 700 BTC so as to wind down Desolation and Bittrex Malta in an orderly manner and return customers’ funds. The loan will be from themselves — Aquila Holdings Inc, Bittrex’s parent entity, which is not in bankruptcy. [Liquidation plan, PDF]
The precedence of creditors (who gets paid back first) would be: themselves, then the customers, then the US government. That’s novel.
Michel de Cryptadamus notes several other interesting wrinkles. Bittrex’s US gross (not net) revenue for 2022 was $17 million, against the $30 million in government fines. “Several states alleged that BUS was undercapitalized and demanded that BUS immediately surrender its money transmitter licenses in those states.” Bittrex’s complicated corporate structure is reminiscent of FTX. And Bittrex may also be trying to protect the salaries of Bittrex executives from being seized by the SEC. [Twitter, archive]
Michel thinks the whole filing is a massive troll. We concur. The idea seems to be for Bittrex to set up a sacrificial entity to pay back their customers but stiff the US government. We are unconvinced that the government agencies will be inclined to let this one slide.
Good news for Binance
Market makers are leaving Binance US. Jane Street Group in New York and Jump Trading in Chicago — two of the world’s top commodities market makers — are pulling back from crypto in the US as regulators crack down on the industry. Their business in normal commodities is much larger, and they could do without the regulatory heat. [Bloomberg]
The Department of Justice is investigating Binance for possible violations of US sanctions against Russia. There’s already plenty of evidence that Binance has committed sanctions violations. Binance was the final destination for millions in funds from Bitzlato, an exchange shut down for money laundering. Now Dirty Bubble writes that Binance partner Advcash may be facilitating transfers from Russian banks. [Dirty Bubble]
Binance is withdrawing from Canada, owing to a surfeit of regulatory clarity. [Twitter, archive; Reuters]
Bitcoin has been trading at a premium of up to $650 on Binance US. A premium like this is usually an indication that people can’t get their dollars out of the exchange, so they buy bitcoins and move those to another exchange to cash out. [CoinDesk]
We also saw bitcoin trading at a premium on Mt. Gox just before that exchange collapsed in 2014, and the same with QuadrigaCX, which imploded in 2019. Naïve traders who don’t understand what’s happening will often move their BTC to the dying exchange, thinking it’s an arbitrage opportunity.
Trading at a premium is not a good sign, but a worse sign is when people complain they can’t get their crypto off an exchange. Binance US has long had a reputation for demanding arbitrary new KYC documentation when users try to withdraw.
Monkey laundering comes to bitcoin
Binance paused withdrawals twice on Sunday, May 7. The first time was due to a “congestion issue.” Later in the day, Binance paused withdrawals again due to a “large volume of pending transactions.” [Twitter, archive; Twitter, archive]
For once, Binance might have been on the level. On May 7, the bitcoin mempool was clogged with 400,000 transactions waiting to be processed, and transaction fees surged.
In bitcoin, the mempool, or memory pool, is where pending transactions pile up before a miner selects the most profitable ones and puts them together as a proposed block. If your transaction stays in the mempool too long, it gets dropped.
The best way to break a blockchain is to try to use it for something. In this case, some idiot worked out how to do NFTs on bitcoin.
“Ordinals” are a new way to create NFTs on bitcoin by linking a JPEG, video, or another image type to a satoshi, the smallest denomination of a bitcoin. Ordinals came out in January, and bitcoin has been filled with monkey pictures since. Bitcoin maxis condemn ordinals as a conspiracy to destroy bitcoin by using the network for a purpose. [Decrypt]
Child genius, adult moron
Sam Bankman-Fried’s defense team is trying to strike 10 of the 13 criminal charges against their client. They argue that the Bahamas did not agree to several of the charges — including one claim that Sam hid millions of dollars in political donations — while other claims didn’t meet the legal requirements of the underlying criminal statutes. [Docket, see filings 137-147]
The facts against SBF are solid. There’s no reason to doubt that Sam did everything the US claims. So the defense seems to be going for unreasonable doubt and hoping they have a dumb enough jury member or two.
Former federal prosecutor Sean Shecter of Lewis Brisbois says SBF’s lawyers want to preserve an appeal, so they have to try everything they can think of, “even if it involves throwing spaghetti against the wall.” He thinks the defense is likely hoping that the government gives up “nuggets of information” in response to the motions. [Law360, paywall]
Prosecutors have until May 29 to respond. Judge Lewis Kaplan will hear oral arguments on June 15.
The IRS has hit the FTX companies with a $44 billion tax bill, with the largest chunk being $20.4 billion for Alameda. It looks like the IRS reclassified all FTX employees from contractors to employees and charged for unpaid employment taxes. [Docket, see filings April 27, 28; IRS Alameda claim, PDF; CoinDesk]
The IRS has not released its calculations in detail, but we’d assume the bill is inflated by fraud (fictitious profits), penalties, and interest. John Jay Ray is sure to fight this. But even if Ray gets that amount substantially reduced, this is still sure to be a huge hit for FTX creditors.
The IRS claims are treated as unsecured — but they will receive priority status as ordinary and necessary business expenses of the bankruptcy estate. So the IRS will come before ordinary unsecured creditors.
The searing light of regulatory clarity
Ishan Wahi will spend two years in prison for insider trading as a former product manager at Coinbase. He previously admitted to passing on confidential information from Coinbase to his brother and friend, who profited from the tips. [WSJ, paywall; DOJ press release]
In Estonia, nearly 400 VASPs (“virtual asset service providers,” the FATF term for companies dealing in crypto) have shut down or had their licenses revoked after the government’s recently enhanced terrorist financing prevention and anti-money laundering laws came into effect in March. [Protos; Estonia Financial Intelligence Unit]
Bakkt has delisted a bunch of tokens from the institutional crypto business they bought from Apex Crypto, including several that the SEC has indicated it considers securities. “Our review process ensures those interests are best served when we contemplate the most up-to-date regulatory guidance.” [CoinDesk]
John Reed Stark thinks an SEC action against Coinbase is imminent. He explains the regulations and how they work in detail and why Coinbase doesn’t stand a chance.
Stark notes also that Coinbase’s “regulatory estoppel” claim — that the SEC approving their S-1 public offering means the SEC must have approved the exchange dealing in securities — is directly contradicted by the mandatory “no approval clause” in the S-1: “Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.” Whoops. [LinkedIn]
Unvaxxed bitcoin is the new bitcoin
QuadrigaCX bankruptcy claimants will get 13% on the dollar. They will be paid out the dollar value of their crypto at the time Quadriga filed for bankruptcy — April 15, 2019, when bitcoin was in the toilet.
Arthur Hayes of BitMEX has been tweeting at Three Arrows Capital co-founders Su Zhu and Kyle Davies because 3AC owes him $6 million following its collapse in June 2022. Rather than returning Hayes’ money, 3AC cofounder Su Zhu has filed a Singapore restraining order to prohibit Hayes from using “threatening, abusive or insulting words” and “making any threatening, abusive or insulting communication, that would cause the Applicant harassment, alarm or distress.” [Twitter, archive; Twitter, archive; CoinDesk]
Awe that's sweet, is that your way of using symbolism to represent the $6 million you owe me? 1 Oyster = $1 million … https://t.co/ehWJ4wUfXB
BlockFi users discover that BlockFi owned their coins. Bankruptcy Judge Michael Kaplan ruled that BlockFi users who had money in BlockFi’s interest-bearing accounts gave up ownership of their bitcoins — all they owned was a liability from BlockFi — and all of the $300 million in crypto deposits is now the property of the bankruptcy estate, as is normal. [Bloomberg]
P2P exchange Paxful has resumed operations after it shut down last month amidst a messy dispute between cofounders Ray Youssef and Artur Schaback. The entire operation has been comedy gold. Youssef and Schaback say the exchange is now owned by a custodian — who they never actually name — and the custodian, Schabeck, and Youseff all serve as directors. [Paxful, archive; CoinDesk]
In the crypto bubble, Miami crypto companies boomed with the enthusiastic support of Mayor Francis Suarez. Now there’s empty real estate and lawsuits. “Most of crypto was a pyramid scheme,” said local businessman Ryan Kirkley. Suarez is now trying to lure tech startups into Miami instead. [WSJ, paywalled]
Robert F. Kennedy Jr., who is running for US President on the gibbering insane Twitter blue check conspiracy theorist ticket, will be making the first appearance of his campaign giving the keynote at Bitcoin 2023 in Miami later this month. So, on brand then. [Twitter; NBC]
A propaganda movie is in the works for bitcoin mining — because consuming a country’s worth of electricity is actually good news for bitcoin. Based on the trailer, the film is amazing, but not in a good way. [Dirty Coin the Movie]
Media stardom
Amy spoke to Bloomberg about the growing ranks of crypto skeptics after the crypto collapse: “There were a handful of us before, screaming into the abyss. Now there’s a lot more.” We’ll just be over here, quietly being right. [Bloomberg]
“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.
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]
Sometimes months happen in weeks, and it’s been six months of that sort of week. So please contribute to our Patreons — here’s Amy’s, and here’s David’s.
Oh, what a tangled web we weave, when first we practice to deceive!
— Sir Walter Scott, 1808
DCG: Congratulations, you played yourself
The Department of Justice’s Eastern District of New York and the SEC are looking into money flows between Barry Silbert’s Digital Currency Group and its lending subsidiary Genesis, and what investors were told about the transfers. [Bloomberg]
DCG has been playing all the same games as the rest of crypto — trying to create the illusion of money where there is no money, to keep the party going a little bit longer.
Genesis should have declared insolvency in June when Three Arrows Capital (3AC) blew a $2.4 billion hole in its accounts — but DCG purchased 3AC’s defaulted loan from Genesis and financed the purchase with a promissory note of $1.1 billion, to be paid back over 10 years.
That is: DCG and Genesis counted an internal IOU as money, to claim Genesis was still solvent.
The catch with the promissory note is that if the 10-year loan is “callable” — meaning DCG would have to pay Genesis the full amount immediately in the event of a liquidation or bankruptcy — then it could give Genesis creditors a claim on DCG itself, and take all of DCG down with it.
“The Promissory Note is like a noose wrapped tight around the neck of DCG. If Genesis goes over the cliff, it drags DCG with it,” said Ram Ahluwalia, the co-founder of Lumida, an investment advisory firm that focuses on crypto. [Twitter]
In a letter to shareholders in November, Silbert disclosed that DCG borrowed another $575 million from Genesis — due in May 2023. The funds were used for “investment opportunities” and buying back shares of DCG stock from outside investors. [Twitter]
A creditor committee that includes crypto exchange Gemini presented Genesis and DCG with a plan to recover the assets. Silbert had until January 8 to respond. Cameron Winklevoss threatened that “time is running out.” [Twitter; Twitter]
We think Gemini will try to force Genesis into involuntary chapter 11 — they just need three creditors to file a petition with the bankruptcy court. The judge then holds a hearing and decides if the matter will go through. [11 U.S. Code, section 303]
Gemini Earn, Genesis, GBTC, and 3AC
As is usual in crypto, DCG screwed itself by greed. DCG also owns Grayscale, which operates the Grayscale Bitcoin Trust (GBTC) — DCG’s cash cow. Grayscale collects a whopping 2% annual fee on its assets under management — currently, 633,000 BTC.
