Tag: Winklevoss

Crypto collapse: Venture capital goes home, Coinbase, Tether backing, FTX sues Hollywood VCs, 3AC on the beach

  • By Amy Castor and David Gerard

“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.”

— crossestman

Crypto’s not dead! Look, it’s still twitching

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.

3AC’s two founders, Su Zhu and Kyle Davies, just shut their office door in Singapore in late May 2022 and skipped the country, leaving their staff to tell investors the bad news.

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]

Posted on by Amy Castor 0

SEC sues Genesis and Gemini, Genesis owes $3 billion to creditors

  • By Amy Castor and David Gerard

Kids, kids, you’re both ugly

There’s a huge conflict between the Gemini crypto exchange and the Genesis crypto investment firm over the Gemini Earn product — and what happened to the money.

Fortunately, the SEC has stepped in to clear things up — they’re suing both of them! [Press release; Complaint, PDF; Docket]

The charge is that the Gemini Earn program, which offered retail investors up to 8% return on crypto they lent to Genesis, was an unregistered securities offering. This is because it was really obviously an unregistered securities offering.

Genesis had hitherto only dealt with accredited and institutional investors, which is fine. But starting in February 2021, Gemini Earn gave Genesis access to money from ordinary retail investors. Somehow, this didn’t set off the “Howey test” alarms for anyone at either company.

(Coincidentally, February 2021 is when the GBTC premium dried up. Did someone need money quickly?)

The SEC says: “Both Defendants were integral to the operation and success of the Gemini Earn program.”

Retail customers suffered hugely — they are out $900 million — as Gemini froze withdrawals without warning in November, after Three Arrows Capital (3AC) collapsed in July, then FTX collapsed in November. The SEC has actual harm it can point at.

Gemini terminated the Earn program on January 8, when it pulled the plug on its Master Loan Agreement between Genesis and Gemini.

The SEC is getting out there and just busting unregistered crypto securities now that the government and public are onside.

Here’s Gary Gensler, explaining in a video what the SEC just did in very small words. [Twitter, video] 

The SEC complaint

The SEC’s complaint outlines how Gemini Earn worked.

Genesis was founded in 2018. It marketed its services to institutional and accredited investors — and that was more or less fine.

With Gemini Earn, however, Genesis got into soliciting retail investors, via Gemini — and selling to retail requires companies to file paperwork with the SEC and make important financial disclosures, so the public can make an informed decision about what they are investing in. Of course, neither company bothered with that part.

Earn investors agreed they were sending their cryptos to Genesis. Gemini acted as the agent in the offer. In the first three months of 2022, Gemini received about $2.7 million in agent fees from the Gemini Earn program, according to the complaint.

Gemini Earn took in billions of dollars worth of cryptos — mostly from US retail investors. Both companies widely marketed Gemini Earn by promoting its high interest rates.

By November 16, 2022, when Genesis froze withdrawals, it was holding $900 million in Gemini Earn investors’ cryptos, from 340,000 customers, mostly in the US.

The SEC holds that Gemini Earn is an investment contract, per the Howey Test:

  1. Gemini Earn involved the investment of money;
  2. in a common enterprise;
  3. and investors reasonably expected to profit from the efforts of the defendants.

If you want to sell such an offering to retail investors, you have to file the paperwork. Or the SEC can bust you.

Prayer for relief

The SEC asks that the defendants don’t offer unregistered securities ever again, that they be enjoined from offering Gemini Earn and any similar offering in the future, and they disgorge all ill-gotten gains — that includes interest and all profits associated with Earn — and pay civil penalties.

Most SEC suits never go to trial, they just end in a settlement. There is no settlement as yet.

By the way, investors will likely be able to claim the right of rescission — if you buy something that’s found to be an unregistered security, you can just demand all your money back. Section 12(a)(1) of the Securities Act says “Any person who — (1) offers or sells a security in violation of section 5, … shall be liable, subject to subsection (b), to the person purchasing such security from him”

If the SEC prevails, investors will be able to demand their money back from Gemini as well as from Genesis — the SEC considers both companies were offering Gemini Earn, even as their internal agreement said Gemini was just acting as Genesis’ agent. After all, one of these two companies appears to be solvent.

