Crypto collapse: J. Pierpont Moneygone — FTX rekt, bought by Binance

  • By Amy Castor and David Gerard
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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:

  1. Alameda Research, his crypto hedge fund;
  2. FTX, his unregulated offshore crypto casino that doesn’t allow US customers;
  3. 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]  

FTX US is also attempting to buy the remains of the bankrupt Voyager Digital, a deal that we think is likely to go through.

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:

  1. Who is lending to Alameda?
  2. 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!

Image: FT Alphaville

Crypto collapse: Bitcoin stagnant, selling Celsius and Voyager, how 3AC died

“I kept up the bluff, hoping that I might eventually hit upon some workable plan to pay all my creditors in full.” 

— Charles Ponzi, The Rise of Mr. Ponzi

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]

Crypto collapse: Celsius, Voyager, SkyBridge — the liabilities are real, the assets are fake

“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.

    Not registering such an investment contract when offering it to the public is why BlockFi had to fork over $100 million to state regulators and the SEC, and why Coinbase ultimately had to abandon its Coinbase Lend product.
  • 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. 

(We wrote about Celsius’ 341 meeting previously.)

Listening to creditors, it’s clear that they’re upset and confused as to why their crypto, including USDC, has become part of the bankruptcy estate. They thought the money was theirs and they could have it back at any time. It didn’t help that Voyager gave users the false impression that their money was FDIC insured.

Ehrlich kept referring the distraught creditors back to the customer agreement, which many had never read, or never fully understood.

Ehrlich noted during the meeting that Voyager is still staking crypto. He said the firm had filed a motion asking the court if it’s okay to stake even more. The court has allowed Voyager to continue staking pursuant to their ordinary business practices. The UCC oversees their staking. [Docket 247, PDF]

Staking is risky!

Some staking, such as proof-of-stake staking, doesn’t risk losing the coins in that currency. Once Ethereum switches to proof-of-stake and, perhaps several months later provides a way for you to withdraw your stake, there’s little risk when your ETH staking is denominated in ETH.

But most staking activity involves first moving your liquid crypto (such as ETH) into a company’s own crypto (such as CEL or UST), which is basically a self-assembled Ponzi scheme for staking. And a lot of “staking” is just lending to a DeFi structure, which means you’re at risk even when it’s denominated in that staked crypto.

Voyager says it got multiple bids to buy the company. The deadline for bids was Sept. 6 — extended from Aug. 26 — so now it’s headed to auction. The auction will be held on Sept. 13 at 10 a.m. ET in the New York offices of Voyager’s investment bank Moelis & Co. A court hearing to approve the results is scheduled for Sept. 29. [Bloomberg; court filing, PDF]

Sam Bankman-Fried’s FTX and Alameda disclosed a joint bid for Voyager in July. Voyager dismissed this as a lowball bid — but we think SBF is the one who is most interested in Voyager. Maybe they’ll up their offer in the auction?

What is there left to buy anyway? That’s what we want to know. Voyager is in much the same position as Celsius — its liabilities are real, but its assets are fake. What does FTX get if it buys Voyager?

The Georgia Department of Banking and Finance has a limited objection to the sale of Voyager. Voyager is a licensed money transmitter in the state of Georgia. If the auction is a success, the department is asking the court to stay the acquisition unless or until the new buyer is also licensed in the state as a money transmitter. We wonder how harshly that will limit the field of buyers. [limited objection, PDF

Bankruptcies are expensive. Quinn Emanuel, special counsel for Voyager, has submitted their first-month fee statement: $244,080. That’s for 196.7 hours of work. The lead lawyer ​​charges $2,130 an hour for his services. Voyager brought Quinn Emanuel on board in July to look into the possibility of insider trading at 3AC. [Doc 358, PDF; Bloomberg Law]

The next Voyager omnibus meeting is on Sept. 13 at 11 ET. The deadline for filing a proof of claims is Oct. 3. 

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 collapse: 3AC yacht ‘Much Wow’ back on the market, Celsius maybe-Ponzi, Voyager pays off the boys, Hodlnaut

“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

Here’s the 3AC yacht in all its glory: the Much Wow. Yes, Zhu was into Dogecoin too. [Much Wow; Boat International, archive]

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]

Elsewhere amongst the wreckage 

Last week, we talked about Coinbase’s horrific $1.2 billion Q2 loss. Frances Coppola took a deeper dive into the company’s 10-Q. She explains why Coinbase’s balance sheet has massively inflated. [Coppola Comment]

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

Crypto collapse: Terra Luna, 3AC’s Singapore liquidation, Celsius, Voyager 

“Lotta stadiums getting renamed in the next few years”

Ben McKenzie
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.

The party ended on May 9, when UST and luna imploded, setting off a cascade of insolvencies across cryptoland. We’re still seeing the fallout.

Crypto hedge fund Three Arrows Capital (3AC) went into liquidation as it was heavily invested in UST and luna. Firms that had big loans to 3AC, such as Voyager, Celsius, and BlockFi, had to file bankruptcy or seek bailouts from other crypto firms. Even crypto exchanges had been playing the CeFi markets with customer funds, and many had to close their doors.

Thousands of South Koreans also lost money when UST and luna collapsed. Terraform Labs founders Daniel Shin and Do Kwon are stuck in South Korea for now, while investigators look into the incident.

On Wednesday, July 20, investigators from the Seoul Southern District Prosecutors Office raided seven crypto exchanges, including Upbit, Bithumb, and Coinone. They’re looking for clues as to whether Terraform intentionally caused the collapse. They also raided some exchange executives’ homes and the home of Daniel Shin. [Yonhap News; Donga News, in Korean]

Elsewhere, South Korean prosecutors have discovered a shell company called “Flexi Corporation” that Kwon allegedly used to launder large sums of money out of Terra and into his own private accounts via over-the-counter trades. How can this be? Kwon said he only took a small salary from Terraform. [KBS, in Korean; Twitter

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]

Celsius

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]

Who had Voyager Digital next in the DeFi dead pool?

  • By Amy Castor and David Gerard
  • Become a patron and support our work — Amy’s Patreon is here; David’s is here.

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]

The Q3 2022 numbers were announced when UST and luna had gone to zero, and Terraform’s Anchor protocol had collapsed. Voyager CFO Evan Psaropoulos said on the quarter’s earnings call: [Seeking Alpha]

“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.

Scam Economy podcast: Crypto Jenga: Celsius and the Latest Crypto Crash 

Earlier this week, David Gerard and I did a podcast together for Matt Binder’s Scam Economy. It just went up this evening. [Youtube; Apple Podcast; Google Podcast, Spotify]

The interview is based on a popular story that David and I recently co-wrote: “The Latecomer’s Guide to Crypto Crashing,” which has now been translated into German and French, and soon, possibly Italian.

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.

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

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

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

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

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

Recent disasters

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

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

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

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

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

UnTethering

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

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

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

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

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

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

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

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

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

Sentiment

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

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

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

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

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

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

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

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

Crypto hedge funds and DeFi

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

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

BlockFi — Another crypto lender promising hilariously high returns. 

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

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

Large holdings ready for release

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

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

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

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

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

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

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