Genesis took the crypto it got from Gemini Earn customers and lent those funds out to institutional investors and crypto hedge funds — such as Three Arrows Capital.
3AC was one of the biggest investors in GBTC, taking advantage of a lucrative arbitrage opportunity. They would borrow bitcoins from Genesis and swap those for GBTC shares at NAV from Grayscale. After a six-month lockup, 3AC could dump the shares on retail for a handsome profit. Rinse and repeat, and when GBTC was trading at 20% above NAV, they could make a 40% profit a year that way
At the end of 2020, 3AC was the largest holder of GBTC with a position worth $1 billion at the time. After February 2021, the GBTC premium dried up, and GBTC began trading on secondary markets at a steep discount to NAV.
3AC had hoped the discount would be reversed when the SEC approved Grayscale converting its bitcoin trust to an ETF. But the SEC rejected the application, and the GBTC discount continued to widen. [Bloomberg]
When 3AC defaulted on its $2.4 billion loan to Genesis, Genesis seized the collateral backing the loan, including 17.4 million shares of GBTC, and filed a $1.1 billion claim against 3AC — a claim that is now on DCG’s books. [Coindesk; Affidavit Russell Crumpler, PDF]
Class action against Gemini Earn
Gemini partnered with Genesis for their Earn program. After Genesis lost $175 million in FTX in November, it froze withdrawals. Gemini Earn froze withdrawals in turn. Now Gemini Earn customers are out $900 million.
In an effort to get those funds back, three Gemini Earn customers are seeking class arbitration against Genesis and DCG.
Gemini and Genesis had a “master digital asset loan agreement,” which Gemini Earn customers entered into — when you became an Earn customer, you agreed you were lending money to Genesis.
The complaint alleges that Genesis breached this agreement by hiding its insolvency through a “sham transaction,” whereby DCG “bought” the right to collect a $2.3 billion debt owed to Genesis by 3AC with the aforementioned $1.1 billion promissory note. The plaintiffs also claim that the Genesis loan agreement created an unregistered sale of securities. [Press release; Complaint, PDF; Master Digital Asset Loan Agreement]
The master loan agreement states that: “Each Party represents and warrants that it is not insolvent and is not subject to any bankruptcy or insolvency proceedings under any applicable laws.”
This is why Silbert keeps insisting that Genesis has a liquidity issue and not a solvency issue — even as those are functionally identical in crypto. If Genesis was found to be insolvent and took customer funds in, it would be in violation of that contract. (As well as promptly calling that promissory note from DCG.)
Amidst all of this, Larry Summers, the former US Treasury Secretary and World Bank Chief Economist, has quietly left DCG — going so far as to remove all mention of DCG from his own website. Summers joined DCG as a senior advisor in 2016, a year after the company’s founding. [Protos]
Silvergate Bank
Moody’s has downgraded Silvergate Bank’s long-term deposit rating to Ba1 from Baa2 after the crypto bank announced that its customers — who are almost entirely crypto firms now — withdrew $8 billion in deposits in Q4 2022: [Moody’s]
The negative outlook reflects Moody’s view that the bank’s profitability over the near term will be weak along with the risk of further declines in deposits from crypto currency centric firms further pressuring profitability. In addition, the negative outlook reflects the increasing regulatory and legal risks that the firm is currently facing.
Silvergate’s other customers are worried about the bank’s solvency and about the regulatory heat coming its way. Silvergate was key to FTX/Alameda having access to actual money — they helped funnel money to FTX from accounts in the name of Alameda and of Alameda’s dubious subsidiary, North Dimensions.
If Silvergate are found to be complicit in FTX’s fraud, they will be fined. But if there was money laundering and sanctions busting, they could be shut down. They will at the very least be fined. We would guess some individuals will also get a bar from being bankers. Here’s a list of enforcement actions on Federal Reserve member banks. [Federal Reserve]
Silvergate’s 8-K SEC filings this year are full of bad news. We noted Silvergate’s layoffs and writing off its Diem investment last time. [SEC 8-K; SEC 8-K; SEC 10-Q]
FTX
After a series of knock-down-drag-out filings — and the hilarious revelations of how FTX Digital Markets (FTX DM) was functionally Sam Bankman-Fried’s Bahamas partying fund — the US and Bahamas bankruptcies are working together now. John Jay Ray III and his team met in Miami with the joint provisional liquidators (JPLs) handling the FTX DM liquidation, and they’ve reached an agreement. [press release; agreement, PDF]
The Bahamas JPLs will handle everything to do with FTX DM, and the US administrators will handle everything to do with all the other FTX companies. The JPLs will handle the Bahamas real estate and the cryptos being held by the Securities Commission of the Bahamas. (This doesn’t mean that the Bahamas will handle the disbursement of the crypto they have under their control — only that FTX is fine with them holding the funds for now.) The parties will share information. FTX DM’s chapter 15 foreign entity bankruptcy in the SDNY will continue.
We suspect it was clear the US side would win in court, and the Bahamas liquidators realized they weren’t being paid enough to damage their reputations this way. The agreement is subject to approval by the courts in the US and the Bahamas, but it would be surprising for them not to allow it.
The Department of Justice has put out a call for victims of “Samuel Bankman-Fried, a/k/a ‘SBF.’” That’s his rapper name now. [Justice]
Huobi’s real-time meltdown
Huobi has always been a dodgy crypto exchange — even before it was run by Justin Sun from Tron. Huobi has $2.6 billion in reserves, and 40% of that is its own HT token. If you don’t count its own internal supermarket loyalty card points, Huobi is insolvent. [Twitter]
Huobi is desperately searching its pockets for spare change. On December 30, Wu Blockchain reported that Huobi was canceling year-end bonuses and planning to slash half its staff of 1,200 people and cut the salaries of senior employees. Sun denied the rumors. [Twitter; South China Morning Post; Twitter]
Other unofficial reports from small accounts on Twitter said that Huobi was offering to pay its employees in stablecoins — USDC and tethers — instead of actual-money yuan. If they objected, they would lose their jobs. [Twitter]
Employees revolted at being paid in magic beans — so Sun cut off internal communications. On January 4, Bitrun said that “all communication and feedback channels with employees” had been blocked. [Twitter]
Here’s the unofficial details on how Huobi is treating its employees. Those who quit because they’re getting paid in tethers get no severance pay either. This is what a doomed company does. [Twitter]
After initially denying Huobi was cutting staff, Sun finally admitted that Huobi was indeed laying off 20% of its employees in the first quarter of 2023 — after rumors swirled that half of all employees would be let go. [FT]
Huobi users rushed to get their funds off of the exchange. Blockchain analytics platform Nansen noted a wave of withdrawals on January 5 and 6. Following the withdrawals, Peckshield reported a wallet associated with Tron moved $100 million in stablecoins — USDC and tethers — into Huobi. [Twitter, Twitter]
In a lengthy Twitter thread, Sun assures you that your funds are totally safe. We fully expect the exchange to blow up at any moment. [Twitter]
Binance
US prosecutors for the Western District of Washington in Seattle are sending subpoenas to hedge funds for records of their dealings with Binance. John Ghose, formerly a Justice Department prosecutor who specialized in crypto and now a lawyer at compliance vendor VeraSafe, thinks this is about money laundering. [Washington Post]
We noted previously that “BUSD” on Binance is not the BUSD issued by Paxos, which claims to be backed by actual dollars in Silvergate Bank. Binance “BUSD” is a stablecoin-of-a stablecoin, maintained internally. This is the sort of arrangement that’s fine until it isn’t.
It turns out that Binance has been issuing uncollateralised “BUSD” on its own BNB blockchain. Data Finnovation looked at the Ethereum and BNB blockchains and saw that Binance has a history of minting fake “BUSD” internally on BNB. At some points in 2021, there were $500 million to $1 billion of fake dollars circulating on BNB. They’re caught up now, though — so that’s all fine, right? [Medium]
Dirty Bubble thinks Binance US isn’t meaningfully separate from Binance.com, if you look at how the cryptos flow. But that shouldn’t be news to anyone here. [Dirty Bubble]
Reuters is still on the Binance beat. Here’s a special report on Binance’s accounts, as far as can be told. Reuters calls Binance’s books a “black box.” Private companies don’t have to disclose their financials, especially if they’re operating outside all effective regulation — but even Binance’s former CFO, Wei Zhou, didn’t have full access to the company’s accounting records in the three years he was there. We’ve noted previously how regulators have a heck of a time getting the most basic information out of Binance. [Reuters]
John Hyatt from Forbes notes how Binance is spending tens or hundreds of thousands of dollars sponsoring Politico’s Playbook newsletter to reach politicians and bureaucrats. Worked great for FTX! [Twitter thread]
DeFi: Go directly to jail
Discussions of crime on the blockchain hardly ever point out that almost all of what goes on in DeFi was always just straight-up illegal under US law.
Pretty much every token was always an unregistered security. The sort of market manipulations that are standard practice in the DeFi trash fire have been illegal under Dodd-Frank since 2010. And that’s before we get to the rugpulls, hacks, and “hacks.”
The authorities are finally moving in. Every DeFi trader should consider themselves on notice.
Hotshot DeFi trader Avraham “Avi” Eisenberg was arrested in Puerto Rico on December 27 on a Department of Justice (Southern District of New York) indictment for commodities fraud and commodities manipulation in the $110 million trade that took out Mango Markets. [indictment, PDF; case docket]
Mango Markets is a decentralized exchange that runs on Solana. Users can lend, borrow, swap, and trade on margin. The exchange is overseen by a DAO, made up of people who hold MNGO — the native token of the exchange.
On October 11, someone drained the project of $110 million by manipulating the platform’s price oracle. After others had traced it to him, Avi Eisenberg came forward and explained the trade.
Eisenberg sold MNGO perpetual futures from one account he controlled to another account also under his control. He then bought large amounts of MNGO, which had the effect of increasing the value of his large holding of MNGO perpetuals. He then borrowed against these holdings and withdrew $110 million in assorted cryptocurrencies.
This also rendered the Mango platform insolvent. Eisenberg himself explained that the insurance fund in place was “insufficient to cover all liquidations.” He gave back some of his trading profits. [Twitter; Bloomberg]
I believe all of our actions were legal open market actions, using the protocol as designed, even if the development team did not fully anticipate all the consequences of setting parameters the way they are.
Eisenberg’s lawyer will likely explain his client’s erroneous legal reasoning to him.