Former SEC chief of Internet Enforcement John Reed Stark tells us:

An SEC victory would take disgorgement and penalties and perhaps deposit it all in a FAIR fund for investors. The sole priority of the SEC staff filing the action will be to give those investors their money back who hold the $900M of Earn that is now worth nothing. Any remedial steps would typically entail hiring a law firm to create and manage a distribution plan, working feverishly towards that goal of helping investors who incurred losses.

That the SEC seeks disgorgement of profits and penalties to make investors whole is good news for Gemini’s Earn investors. Given that Gemini has the assets to satisfy a judgment, there is cause for some optimism, as opposed to other situations involving bankrupt entities where angry customers are more likely stuck last in line as unsecured creditors.

It’s an outrage!

Tyler Winklevoss of Gemini has responded to the SEC’s action: [Twitter]

It’s disappointing that the @SECGov chose to file an action today as @Gemini and other creditors are working hard together to recover funds. This action does nothing to further our efforts and help Earn users get their assets back. Their behavior is totally counterproductive.

Fortunately, there’s a remedy: the suit demands that Gemini and Genesis give everyone’s money back — $900 million — out of their own pockets, which the Winklevosses are entirely capable of doing because they still sit atop a mountain of bitcoins.

Tyler further pleads that “the Earn program was regulated by the NYDFS and we’ve been in discussions with the SEC about the Earn program for more than 17 months.”

That’s great! Were the SEC discussions along the lines of “you really need to register this stuff before we shut you down”? Perhaps Tyler could clarify.

Also, the SEC complaint notes specifically that New York didn’t regulate anything about how Gemini Earn operated. One of the points of the SEC complaint is that there was no other regulator.

The Daily Beast spoke to former Gemini employees about the Earn program. They had boggled at the terms and conditions — deposits were uninsured and crypto was lent out on an unsecured basis, meaning Genesis wasn’t putting up any collateral. “We were like, ‘Holy sh-t, are you f-ing kidding me?’” [Daily Beast]

The SEC had previously gone after BlockFi for failing to register its crypto-lending program, and they stopped Coinbase from launching its crypto-lending program, so they are getting serious about ending this sort of nonsense.

Current unconfirmed rumor: Gemini will get only this SEC charge and will settle with a fine — and disgorgement. But the Department of Justice and the US Attorney’s Office for the Eastern District of New York are coming quickly for Genesis and its parent company Digital Currency Group (DCG). [Twitter, archive]

Genesis is in hock for $3 billion

Genesis owes more than $3 billion to creditors, according to sources who spoke to the Financial Times. DCG is looking for silverware to sell to plug the gap. DCG has a huge venture portfolio it’s looking at dipping into. [FT, archive]

DCG had been trying to raise capital — about $1 billion — after 3AC blew up Genesis’ books. But it couldn’t get any takers. So now DCG’s only option is to try to sell what it’s got. 

DCG’s portfolio includes 200 crypto companies — and most of them are illiquid because crypto is a losing business right now.  

Some direct customers of Genesis — not Gemini Earn customers, but Genesis’ accredited and institutional customers — are claiming that Genesis lied to them to get them to reinvest after they pulled out: [Protos]

He says he was lured back in by reassuring emails from Genesis salespeople and the delivery of monthly balance sheets that seemed to show in late summer and early fall that the firm’s financial position was stable. The creditor now says those financial documents were inaccurate and hid the firm’s growing financial problems.

Media stardom

David went on Blind Spot Markets Live on Friday morning. The transcript is up now. Izabella Kaminska talked to David about FTX, Nexo, Genesis vs. Gemini, and US banking for crypto companies. This episode was sponsored by Big Nocoin, the Federal Reserve, and the Pentagon. [The Blind Spot]

Image: They fired 10% of their staff and went on tour. Instagram.

Posted on by Amy Castor 3