Eisenberg wasn’t just arrested, he was denied bail as a flight risk — he has significant ties outside the US, he already left the US for two months just after the alleged offense, he likely has crypto stashed away somewhere, the charge carries a heavy penalty, and his background could not be checked. (Compare Sam Bankman-Fried’s release on bail.) [Order of detention pending trial, PDF]
It’s not clear why prosecutors went after Eisenberg in particular. We’d guess the CFTC and DoJ were looking for someone to make an example of. The bit where Eisenberg tweeted a complete confession probably helped, much as SBF’s confession tour of the press helped get him indicted.
What Eisenberg did to Mango was not remarkable at all. DeFi traders pull this nonsense all the time. Perhaps you don’t think DeFi trading shenanigans should be crimes, and that’s nice for you that you think that.
As Avi tweeted on October 19: “What are you gonna do, arrest me?” [Twitter, archive]
Send us money! Our work is funded by our Patreons — here’s Amy’s, and here’s David’s. Your monthly contributions help greatly!
The 2021–2022 crypto bubble made a lot of traders look like geniuses. Then the bubble popped, the tide went out, and the traders turned out to be hugely overleveraged formerly-lucky idiots.
Sociologists know that when a cult prophecy fails, most cultists exit the cult, and the remaining factions turn on each other.
Crypto watchers know that this can also be exceedingly funny.
Imaginary assets, real liabilities
Sam Bankman-Fried’s boosters compare him to the legendary banker J. P. Morgan. He’s spent the crypto collapse bailing out ailing companies to keep the entire market afloat.
Bankman-Fried runs three large crypto enterprises:
Alameda Research, his crypto hedge fund;
FTX, his unregulated offshore crypto casino that doesn’t allow US customers;
FTX US, his exchange for US customers that purports to operate under US law and accepts actual dollars.
On November 2, Coindesk’s Ian Allison posted an explosive story on a partially leaked balance sheet for Alameda. [CoinDesk]
Of Alameda’s $14.6 billion in claimed assets, $5.8 billion is FTT — FTX’s internal exchange token. You can use FTT for cheaper trading fees and increased commissions. FTT is also traded outside FTX.
Allison also noted that $5.8 billion is actually 180% of the circulating supply of FTT!
Alameda’s liabilities are listed at $8 billion, most of which is $7.4 billion of loans — quite a bit of that from FTX.
Alameda is super cashed-up … if you account for FTX’s own FTT token at mark-to-market, and not what you could actually get for that much of their private illiquid altcoin.
To make matters worse, Dirty Bubble notes that a lot of Alameda’s other assets are crypto tokens from other Sam Bankman-Fried enterprises. [Dirty Bubble Media]
Alameda and FTX seem to have printed FTT, pumped its price using customer assets — FTX was quite open that it was the FTT market maker, and there’s no other real demand — and used the mark-to-market value of their illiquid made-up token as collateral for loans, or as evidence that pension funds should invest in crypto companies.
This works great while number is going up!
Regular readers will know that this sort of flywheel scheme is precisely what Celsius Network tried to run with their CEL token and Nexo with their NEXO token. Celsius is bankrupt, and regulators have noticed that Nexo is only solvent if you allow them this particular tricky bit of accounting.
Alameda CEO Caroline Ellison said the leaked balance sheet Coindesk got a hold of was “incomplete,” and there were $10 billion in assets not listed there. [Twitter, archive]
The crypto world spent a few days wondering if Alameda was the next Three Arrows Capital.
CZ pulls the plug
Large flows of FTT were noticed on the blockchain on November 6. Binance CEO Changpeng Zhao confirmed that this was Binance selling off its FTT: [Twitter, archive]
“As part of Binance’s exit from FTX equity last year, Binance received roughly $2.1 billion USD equivalent in cash (BUSD and FTT). Due to recent revelations that have came to light, we have decided to liquidate any remaining FTT on our books.”
The remaining FTT that Binance sold was worth $530 million. [Bloomberg]
CZ was also annoyed at Bankman-Fried’s lobbying efforts for crypto regulation in Washington: “We won’t support people who lobby against other industry players behind their backs.” [Twitter, archive]
The crypto market is incredibly shaky. Alameda and FTX operate as separate corporations, but the market seems to think they’re closely entwined. Trouble at Alameda leads to worry about FTX.
So panicked holders, thinking Alameda might be insolvent, started withdrawing funds from FTX as fast as possible — and hardly deposited anything at all.
FTX paused all withdrawals on the Ethereum, Solana, and Tron blockchains around 11:37 a.m. UTC on November 8, according to Steven Zheng at The Block. [The Block]
Finally, just after 4 p.m. UTC, Bankman-Fried and CZ announced that Binance was buying FTX. Specifically, they have a non-binding letter of intent, pending due diligence. [Twitter, archive; Twitter, archive]
Essentially, CZ started a bank run on FTX, then swooped in to buy his competitor after breaking it. CZ did to Bankman-Fried what Bankman-Fried has been accused of doing to a string of others.
At present, this is only a letter of intent, not a done deal — CZ is making Bankman-Fried suffer. He could just let FTX go hang.
How screwed are FTX and Alameda?
CZ said FTX was in a “significant liquidity crunch.” This is the sort of “liquidity crunch” that everyone else calls “insolvency.” If it were just liquidity, FTX could have borrowed against its assets and found another way out of this. [Twitter, archive]
We don’t know for sure that Alameda was trading with FTX customer funds — but this sort of fractional reserve operation is the only not-entirely-fraudulent reason that FTX could have run out of customer funds in this way.
Bankman-Fried claimed on November 7 that “FTX has enough to cover all client holdings. We don’t invest client assets (even in treasuries).” This appears not to have been true, and he later deleted the tweet. [Twitter, archive]
If FTX couldn’t get its funds back from Alameda quickly, that would have then led to the liquidity crunch.
What about FTX US?
Bankman-Fried was quick to reassure customers that FTX US was not affected and that it was “fully backed 1:1, and operating normally.” So at least FTX US explicitly claims it isn’t playing the markets with your deposits. [Twitter, archive]
The separation of customer funds and platforms is the whole point of FTX US versus FTX. It’s there to make Sam look good to regulators.
But it’s all Sam Bankman-Fried. It’s Sam’s left pocket versus his right pocket.
We think that if your paycheck goes into FTX US, you probably want to stop doing that immediately.
What happens next? It’s contagion time!
Alameda has likely been borrowing against the FTT it held — the FTT that is now crashing. (Earlier today, FTT was worth $19; as we post this, it’s trading at $4.60.)
Binance might rescue FTX, but it’s sure not going to rescue Alameda.
This means a series of margin calls by everyone who’s lent to Alameda. If Alameda defaults, those lenders will likely end up with worthless FTT.
BlockFi and Genesis have a pile of money in Alameda. BlockFi is or will be owned in some unspecified manner by FTX US, but that doesn’t make the books balance — there’s already a rumor of a 24-hour margin call by BlockFi against Alameda. [Twitter]
Remember that Three Arrows Capital collapsed when their UST turned out to be worthless. This then took out a pile of other crypto trading firms — most notably Celsius Network and Voyager Digital.
We’re left with two questions:
Who is lending to Alameda?
Who’s lending to those lenders — and risks going down in turn?
The crypto market is not happy. Bitcoin has been up and down like a yo-yo today, from $19,500 just before 4 p.m. UTC to a peak of $20,500 and a trough of $17,500.
We predict more market excitement to come — specifically, a possible Alameda collapse, a chain reaction of lender failures, and attempts to cover sudden balance-sheet holes, much as we saw after the Terra-Luna and Three Arrows collapses.
But Caroline Ellison from Alameda insists there’s another $10 billion behind the sofa or something. Maybe it’s all fine!
So, the thing that is bringing down crypto is: The largest exchange, which launders money for for the Iranians, lost trust in the second largest exchange, whose founder said that crypto is basically a ponzi scheme on the Odd Lots podcast?
Crypto has crashed, and some of our readers are asking us why the price of bitcoin has been holding steady at around $19,000 to $20,000 for the past few months. Why won’t it go down further?
We think the price of bitcoin is a high wire act. If the price drops too low, some leveraged large holders could go bust. So the number needs to be kept pumped above that level. If the price goes up too far, the suckers — not just retail, but the bitcoin miners — may be tempted to cash out at last.
The idea is to pump just enough to keep the price up — but not so much that suckers dump their bitcoins directly into the pump.
If too many bagholders try to sell, what quickly becomes obvious is there are no actual buyers. At least, none with real money.
The party is over. Retail investors have all gone home, so there are no more suckers getting in line to pump the price up anymore. Coinbase’s 10-Q showed a drop in retail dollars.
In addition to a dearth of real dollars, there’s also been a dearth of fresh tethers coming in since June. That dearth lasted until October 25 — when a billion tethers were printed and prices suddenly jumped 10%, just in time to liquidate a pile of short-margin traders on FTX.
Bitcoin miners in North America have been taking on increased debt, so there’s still no real incentive for them to sell their bitcoin. Core Scientific is the exception, as we note below, because they’re running out of cash — not least because they’re stuck with hosting Celsius.
Bitcoin derivatives — assets that derive their value from bitcoin — aren’t doing well either. The ProShares Bitcoin Strategy ETF (BITO) tracks the CME’s bitcoin futures. These are just bets in dollars on the price of bitcoin. Bloomberg Intelligence analyst James Seyffart says: “If you just want exposure to Bitcoin” — i.e., not doing anything so gauche as touching a bitcoin — “BITO is the best option in the ETF landscape, at least in the US.” But in the more than a year that it’s existed, BITO has performed even worse than bitcoin itself. BITO holders have mostly stayed holding, so its holders are just like bitcoin bagholders too. [Bloomberg]
Celsius: the state of play
Celsius Network is dead. It’s an ex-parrot. Most of the back-and-forth in the bankruptcy is over the spare change that might be in the corpse’s pockets. Also, the spare change is being nibbled away by lawyers’ fees and operational costs. So the creditors think it’s time to see what they can get by just selling it all for parts.
At the same time, Celsius is saying “I’m not dead yet!” and throwing up plans to come back to life. That’s the difference between a Chapter 7 liquidation and a Chapter 11 reorganization — Celsius has to pretend it has a future.
And also, the US Trustee got an examiner on the case, to see just what happened here — if this bankruptcy was the result of ineptitude … or of Celsius being a scam.
The examiner’s report is a wild card. It could blow up the whole bankruptcy proceeding. We think the Trustee, who is part of the Department of Justice, suspects Celsius is a crime scene.
Celsius’ bidding process approved
Judge Martin Glenn has approved the bidding procedure plan for Celsius to sell virtually all of its assets — including its mining business. He is quite concerned that this business is, in bankruptcy jargon, a “melting ice cube,” and wants to make the sale happen for the sake of the creditors. [Memorandum Opinion and Order, PDF]
The initial bid deadline is November 21. Final bids are due on December 12. An auction, if necessary, is scheduled for December 15.
The court directed the Trustee to “promptly” appoint a privacy ombudsman with experience in consumer privacy laws to protect consumer data. The Trustee has appointed Lucy L. Thompson. [Appointment, PDF; Order, PDF]
The Trustee, the examiner, and the consumer privacy ombudsman will be able to listen in on the auction — but they can’t interfere.
Celsius is required to submit any stalking horse approval to the court. A stalking horse is a bid that is arranged in advance to prevent other bidders from making lowball offers.
The final deadline for bids falls after the examiner begins to reveal her findings. An interim report is due on November 18, and an initial report is due on December 10.
Your keys, whose coins?
The court has yet to decide whether the contents of Celsius Custody and Withhold accounts belong to the individual customers, or to the bankruptcy estate.
The issues are set to be heard on December 7 and 8, and they’ll raise a host of questions about what constitutes ownership in crypto. If someone else controls the keys to your crypto, is that really your crypto? There is no straightforward answer to this.
In a letter filed with the court on October 17, Judge Glenn notes: “cases involving cryptocurrency may raise legal issues for which there are no controlling legal precedents in this Circuit or elsewhere in the United States or in other countries in which cases arise.”
So, he’ll be using the Law Commission of England and Wales’ lengthy and detailed “Digital Assets Consultation Paper” as his framework in this case. [Doc 1073, PDF; Consulting Paper]
We think he’ll be particularly interested in Chapter 16 of the paper, which specifically talks about custody and what happens in an insolvency.
This is surprisingly big news for US crypto in general — it will introduce a whole swathe of legal thinking that’s entirely new for US crypto regulation and jurisprudence. This may turn out to be a lasting consequence of the Celsius bankruptcy.
Who owns cryptos in custody is already fraught. A few months ago, it turned out that cryptos held in Coinbase Custody are not the customer’s cryptos, being held by Coinbase — instead, they’re assets of Coinbase that are liabilities Coinbase has to the customer, just like cryptos on deposit on the Coinbase trading platform. This is precisely not what Coinbase was selling Custody to its customers as! But that’s how SEC regulations said to account for it.
No equity committee for you
Judge Glenn has denied the motion for an official equity committee, which would have allowed Celsius investors to bill their professional fees to the bankruptcy estate. We discussed this motion last time.
It’s actually not uncommon for equity security holders to request the appointment of official equity committees to represent their interests in bankruptcy cases — and to get a formal seat at the negotiations table.
But in this case, Judge Glenn wasn’t convinced. He thinks the equity investors already have adequate representation in the form of existing stakeholders, particularly the board of directors, who literally represent the owners of the company. The court also feels there is little chance investors will recoup any of their $400 million — it’s normal in bankruptcy for equity holders to get zero — and the costs involved are unlikely to benefit the estate. [Doc 1166, PDF]
The equity investors also want Celsius to list liabilities and assets in dollars, not crypto — which is quite normal even for volatile and illiquid assets like crypto. [Doc 1183, PDF]
Discharge objections
The purpose of filing Chapter 11 is to wipe out debt and start anew. But a party can object to the discharge of a particular debt — or the entire bankruptcy case — by filing an adversary proceeding, as we detailed last time.
In Chapter 11, the deadline to file objections to dischargeability is 60 days after the first creditors’ meeting. Celsius has agreed with state regulators to extend the states’ deadline by six months, to April 18, so the states can finish their investigations. And they’ve agreed on the same with the Federal Trade Commission. [Doc 1107, PDF; Order, PDF]
The Securities and Exchange Commission wants to extend its deadline to January 17. If Celsius raised money in a way that knowingly violated securities law or other laws — which they totally did, come on — then those debts might not be dischargeable. [Order, PDF]
Other Celsius stuff
As we mentioned last time, Core Scientific doesn’t want to keep paying the ever-increasing electricity bills for hosting Celsius’ bitcoin mining. Core Scientific, Celsius, and the Unsecured Creditors’ Committee are asking Judge Glenn to schedule a hearing on the matter on or after November 9. [Scheduling, PDF]
Celsius’ bills are a big problem for Core Scientific, who are already short on cash. Core Scientific dumped $20 million of bitcoin in September, and still only has $27 million in cash on hand — they burned through $25 million in the last month. They are on the verge of filing for bankruptcy themselves: [SEC]
“Furthermore, the Company may seek alternative sources of equity or debt financing, delay capital expenditures or evaluate potential asset sales, and potentially could seek relief under the applicable bankruptcy or insolvency laws. In the event of a bankruptcy proceeding or insolvency, or restructuring of our capital structure, holders of the Company’s common stock could suffer a total loss of their investment.”
Data Finnovation thinks he’s found Tether’s loans to Celsius, which are a major point of contention in the Celsius bankruptcy. “We found the Tether-Celsius loans, Tether’s equity investment into Celsius, and can therefore prove a lot about both defects in the Celsius business model and questionable conduct by Tether.” [Data Finnovation]
There’s failing upward, and then there’s whatever this is: ex-Celsius exec Aaron Lovine joins JPMorgan as the new executive director of crypto regulatory policy! [Reuters]
The next Celsius omnibus hearing is November 1. The November 30 omnibus hearing has been rescheduled for December 5. [Doc 1169, PDF]
Voyager Digital
Voyager is trying to sell itself off to FTX US. The deal is still tentative. Texas is concerned that FTX is offering unregistered securities to US retail customers. New York is sniffing around Voyager as well.
Voyager’s sale to FTX is part of Voyager’s broader bankruptcy plan, which creditors need to vote on next month. If they vote yes, the court still has to confirm the plan. A hearing for plan confirmation is set for December 8. In the meantime, Judge Micheal Wiles wants Voyager to stay open to better offers.
The sale to FTX is valued at about $1.4 billion, of which $51 million is in cash. As part of the sale, FTX US would move customers onto its platform and return them 72% of their claims. [Second Amended Plan, PDF; Bloomberg; Bloomberg Law,archive]
Only creditors who transition to FTX US will receive crypto — customers who don’t go to FTX US will receive cash from the bankruptcy estate. FTX US doesn’t support Voyager’s VGX token, but it has offered to purchase all VGX for $10 million.
Voyager is pushing the FTX sale plan hard. Creditors have until November 29 to cast their votes. [Voyager, archive]
We mentioned on October 16 that Texas objected to the Voyager sale because the state was going after FTX, and then the rest of the crypto media covered the story the day after we posted it. The Texas Tribune spoke to Joe Rotunda, Director of the TSSA Enforcement Division, who discovered that FTX would let him trade securities from his Austin office. [Texas Tribune]
In its response to objections, Voyager holds that the sale to FTX is within its business judgment. For Texas’ objections regarding FTX, they’re adding a note that nothing should be construed as restraining state regulators. [Doc 558, PDF, Doc 559, PDF]
The New York Department of Financial Services has applied for an order lifting the automatic bankruptcy stay on an action against Voyager to “permit DFS to proceed with an investigation into whether the Debtors, or any one of them, have engaged in fraudulent activity and/or violated applicable law with respect to unlicensed cryptocurrency business activities within New York.”
There’s a provision in section 362 of the Bankruptcy Code for “police action” to proceed during a stay. Payment of a fine might be delayed — but that shouldn’t stop an investigation. The DFS outlines why it thinks it could just proceed anyway — but it’s asking nicely. There’s a hearing on November 15. [Doc 573, PDF]
The fall of Three Arrows Capital
Kadhim Shubber from the Financial Times spotted a hilarious detail in a disclosure statement that Voyager filed on October 17 — on precisely how Three Arrows Capital screwed them over. [Doc 540, PDF, p47 on; Twitter]
Terraform Labs’ UST and luna tokens collapsed in mid-May. This sent 3AC bust, immediately — they were up to their necks in Terraform’s Anchor protocol and had a ton of UST.
Voyager asked their debtors if they had been affected by the UST-luna crash. Voyager’s contact at 3AC assured them everything was fine.
Later that month, 3AC reached out to Voyager asking to borrow even more from them — when 3AC was already 25% of Voyager’s loan book. Voyager said no.
Celsius froze withdrawals on June 12. Voyager again reached out to its debtors, asking how things were. Their 3AC contact assured Voyager on June 13 that 3AC was not exposed to Celsius.
Voyager put out a press release on June 14 assuring everyone that everything was fine. [Press release, archive]
Upon seeing the press release, Voyager’s 3AC contact called them straight away and told them that the founders of 3AC had gone silent and weren’t answering queries from their own employees. Their contact suggested that Voyager should recall all of its loans to 3AC immediately. This was the point at which Voyager knew that it, too, was bust.
We now know, of course, that 3AC’s founders had skipped Singapore sometime in late May — as soon as they realized there was no way to come back from the UST-luna collapse. They just locked the office doors and vanished. We even have a photo of the mail piling up on the office floor.
(You can tell it’s a rug pull from the lack of a carpet.)
Teneo is the court-appointed receiver in 3AC’s bankruptcy. Teneo wants US Judge Martin Glenn — yes, the same one overseeing Celsius — to let them subpoena 3AC founders Zhu and Davies via Twitter and email.
Teneo previously requested that Advocatus Law, the Singapore law firm representing the founders, accept the service of papers. Advocatus resisted. [Doc 54; Doc 55; The Block]
The CFTC and SEC are looking into the collapse of 3AC, according to “people familiar with the matter.” The question is whether 3AC broke any laws by misleading investors about the strength of its balance sheet and not registering with the agencies. [Bloomberg]
Terra-Luna
Laura Shin’s podcast with Terraform Labs founder Do Kwon is now up! David Z. Morris at CoinDesk dissects it, straight-up calling Kwon a sociopath. [Unchained; CoinDesk]
“To the crowd there assembled, I was the realization of their dreams….The ‘wizard’ who could turn a pauper into a millionaire overnight!”
~ Charles Ponzi
Celsius Network
For years, Celsius founder Alex Mashinsky told people banks were the enemy, and Celsius was your friend. Now everyone is wondering where their money went. Here’s our summary of the current situation at Celsius:
The money is gone. There’s almost nothing left for creditors.
The lawyers are stripping the last shreds of meat off the bones.
Celsius’ ludicrous plan to run a bitcoin mining operation to get out of debt is a way for execs to put off liquidation a bit longer while they fill their pockets.
Insiders will keep paying themselves with the remaining funds for as long as they can get away with it.
An examiner report could lead to a liquidation, possibly more. Any party can file a motion to convert to a liquidation “for cause.” The sooner that happens, the better, as far as we’re concerned. It’s time to close the curtains on this clown show.
We can hope for criminal charges — but those would require something like solid evidence of a deliberate Ponzi scheme, which could well come from the examiner, once appointed.
Both the Trustee and the judge have the power to refer a case to the Department of Justice. If the examiner finds evidence of federal crimes, the case will have already been made.
Let’s review the four types of Celsius customers:
Earn: Celsius promised up to 18% APY if you gave them your crypto to invest in … secret things. Crypto deposited into Earn accounts became the property of Celsius. The Earn product resembled an unregistered securities offering. When you give someone your money and they do stuff with it to make more money, that’s an investment contract — a security.
Borrow: Celsius let you take out loans against your crypto assets. Borrow customers were usually crypto gamblers borrowing USDC (casino chips) to play the DeFi markets. You paid interest monthly, and then paid the principal in one lump sum at the end. Similar to Earn, the crypto you put up as collateral became Celsius property.
Custody: Celsius launched a Custody solution on April 15, 2022 — 89 days before it filed for bankruptcy, making all of those funds subject to a 90-day clawback under the bankruptcy code.
Custody was a response to state regulators casting an acerbic eye upon Celsius’ Earn product. “New transfers made by non-accredited investors in the United States will be held in their new Custody accounts and will not earn rewards,” Celsius said. [Celsius blog post, archive]
Custody essentially served as storage wallets. In the bankruptcy proceedings, this has led to ongoing discussion on whether Custody account holders are secured creditors who will get their money back right away … or unsecured creditors, whose funds are now part of the bankruptcy estate. Judge Martin Glenn, who is preceding over the bankruptcy, says he hopes to resolve the matter sooner rather than later.
Withhold: If you lived in a US state where Celsius became unable to offer serviceable Custody accounts, you had to move your Earn funds to Withhold accounts, where they remained frozen. The Withhold group accounts for $14.5 million of the $12 billion in digital assets stuck on Celsius when it stopped withdrawals in June.
The big question now in the Celsius bankruptcy is how to classify creditors: who’s first in line to get their money back, and who’s last in line? This is why, in addition to the official Unsecured Creditors’ Committee (UCC), there are currently three ad-hoc groups, all vying to get the judge’s attention.
Celsius believes that funds held in Earn and Borrow accounts are property of the bankruptcy estate, meaning those customers will have to wait until the lawyers finish to see what’s left. But Celsius wants to return money held in specific Custody and Withhold accounts to customers now. [Motion, PDF]
Celsius argues that $50 million of the $120 million in Custody and Withhold accounts should go back to customers, if they meet one of the following criteria: [Twitter]
The accounts are pure Custody or pure Withhold with funds that were transferred from an external wallet — not Earn or Borrow programs.
In instances where the Custody and Withhold accounts do contain funds transferred from the Earn or Borrow programs, they want customers to have their money back, if the transfers were less than $7,575, a specific legal threshold under the bankruptcy code clawback provision, 11 U.S. Code § 547(c)(9). This is an adjusted amount. [Twitter; LII; LII]
Much of the discussion at the third bankruptcy hearing on Sept. 1 centered around whether custody holders should be able to get their money back. [Coindesk]
During the hearing Judge Martin Glenn also emphasized: “Nobody is getting their money back if they remain anonymous. Let me make that clear.” [Twitter]
According to new financial docs, Celsius seems to have magically found $70 million “from the repayment of USD denominated loans.” Imagine that! The company originally forecasted it would run out of money by October, but now it has more runway. [Docket #674, PDF; Coindesk]
Last month, the Trustee called for an independent examiner and filed a motion to show cause. [Motion, PDF] Creditors — the UCC and the ad-hoc groups — are worried that an examiner will drain more of their dwindling pool of funds.
David Adler, a lawyer with the firm McCarter & English, representing four Celsius borrowers, says an examiner will cost too much money. The group thinks the job can be done with a Chapter 11 Trustee. [response, PDF]
The Vermont Department of Financial Regulation says Celsius sure looked like a Ponzi scheme and is urging the court to appoint an examiner. Vermont is concerned about Celsius’ offerings of unregistered securities. “At a minimum, Celsius has been operating its business in violation of state securities laws. That improper practice alone warrants investigation by a neutral party.” Vermont also alleges that without Celsius’s holdings of its own native CEL token, the firm has been insolvent since at least February 2019. [FT; court filing, PDF]
Celsius has agreed to the Trustee hiring an examiner — as long as the examiner does not duplicate work already done by the UCC. Celsius says they’ve reached an agreement with the Trustee on this point. [response, PDF]
The next Celsius bankruptcy hearing is set for Sept. 14. There is also a hearing scheduled for Oct. 6 to discuss the custody account holders.
Meanwhile, Celsius has announced a Celsius-themed Monopoly game! It appears to be an unlicensed knockoff — not officially endorsed by Hasbro. This seems to have been in the works since well before the bankruptcy. [Web 3 Is Going Great]
Alex Mashinsky had a favorite slogan: “Unbank Yourself.” His wife Krissy is now selling a new T-shirt: “Unbankrupt Yourself.” [Twitter]
Daniel Leon, one of the founders of Celsius, says his 32,600 shares of Celsius stock are worthless. It looks like he wants to use them as a tax write-off. [Docket 719, PDF]
Voyager Digital
On Aug. 30, the US Trustee held the first 341 creditors’ meeting for Voyager, where the Trustee and the creditors got to ask CEO Steven Ehrlich questions about the bankruptcy — under oath. The Trustee is an agent of the federal government. If you lie to the Trustee, it is like lying to the FBI — a federal crime.
Listening to creditors, it’s clear that they’re upset and confused as to why their crypto, including USDC, has become part of the bankruptcy estate. They thought the money was theirs and they could have it back at any time. It didn’t help that Voyager gave users the false impression that their money was FDIC insured.
Ehrlich kept referring the distraught creditors back to the customer agreement, which many had never read, or never fully understood.
Ehrlich noted during the meeting that Voyager is still staking crypto. He said the firm had filed a motion asking the court if it’s okay to stake even more. The court has allowed Voyager to continue staking pursuant to their ordinary business practices. The UCC oversees their staking. [Docket 247, PDF]
Staking is risky!
Some staking, such as proof-of-stake staking, doesn’t risk losing the coins in that currency. Once Ethereum switches to proof-of-stake and, perhaps several months later provides a way for you to withdraw your stake, there’s little risk when your ETH staking is denominated in ETH.
But most staking activity involves first moving your liquid crypto (such as ETH) into a company’s own crypto (such as CEL or UST), which is basically a self-assembled Ponzi scheme for staking. And a lot of “staking” is just lending to a DeFi structure, which means you’re at risk even when it’s denominated in that staked crypto.
Voyager says it got multiple bids to buy the company. The deadline for bids was Sept. 6 — extended from Aug. 26 — so now it’s headed to auction. The auction will be held on Sept. 13 at 10 a.m. ET in the New York offices of Voyager’s investment bank Moelis & Co. A court hearing to approve the results is scheduled for Sept. 29. [Bloomberg; court filing, PDF]
What is there left to buy anyway? That’s what we want to know. Voyager is in much the same position as Celsius — its liabilities are real, but its assets are fake. What does FTX get if it buys Voyager?
The Georgia Department of Banking and Finance has a limited objection to the sale of Voyager. Voyager is a licensed money transmitter in the state of Georgia. If the auction is a success, the department is asking the court to stay the acquisition unless or until the new buyer is also licensed in the state as a money transmitter. We wonder how harshly that will limit the field of buyers. [limited objection, PDF]
Bankruptcies are expensive. Quinn Emanuel, special counsel for Voyager, has submitted their first-month fee statement: $244,080. That’s for 196.7 hours of work. The lead lawyer charges $2,130 an hour for his services. Voyager brought Quinn Emanuel on board in July to look into the possibility of insider trading at 3AC. [Doc 358, PDF; Bloomberg Law]
The next Voyager omnibus meeting is on Sept. 13 at 11 ET. The deadline for filing a proof of claims is Oct. 3.
SkyBridge
FTX is paying an undisclosed sum for a 30% stake in Anthony Scaramucci’s SkyBridge, and SkyBridge will buy $40 million of crypto to hold “long-term.” Scaramucci is not giving up any of his own share of SkyBridge. [Bloomberg; FT]
SkyBridge used to be a general hedge fund then went hard into crypto. “We will remain a diversified asset management firm, while investing heavily in blockchain,” says Scaramucci.
The weird part of this is that SkyBridge is already an investor in FTX and FTX US. We’re reminded of how FTX “bailed out” Voyager, then it turned out that Voyager owed FTX a bundle.
Other stuff
Three Arrows Capital (3AC) withdrew 20,945 staked ether (worth about $33.3 million) from Curve and $12 million in various assets (wrapped ETH, wrapped bitcoin, and USDT) from Convex Finance. Nobody seems to know why they withdrew the funds. [The Block]
The Algorand Foundation has admitted it had $35 million (in USDC) exposure to collapsed crypto lender Hodlnaut. [Algorand blog]
Another class action has been brought against Terraform Labs. This one was brought by Matthew Albright. He is represented by Daniel Berger of Grant & Eisenhofer. The claim alleges Terraform violated the RICO act by artificially inflating the price of their coins and publishing misleading information following UST and luna’s collapses to cover up for an $80 million money laundering scheme. “UST amounted to a Ponzi scheme that was only sustained by the demand for UST created by Anchor’s excessive yields.” The proposed class is all individuals and entities who purchased UST and luna between May 1, 2019, and June 15, 2022. [Complaint, PDF]
From May: Chancers, the Korean crypto streamer who went to Terraform CEO Do Kwon’s house. [BBC]
“Crypto sceptics are a bit like the boy who cried wolf, except a villager gets eaten every damn time and the rest of them are still going ‘why did you cry wolf, FUDster?'”
— GunterWatanabe
Toot toot, I’m a boat
Everyone trusted Zhu Su and Kyle Davies at Three Arrows Capital (3AC). They knew what they were doing, right?
Only now, the pair have disappeared — and their fabulous yacht is back on the market. “The unclaimed yacht looms as a slightly ridiculous avatar of the hubris, greed, and recklessness of the firm’s 35-year-old co-founders.” [Intelligencer]
3AC talked like competent hedge fund guys — which straight away made them look a zillion times smarter than the rest of the crypto bros. But they weren’t good at this at all. They had no clue on how to hedge their bets. The 2021 crypto bubble saved 3AC’s backside — they could keep looking like geniuses a little longer.
3AC used a “spray and pay” strategy: invest in a whole pile of trashy minor altcoins, and hope for a return.
On May 26, 2022 — by which time 3AC had likely already abandoned their Singapore office and skipped the country — Davies tweeted that “it doesn’t matter specifically what a VC invests in, more fiat in the system is good for the industry.” This is correct, if you view crypto as a single unified scam casino. [Twitter]
Articles about the wider crypto collapse talk about 3AC a lot. This gives the impression that 3AC is fundamentally to blame.
3AC deserves a lot of the blame because they were greedy and stupid. But everyone else was also greedy and stupid.
Terraform’s Anchor protocol paid 20% interest rates — the highest available. 3AC offered the next-highest interest rates available, by putting the money into UST/luna and skimming some off the top.
So everyone else put their money into Anchor and 3AC. Many of these were feeder funds, who skimmed a bit off the top themselves.
You can picture the crypto investment market as an inverted pyramid, where the point is UST/luna — a Ponzi box full of hot air. 3AC was the box above that. Everyone else is in a funnel down to those two. The bottom two Ponzi boxes collapsed, and the whole inverted pyramid came tumbling down with them.
Terraform was running the load-bearing Ponzi box; we put most of the blame on Do Kwon. But we also blame Terraform’s enablers — the rest of the crypto investment firms.
There’s a lot to blame 3AC for — the way that Zhu and Davies just kept going “this is fine” even as they knew it was going to hell. They were greedy fools.
But anyone who put their money into 3AC was also a greedy fool.
Voyage to the bottom of the sea
Voyager Digital’s official unsecured creditors’ committee (UCC) held a town hall on August 11. The meeting was led by UCC counsel Darren Azman and Chuck Gibbs at McDermott Will & Emery. Amy wrote up some notes. [YouTube; presentation]
Azman says: if you want to buy Voyager, hurry! The deadline to submit bids is August 26. Sam Bankman-Fried’s FTX has already submitted a bid. It may have been a low-ball bid, but SBF’s Alameda Research is a borrower from, lender to, and shareholder of Voyager. We expect FTX will want Voyager the most — if anyone really wants it at all.
Azman and Gibbs say that Voyager is aiming to file a restructuring plan in October — and that creditors might get their money back as soon as November! What money there is, anyway.
This time frame would be welcome, but isn’t plausible — Mt. Gox (2014) and QuadrigaCX (2019) creditors are still waiting for their money years later.
Meanwhile, the boys gotta get paid. Voyager wants $1.9 million to pay bonuses to 38 employees as part of a “Key Employee Retention Plan.” (KERP). In a bankruptcy, KERP is a way to incentivize upper management to keep working throughout the bankruptcy — and not flee the sinking ship.
Voyager is also seeking to file under seal all pertinent information about KERP participants — their names, job titles, supervisors, salary, and proposed bonus. These folks are definitely not insiders, and Voyager can’t give you their names — but trust them.
When your ship is sinking, the last thing you want is people leaving with all your deep, dark secrets. Keep them happy — and quiet.
The US Trustee objects to the sealing: “The payment of bonuses, let alone bonuses in such a significant sum to such a limited number of individuals under the circumstances that brought Voyager to this Court, should not be countenanced.”
The UCC also objects — of Voyager’s 350 employees filed, only 12 have resigned so far. Nobody’s leaving. In fact, nobody’s been asked to leave.
Creditors are pissed that Voyager hasn’t bothered to reduce employee headcount at all, given the platform has been frozen since July 1. What are the employees doing, other than collecting paychecks? [motion, PDF; objection, PDF; objection, PDF; Coindesk]
Just days before Bernie Madoff was formally charged by the SEC, he wanted to distribute hundreds of millions of dollars in early bonuses to employees. We’re sure he was just being nice to them too. [National Post, 2008]
Celsius: When you’re in a hole, keep mining
Celsius submitted their Budget and Coin Report, reflecting the funds they were holding as of July 29. (They filed for bankruptcy on July 13.) The company plans to file similar reporting on a monthly basis throughout their bankruptcy. [Notice of filing and coin report, PDF]
The report shows just how much money Celsius wants to set on fire. Over a three-month period from August through October, Celsius is allocating $14 million to payroll, $57.3 million to mining, and $33 million to restructuring costs. By the end of October, they’ll be operating hugely in the red.
Those negative numbers were the elephant in the room during Celsius’ second-day hearing on August 16. Amy summarized this hearing previously. Here’s the slide deck that Celsius lawyers from Kirkland & Ellis presented. [presentation, PDF]
Celsius has this mad idea that they can crypto-mine their way out of bankruptcy. First, they plowed customers’ money into stunningly risky investments. [Twitter thread] Now they want to feed the remaining customer funds into their money-gobbling bitcoin mining operation.
Celsius sought approval from the court to sell their mined bitcoin — so they could use the proceeds to fund Capex for their Texas mining operation.
The US Trustee’s attorney, Shara Cornell, objected on the grounds that Celsius wasn’t being transparent about what bitcoin it planned to sell, or how much the mining business was expected to generate.
Despite those objections, Judge Martin Glenn approved the motion — though he had reservations: “At bottom, this is a business judgment decision that may turn out to be very wrong, but we will see.”
We think he should have had stronger reservations. Celsius says its mining will be profitable in January, but the numbers don’t add up.
Celsius expects to generate 10,118 BTC this year and 15,000 BTC next year. Last year, they only mined 3,114 BTC, according to filings. The company has paid for 120,000 rigs, of which 49,000 are in operation.
Even if Celsius mines and sells 1,000 BTC per month, that’s only $2 million when their hosting costs are $19 million per month, with only half the rigs operational. This business simply isn’t viable. It’s just an attempt by Celsius CEO Alex Mashinsky to postpone his company’s liquidation.
Well, that was a huge arithmetic error. Sorry about that. We blame the intern. (i.e.,ourselves.)
A question of trust
Celsius also wanted to sell some de minimis assets. These turned out to be notes/bonds and equity in other crypto companies — but Celsius hadn’t bothered to mention that bit.
Cornell from the US Trustee said, “The motion makes it sound like the debtor is selling office furniture.” Judge Glenn said he had “no inkling the debtor was proposing to sell millions of dollars of equity or notes/investments in other crypto businesses.” He did not approve the motion.
US Trustee William Harrington has had enough of Mashinsky messing around. Days after the hearing, Harrington filed a motion requesting the court appoint an examiner to investigate what’s really going on inside Celsius and present their findings to the court. [motion, PDF]
As grounds for hiring an examiner, the Trustee lists allegations of incompetence or gross mismanagement — including the offering of unregistered securities — significant transparency issues, and widespread mistrust in the debtors.
Under US bankruptcy laws, an examiner can be appointed in any bankruptcy case if someone requests it and the court finds the company’s debts exceed $5 million. We have no doubt Judge Glenn will approve the request.
The language in the motion suggests that Mashinsky can’t be trusted. (We concur.) Among other things, it points out that Celsius owes $20 million in back taxes. Unpaid taxes are senior debt. The IRS gets first dibs on the remaining assets before the unsecured creditors.
The Celsius UCC is “concerned” about the Trustee hiring an examiner because “It will run up millions in costs.” [Twitter]
We know for sure that it’ll be costly — the examiner in Lehman Brothers’ 2008 bankruptcy cost $100 million, up from a projected cost of only $23 million. The examiner for Enron was $90 million. So our guess is the examiner will probably cost creditors $25 million, if not more.
The seven-member UCC feels it can conduct its own investigation and doesn’t need an examiner. The problem there is that the UCC is selected from a list of the largest Celsius creditors. These people represent companies that have a vested interest in the crypto space succeeding. They are not in any way neutral.
The P-word
A “341 meeting” was held on August 19 — a creditors’ meeting, named after section 341 of the Bankruptcy Code, where the debtor answers questions about their financial status under oath.[LII]
At the 341 meeting, Celsius CFO Chris Ferraro admitted that Celsius was paying old investors rather more money in rewards than they were actually getting in yield.
“In hindsight, we did not generate enough yield to support the return,” says Ferraro. He confirms Celsius was paying “over 100%” at times — 120% to 130% of the actual yield. There’s no transcript, but Kadhim Shubber from the Financial Times and Thomas Braziel from 507 Capital live-tweeted the call. [Twitter; Twitter]
If Celsius was paying this excess yield from incoming investor money … then that’s literally a Ponzi scheme. (A lawsuit filed against Celsius on July 7, also claimed Celsius was operated as a Ponzi.)
Ferraro said, “I don’t think it was that connected” — but he didn’t answer where else the money could have been coming from. It was just “hyper-growth mode,” see. [Twitter; Twitter]
A question of competence
Mashinsky is a good salesman — but he’s not so great at any other part of the job. In January, Mashinsky ordered Celsius’ in-house investment team to sell bitcoin worth hundreds of millions of dollars. A day later, Celsius had to repurchase it all at a loss. “He was ordering the traders to massively trade the book off of bad information,” said one of the traders. “He was slugging around huge chunks of bitcoin.” [FT, archive]
Mashinsky is selling his $2.5 million home in Austin, Texas. He bought it only a year ago. [Twitter]
Canadian pension fund CDPQ has written off its CA $200 million investment in Celsius. “We arrived too soon in a sector which was in transition.” Whoever authorized the investment definitely wasn’t a foolish and greedy investor in a bubble, who didn’t look into the already-insolvent company at all. [La Presse, in French]
Genesis Trading CEO Michael Moro has quit, effective immediately — definitely a thing that happens all the time in healthy companies where things are going well. Moro “will continue to advise the company through the transition.” Genesis is also laying off 20% of its staff. The company had lent $2.36 billion to 3AC, and Genesis’ parent company DCG has made a claim against 3AC for $1.2 billion. [press release; The Block]
BlueBenx, a Brazilian crypto lending platform, has bitten the dust following a $32 million hack — or, its users think, a “hack.” Withdrawals have been halted, and employees have been laid off. [CoinTelegraph]
Hodlnaut has applied for creditor protection in Singapore. This is the equivalent of Chapter 11 in the US. They’re insolvent. [Hodlnaut announcement, archive; CoinDesk]
In court filings, Hodlnaut formally admitted that they had lost money in the Terra-Luna crash via their Hong Kong entity. Hodlnaut had previously told customers they had no Anchor exposure. We knew they had, and wrote about it in our previous update. [Twitter; CryptoBriefing]
All deposits are part of the bankruptcy estate. If Hodlnaut is liquidated, even stablecoin depositors will only get a fraction of what they had on account at the company.
Hodlnaut is now facing a probe from the Attorney-General’s Chambers and the Singapore Police Force — “pending proceedings,” though they didn’t give any other details. About 40 out of the 50 employees the company had have been laid off. [Straits Times]
Daniel Shin and Do Kwon while number was going up. Source: Terraform Labs
TerraUSD
Centralized finance (CeFi) is centralized DeFi — investment firms that played the DeFi markets. CeFi was where a lot of the money in DeFi came from.
CeFi looked like an industry of separate institutions — but it turned out to be a few companies all investing in each other. The chart of who invested in who would look like an inverted pyramid resting on a single point — Terraform Labs’ Anchor protocol.
Anchor offered 20% interest rates on holdings of dollar-equivalent stablecoin Terraform USD (UST), the interest being paid in UST. You could get UST by buying Terraform’s luna token from exchanges like Crypto.com or KuCoin. (Crypto.com Arena used to be Staples Center in Los Angeles.)
All the other CeFi firms just put their money into Anchor at 20%, then offered slightly lower interest to their own investors and skimmed the difference. Terraform made its money by dumping luna on these UST buyers.
UST and luna were both tokens that Terraform made up one day — neither had any reason to be worth anything. Everyone in DeFi knew how rickety UST/luna was for months — they just went along with it while it made them money. A truly fiat currency.
Crypto hedge fund Three Arrows Capital (3AC) went into liquidation as it was heavily invested in UST and luna. Firms that had big loans to 3AC, such as Voyager, Celsius, and BlockFi, had to file bankruptcy or seek bailouts from other crypto firms. Even crypto exchanges had been playing the CeFi markets with customer funds, and many had to close their doors.
Thousands of South Koreans also lost money when UST and luna collapsed. Terraform Labs founders Daniel Shin and Do Kwon are stuck in South Korea for now, while investigators look into the incident.
On Wednesday, July 20, investigators from the Seoul Southern District Prosecutors Office raided seven crypto exchanges, including Upbit, Bithumb, and Coinone. They’re looking for clues as to whether Terraform intentionally caused the collapse. They also raided some exchange executives’ homes and the home of Daniel Shin. [Yonhap News; Donga News, in Korean]
Elsewhere, South Korean prosecutors have discovered a shell company called “Flexi Corporation” that Kwon allegedly used to launder large sums of money out of Terra and into his own private accounts via over-the-counter trades. How can this be? Kwon said he only took a small salary from Terraform. [KBS, in Korean; Twitter]
Three Arrows Capital
UST and luna went under, and pulled crypto hedge fund Three Arrows Capital down with them.
The Terra collapse completely nuked 3AC. Their exposure was about $600 million. (This is triple what co-founders Su Zhu and Kyle Davies had claimed in mid-June.) [Fortune]
Zhu and Davies are in now hiding. Nobody knows where they are. They told Bloomberg they were headed to Dubai. [Bloomberg, archive]
The pair knew immediately that they were screwed. But on May 11, when investors asked if 3AC had survived the Terra collapse, 3AC told them everything was fine — and kept taking in money!
3AC had abandoned its Singapore office by late May — they just locked the door and skipped the country — and they finally admitted there were problems only in mid-June.
But Zhu and Davies have been telling the public — especially their creditors — how they lost money too, how they fear for their lives, and how they are so overwhelmed that they can’t turn over banking information just yet, but they’ll get to that soon, for sure.
The two old school buddies say they were shocked by how quickly things unraveled. “What we failed to realize was that luna was capable of falling to effective zero in a matter of days.”
Never mind that the instability of UST/luna was obvious to outside observers, that UST/luna worked exactly the same way as the Titan/Iron pair that collapsed in 2021, and that these guys were supposed to be a crypto hedge fund with alleged competence, and not the drooling crypto degen brainlet rubes they appear to have been trading like.
Zhu and Davies never planned for number go down, and had just been piling leverage on leverage. “We positioned ourselves for a kind of market that didn’t end up happening,” Zhu told Bloomberg. Never mind that a “hedge fund” is named for the act of hedging your speculations, and not just assuming you’re a genius because there’s a bubble going on.
Teneo is the firm handling 3AC’s liquidation, and they are moving quickly. They filed Chapter 15 in the US on July 1. Shortly after, they also filed for recognition of 3AC’s British Virgin Islands liquidation with the Singapore high court.
Someone leaked Teneo’s 1,157-page Singapore filing earlier this week. The comprehensive document is a gem — it gives us a full update on the bankruptcy proceedings up to July 9. Teneo’s Christopher Farmer and Russell Crumpler left no rock unturned. [Filing, archive]
We recommend reading at least the first 35 pages — it tells the story of Ponzi borrowing, multiple defaults, ghosting creditors and liquidators, and doing deals with some lenders while cutting out others. The rest of the filing is exhibits, other court filings, and affidavits of furious creditors.
3AC’s biggest creditor is Barry Silbert’s Digital Currency Group, the parent company of Genesis Trading, which had a $2.4 billion partially collateralized loan to 3AC. DCG is now stuck with up to $1.1 billion in losses. [The Block]
Other large creditors include Voyager Digital ($687 million), Blockchain.com ($302.6 million, up from the originally claimed $270 million), and Deribit ($80.6 million).
Kyle Davies’ wife, Chen Kaili Kelly, filed a claim for $65.7 million, and Zhu Su himself submitted a $5 million claim. We have no idea how 3AC was structured to allow an owner and a cofounder to be a listed creditor in a bankruptcy.
Zhu and Davies reportedly made a $50 million down payment on a yacht — with borrowed money, while they defaulted on their lenders. (We’re definitely feeling the Quadriga vibes with this one.) They wanted it to be bigger than any of the yachts owned by Singapore’s billionaires, and ready for pick-up in Italy. Zhu told Bloomberg that the yacht story was a “smear.”
Tai Ping Shan Capital, an over-the-counter desk in the BVI, claimed it operated independently of 3AC, but it turns out to have tight connections. On June 14, 3AC transferred $30.7 million in USDC and $900,000 in USDT to TPS. It’s unclear where those funds subsequently went. [Coindesk]
Good news! In a supplemental Chapter 15 filing, Teneo says it’s recovered $40 million of assets! The bad news is that this is a drop in the bucket. Creditors have so far submitted $2.8 billion in claims, and there’s plenty more coming. [Court filing]
3AC creditors have picked a creditor committee consisting of the largest creditors: Voyager, DCG, CoinList, Blockchain.com, and Matrixport. The committee will work closely with Teneo to “maximize the value of the assets available for distribution.” [The Block]
Blockchain.com is struggling to survive in the aftermath. It just laid off 25 percent of staff. [CNBC]
In addition to owning CryptoDickButt #1462, 3AC had also started a $100 million NFT fund with pseudonymous NFT trader Vincent Van Dough. They supplied the funding, while Van Dough curated the art. (We mentioned CryptoDickButt last time, and we’re shocked that some of you thought we were just making that up. You should know by now that crypto is always stupider.)
The fund, called “Starry Night Capital” planned to launch a physical gallery in a “major city” by the end of 2021. [The Block, 2021]
The Defiant noted on June 17 that the Starry Night portfolio had been aggregated into a single Ethereum address, probably controlled by Zhu, Davies, and Van Dough. Teneo has noticed and is concerned. [The Defiant]
Climate change talk is cheap, but sailing the seven seas on your yacht as an international fugitive is expensive. https://t.co/kq12Me4HFD
Celsius promised 18% returns on your crypto. When too many people tried to pull their money out at once, Celsius paused withdrawals on June 21 and filed for bankruptcy on July 13. We covered the bankruptcy filing and CEO Alex Mashinsky’s declaration in our last post.
Celsius admits to a $1.2 billion hole in its balance sheet. Others think the assets are fake and the liabilities are very real, which would put the hole at $4 billion to $5 billion.
Mashinsky says that Celsius’ losses include $15.8 million from investments in UST and luna, along with $40.6 million in loans to 3AC. He also said that Celsius lost 35,000 ether tokens in 2021 due to an incident involving a staking provider that “misplaced” the keys to its tokens. Oops!
Celsius held its first bankruptcy hearing on July 18. SDNY Judge Martin Glenn is presiding over the case. Kadhim Shubber from the Financial Times live-tweeted the hearing, which took place over Zoom. Here’s a copy of the presentation Celsius gave to the judge on Monday. [Stretto; Twitter thread]
Celsius’ lawyer Patrick Nash told the judge there won’t be a liquidation. Celsius has a recovery plan: to HODL — and mine bitcoins! That’s right, Celsius wants to mine their way out of bankruptcy. Nash says the plan is to mine 10,000 bitcoins in 2022.
How did Celsius end up in bankruptcy? You might think it had something to do with Celsius making horrible investments and losing everyone’s money, but no! As Nash explained, Celsius was driven to insolvency by unfounded Terra/luna fears, worries about Coinbase’s bankruptcy risk factor disclosure in May, and a bank run that knocked over an otherwise well-run business.
Former Celsius employees tell a different story. Celsius compliance and financial crimes director Timothy Cradle spoke of the company’s “sloppiness and mismanagement.” [Coindesk]
Cradle also told CNBC that Celsius execs “were absolutely trading the token [CEL] to manipulate the price.” A former HR employee said she was told not to do a background check on Yarom Shelem, the former Celsius CFO who was arrested in Israel for fraud. [CNBC]
Celsius creditors have been filing claims since July 18. [Twitter] The letters make for some disturbing reading. Molly White has been posting excerpts on Twitter. It’s a reminder that Celsius investors were ordinary people lured in by Mashinsky’s false promises. [Twitter thread]
Québec pension fund CDPQ also has some questions to answer. CDPQ invested $150 million in Celsius in October 2021 as part of a $400 million funding round co-led by WestCap Investment Partners LLC. “We understand that our investment in Celsius raises a number of questions.” [Bloomberg]
Celsius’ next bankruptcy hearing is August 10.
Voyager
Crypto broker Voyager said its secret sauce was “low-risk investments.” Yet it loaned out three-quarters of its assets under management to 3AC.
In June, the firm signed an agreement with Sam Bankman-Fried’s Alameda Ventures for a revolving line of credit so it could keep the music playing a bit longer. But on July 1, Voyager Digital filed Chapter 11 bankruptcy.
Coffeezilla points out that Voyager is trying to sell people on this “Chapter 11 bankruptcy reorg,” and hides the fact that under bankruptcy law, a company that describes itself as a broker cannot file Chapter 11. They should be required to liquidate under SIPA. (Securities Investor Protection Act) [Youtube; Twitter]
The CEO of of crypto media outlet Benzinga will be on the unsecured creditor committee in the Voyager bankruptcy. Jason Raznick is among the largest unsecured creditors for Voyager. [Inside Bitcoins]
Voyager’s next bankruptcy hearing is on August 4. It has $350 million of customer money in an omnibus account at Metropolitan, and it keeps reassuring everyone that they’ll get their money soon! It just has to work things out with the judge first. [Voyager blog; archive]
In the meantime, Bankman-Fried proposed a partial bailout. Under his proposal, Voyager customers would have the opportunity to open new accounts at FTX with a cash balance funded by their bankruptcy claim. They would be able to withdraw the cash, or use it to purchase crypto on FTX. [FTX press release; FT, archive]
Other CeFi firms that are definitely robust and doing fine
Vauld is a Singapore-domiciled crypto lender that serves mainly customers in India. It stopped withdrawals on July 4 and owes $402 million in crypto to its customers.
After suspending withdrawals and laying off 30% of its staff, Vauld filed for protection against creditors in Singapore on July 8. [WSJ]
A Singaporean moratorium order is similar to Chapter 11 in the US. It allows Vauld to avoid a complete cessation of operations and liquidation of assets, while it tries to get its act together.
Vauld later disclosed they were short $70 million, partly from exposure to UST/luna. Vauld issued a statement on July 11. Vauld and Nexo are still discussing an acquisition of Vauld. [Vauld blog, archive]
BlockFi released its Q2 2022 transparency report. The report showed it had $1.8 billion in open loans from retail and institutional investors by the end of June and $600 million in “net exposure.” [BlockFi blog, archive; Decrypt]
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In our last episode, Voyager Digital was looking shaky. Voyager had a massive hole in its balance sheet, courtesy of Three Arrows Capital (3AC), which had imploded. Voyager had maxed out its line of credit from Alameda for the month — it could only withdraw $75 million in credit for each 30-day rolling period.
On Friday, July 1, Voyager announced it was “temporarily suspending trading, deposits, withdrawals and loyalty rewards.” [Voyager, archive; WSJ]
How screwed is Voyager? Three-quarters of their assets — about $600 to $700 million in BTC and USDC owed by 3AC — are missing. [Press release; Yahoo Finance]
How screwed are Voyager’s customers? “Your debit card will stop working … exploring strategic alternatives,” the crypto broker said. “We are in discussions with various parties regarding additional liquidity and the go-forward strategy for the company.” [Voyager blog, archive]
Whoever had Voyager Digital next in the DeFi dead pool: you may now claim your 100 trillion luna.
Voyager’s business
Voyager is — or was — a crypto investment firm. You deposited dollars or crypto into Voyager, and you earned up to 12% interest on your deposits via their Earn program. The company claimed 3.5 million customers.
It also had a mobile app that allowed you to trade 100 different cryptocurrencies commission-free. [Voyager,archive]
Voyager was a “CeFi” company, or centralized DeFi — an investment firm that played the DeFi markets.
It also offered a debit card. Customers deposited dollars, which were immediately converted to the USDC stablecoin, which Voyager paid a yield of up to 9% on. “Earn like crypto, spend like cash.” [Voyager, archive]
Voyager very much wanted its customers to treat the company like their bank — and deposit their money. It encouraged customers to directly deposit their paychecks into their Voyager debit card account.
It’s not a bank, though. We’ll see in a moment why that turned out to be important.
The company offered “even greater rewards” if you owned their VGX token! This was aimed squarely at the cryptocurrency audience: “When it comes to your crypto, every satoshi counts.” With VGX you could get up to a 12% yield! [Voyager; archive]
Voyager is listed on the Toronto Stock Exchange. However, its services were only available to Americans — not Canadians. [Voyager terms of use; archive]
At the end of March 2022, Voyager got cease-and-desist letters and orders to show cause from the states of New Jersey, Alabama, Oklahoma, Texas, Kentucky, Vermont, and Washington — who considered Voyager’s yield platform to be an unregistered offering of securities. [CoinDesk; press release]
Voyager’s liabilities
Here is Voyager’s press release for their Q3 2022 numbers, released on May 16. (Voyager’s financial year is July to June, so January to March is Q3.) The headline announced that revenue was up — $102 million! [Voyager, archive]
But the numbers show that year-over-year losses were also way up — Voyager had operating losses of $43 million. The company was burning money to pump up revenue and user numbers. Voyager promoted both these numbers to investors in June 2022 without mentioning the losses that were getting it there. [Voyager, archive]
“It is important to note with recent news related to UST and LUNA, that Voyager does not have UST listed on the platform and has not placed any access in any DeFi lending protocols such as the Anchor platform.”
But it turned out that Voyager was heavily exposed to UST, luna, and Anchor — via their largest debtor, Three Arrows Capital. The guys at 3AC knew they were in terminal trouble, but hadn’t told anyone yet — including their creditor, Voyager.
In the Q3 2022 earnings call, voyager CEO Steve Ehrlich said:
“We also spoke to all of our counterparties on lending and verified that there were no issues. In the past, we’ve had questions from investors about one counterparty. And as of today, we have no exposure to that counterparty.
… the people we lend to are some of the biggest names in the industry. As we stated, too, we had conversations and verified there was no contagion with them, had conversations with every single one of them. And since we limit who we lend to, to these parties, we’re really comfortable we did not have to call anything in and we had zero issues with any of our borrowers.”
Which counterparty could that have been?
Voyager released new financials yesterday afternoon, July 1, as part of its announcement that it was suspending withdrawals, detailing the 3AC-shaped hole in their numbers.
Is Voyager FDIC insured? No, but they’d like you to think so
If you had dollars on deposit with Voyager, you should assume they’re gone and not coming back.
Voyager tried very hard to imply in the large print that customer deposits were insured up to $250,000 by the Federal Deposit Insurance Corporation (FDIC) if something happened to Voyager — and only admitted in the small print that they weren’t. Voyager tweeted on November 12, 2020: [Twitter; archive]
“Have you heard? USD held with Voyager is FDIC insured up to $250K. Our customers’ security is our top priority. Start growing your crypto portfolio today.”
But your dollars had already been converted into USDC. Voyager then used the USDC, a liability to you, as collateral for loans it took out elsewhere. The user agreement explicitly allows this: [Voyager, archive]
“Consent to Rehypothecate. Customer grants Voyager the right, subject to applicable law, without further notice to Customer, to hold Cryptocurrency held in Customer’s Account in Voyager’s name or in another name, and to pledge, repledge, hypothecate, rehypothecate, sell, lend, stake, arrange for staking, or otherwise transfer or use any amount of such Cryptocurrency, separately or together with other property, with all attendant rights of ownership, and for any period of time and without retaining a like amount of Cryptocurrency, and to use or invest such Cryptocurrency at Customer’s sole risk.”
Your dollars were transformed into Voyager’s USDC the moment you deposited.
Voyager has an omnibus account with Metropolitan Commercial Bank, where it deposited its customers’ dollars. An omnibus account is a single holding account for money from multiple investors. Voyager acts as the money manager of the omnibus account — and maintains full control of the money.
Pass-through FDIC insurance, which would cover the customers and not just Voyager, is a bit tricky. You have to meet several requirements. Fundamentally, the funds need to be a liability of the bank, e.g., Metropolitan, not the account holder, e.g., Voyager. [FDIC; Seward & Kissel LL]
If Metropolitan failed, the FDIC insurance would cover Voyager up to $250,000. But Voyager’s customers were not FDIC insured. And Metropolitan is doing just fine.
Voyager repeatedly and consistently led customers to believe their US dollar deposits were safe if Voyager failed.
Usually, Voyager just tried to imply that customer deposits were directly FDIC-insured — and then detailed in the fine print how this wasn’t the case. Occasionally, Voyager slipped up and claimed this directly, such as in this blog post of December 18, 2019: [Medium, archive]
“Through our strategic relationships with our banking partners, all customers’ USD held with Voyager is now FDIC insured. That means that in the rare event your USD funds are compromised due to the company or our banking partner’s failure, you are guaranteed a full reimbursement (up to $250,000). We’re excited to offer our customers an extra level of security, so they can feel more comfortable holding their USD with Voyager.” [emphasis ours]
Let’s say that again: “you are guaranteed a full reimbursement”
This claim was simply not true.
Metropolitan Bank has issued a statement on Voyager and FDIC insurance — we expect they’ve been getting a lot of calls from Voyager customers: [Metropolitan, archive]
“FDIC insurance coverage is available only to protect against the failure of Metropolitan Commercial Bank. FDIC insurance does not protect against the failure of Voyager, any act or omission of Voyager or its employees, or the loss in value of cryptocurrency or other assets.”
Several Voyager customers on Reddit were very confused about all of this. Many were trying to figure out how to file an insurance claim to get their cash back. Others were learning for the first time that their dollar deposits were not, in fact, safe. [Reddit; Reddit]
Reddit user DannyDaemonic called up the FDIC: [Reddit]
“I called the FDIC earlier and they said Voyager Digital LLC was not a bank and was not FDIC insured. They said for future reference, LLCs cannot be banks, ever. So when you see “LLC,” any claim of FDIC insurance is false. They did confirm that Metropolitan Bank is FDIC Insured but just because Voyager Digital stated “each Customer is a customer of the Bank” doesn’t mean they were funding those accounts. It just means if Metropolitan Bank failed, any holdings Voyager Digital placed under your name there would be safe. But since it’s only Metropolitan Bank that’s FDIC insured, Voyager Digital failing wouldn’t trigger the FDIC insurance.
I imagine Voyager is allowed to withdrawal from those accounts to pay debt or make investments. It’s also possible, if Voyager Digital is insolvent, that they haven’t even been depositing cash into the Metropolitan Bank for quite some time.
It doesn’t look good.”
The precise law that Voyager seems to be playing fast and loose with is 18 USC 709 — “False Advertising or Misuse of Names to Indicate Federal Agency”: [Onecle]
“… or falsely advertises or otherwise represents by any device whatsoever the extent to which or the manner in which the deposit liabilities of an insured bank or banks are insured by the Federal Deposit Insurance Corporation…”
As of March 31, Voyager claimed to have $175 million in cash. At present, it’s not clear they have any cash. They said they had $355 million in cash “held for customers” as of June 30, per their press release. However, they haven’t spelled out liabilities, including “cash owed to customers.” What really matters to customers is the balance held at Metropolitan, and we don’t know what that is.
At this point, Voyager either needs to get another loan from FTX or declare bankruptcy.
If Voyager does need cash, they’ll have to sell their bitcoins and ether — driving down the prices of those.
The purpose of CeFi is to mis-sell investments
The CeFi lenders who are collapsing right now, such as Voyager and Celsius, are in the business of packaging up extreme risk as a shiny product — so that they can mis-sell these to the public as retail-suitable investments.
DeFi is a bunch of wires on a lab bench — not a finished product. CeFi puts a shiny box around the breadboarded system held together with clips and lumps of explosive.
The CeFi companies then lie to their customers that the remarkable interest rates on offer can exist without a jaw-dropping amount of hidden risk.
The very stupid and very crypto thing is when their fellow crypto institutions think “this is fine!” and do things like putting all their money into 3AC, which put all its money into Anchor.
It’s supposed to be retail — and not institutional traders — that sees a 5%, 10%, or 20% interest rate and stops thinking of anything but the big number. Perhaps crypto companies need to be legally restricted to retail-friendly investments? Or we could send some of these guys to jail for fraud, that works too.
It’s as if the entire crypto space has been held together by a giant lynchpin, someone pulled out the lynchpin, and now everything is tumbling to the ground.
UST crashed, Celsius followed, and more recently, Three Arrows Capital has failed to meet lender margin calls. Small crypto funds are next to fall, as David spelled in his recent story on yield farm platform Finblox.
The network effects that brought bitcoin to its heights from 2020 to 2021 are now working in reverse.
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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Amy Castor 
