Crypto collapse: DCG’s check kiting comes home to roost, Nexo raided, Voyager sale to Binance progresses, unbanking the banked

By Amy Castor and David Gerard



Blind Spot Markets Live — 11 a.m. UTC, Friday January 13

Izabella Kaminska’s new financial newsletter is The Blind Spot. On Fridays, it runs Spot Markets Live — a large group text chat like the old FT Alphaville Markets Live. David’s on January 13 at 11 a.m. UTC. He’ll be talking about the crypto markets trash fire. You need to login to a website called Coodash. Sign up here. [The Blind Spot]

Update: Went well! Here’s the transcript. [The Blind Spot]

DCG, Gemini, and check kiting

How crypto worked in 2022:

  1. Massive check kiting between all of the players — write a check you can’t cash, then write a bigger check you can’t cash to cover the first check.
  2. Count the face value of each uncashed check as hundreds of millions of dollars in assets in your reserve.
  3. Pray nobody ever tries to cash one.

How crypto works in 2023:

  1. Someone tried to cash one.

Last week, Cameron Winklevoss of Gemini tweeted an open letter to Digital Currency Group’s Barry Silbert. This week, he tweeted another open letter— to DCG  shareholders. Winklevoss directly accuses DCG of fraud, and calls on the board to fire Silbert as CEO. [Twitter; Gemini, PDF, archive]

“How did we get here? Greed.” Well indeed, Cameron.

Cameron and Tyler Winklevoss knew in July 2022 that DCG had written Genesis a $1.1 billion internal IOU — or so said Matt Levine from Bloomberg, citing The Information. But Gemini didn’t withdraw its client’s money then. Instead, it took a chance that everything would be fine! Then FTX blew up in November and Genesis froze withdrawals. Levine: “If you trusted the IOU in July, you probably feel foolish now. Winklevoss sure seems to.” [Bloomberg; The Information, paywalled]

On page 4 of Cameron’s letter, he calls Grayscale “Barry’s financial Hotel California.” Good to know he’s reading Amy’s stuff.

Silbert sent a letter to DCG shareholders shortly after. His letter does not in any way address the Winklevoss claims. [DCGupdate, archive]

Silbert wants us to believe that DCG subsidiaries operate as fully independent enterprises. “To be abundantly clear, DCG does not direct any trades, loans, or borrows for Genesis’ business.” Sam Bankman-Fried said the same thing about FTX’s various businesses.

Silbert claims that DCG loans to Genesis were structured on an arm’s length basis. 1% interest on a $1.1 billion IOU is not arm’s length.

“DCG has never had a relationship with Three Arrows Capital.” Well, except that 3AC was Genesis’ biggest customer, with a $2.36 billion loan in 2022. And in On December 30, 2020, 3AC had a $1 billion position on GBTC, according to Grayscale’s SEC filings. [SEC]

Silbert says the promissory note from DCG to Genesis is not callable, and does not contain any other similar features of a callable bond.

On January 8, Gemini terminated the Master Loan Agreement with Genesis and emailed customers accordingly. This “requires Genesis to return all outstanding assets in the program.” Genesis did not return the funds by the end of January 10 — so they were officially in default on the loan. At this point, Genesis can pull the pin and try to put Gemini into involuntary bankruptcy.  [Twitter]

RedeemGBTC is a group of GBTC holders trying to pressure DCG’s Grayscale into stepping down as manager of the trust and liquidating GBTC shares back into bitcoins. The trouble is, Grayscale is under no legal obligation to do that — no matter if 90% of GBTC holders want it to liquidate. (DCG is the other 10%.) [RedeemGBTC; Blockworks]

Gemini added trading on tethers to their exchange at 6 p.m. ET on January 10. Not available to New York customers. [Gemini]

Nexo is nexto

Nexo is another dodgy CeFi crypto “lender” targeting ordinary investors in the manner of Celsius and Voyager — complete with unfeasible interest rates.

As is standard in crypto, Nexo is only solvent if you count its internal supermarket loyalty card points, the $NEXO token, as money.

Nexo didn’t offer services in its native Bulgaria — but this didn’t protect them. On the morning of Thursday January 12, Nexo’s offices in Bulgaria and at least some of the homes of the owners — “more than 15 addresses,” according to the General Prosecutor’s office — were raided by prosecutors, investigators and … counterintelligence agents. [BTV Novinite, in Bulgarian; Nova, in Bulgarian]

The General Prosecutor’s office said: “Active actions are being carried out in Sofia to neutralize the illegal criminal activity of the cryptobank Nexo. It established and maintains an international platform for exchanging and lending cryptocurrency. The main organizers of this activity are Bulgarian citizens and the main activity is carried out from the territory of Bulgaria. The cryptobank operates through multiple registered companies, and the vast majority of them are mailboxes — shell companies.” [Nova, in Bulgarian]

300 people in the General Prosecutor’s office are working on the Nexo case, with 35 investigators from other agencies.

The action is apparently part of an international operation — investigating whether Nexo is part of a large-scale scheme for financial crimes, money laundering and violation of international sanctions against Russia. [Mediapool, in Bulgarian]

Nexo’s owners, Antoni Trenchev (a former Reform Bloc MP) and Kosta Kanchev, just happened to relocate themselves to Dubai in Fall 2022.

Nexo’s current corporate strategy is to tweet through it. “Unfortunately, with the recent regulatory crackdown on crypto, some regulators have recently adopted the kick first, ask questions later approach. In corrupt countries, it is bordering with racketeering, but that too shall pass.” Okay. [Twitter thread]

Nexo is already being sued by multiple US regulators, who brought suit in September. Nexo withdrew from the US market altogether in December. [Bloomberg, 2022]

The Nexo website is still up. Are withdrawals working for anyone? []

Voyager for sale

Judge Michael Wiles in New York is allowing Voyager Digital to enter into an asset purchase agreement with Binance US. Under the deal, Binance US would take over $1 billion in Voyager customer assets, giving creditors a chance to cash out in six months. Voyager still has to get approval from creditors. The Unsecured Creditors’ Committee considers this a big win. [Twitter thread]

Multiple regulators objected to the deal. But lawyers for Voyager said the regulators don’t understand how desperate Voyager is: “The Objections ignore the practical realities of these chapter 11 cases and fail to identify any transaction that provides a better outcome for the Debtors’ creditors. There is none.” [Doc 831, PDF]

Voyager says it’s working through CFIUS’ objections to the sale on national security grounds.

Celsius: “Answer the question, Mr. Mashinsky. That wasn’t the question.”

Jason Stone of KeyFi was Celsius Network’ lead DeFi trader — at times, Celsius was the third largest player in the DeFi markets. Stone sued Celsius for not paying him, and Celsius countersued.

The suits between KeyFi and Celsius were heard on Wednesday, January 11, in front of Judge Martin Glenn.

Alex Mashinsky was on the stand and didn’t make a friend of Judge Glenn: “Answer the question, Mr. Mashinsky. That wasn’t the question.”

Mashinsky claims he never once looked at the Celsius general ledger spreadsheet while he was CEO. Okay.

There were a couple of live-tweet threads, from David Adler and Cam Crews. [Twitter; Twitter]

The Examiner’s final report on Celsius is due January 30. We don’t think if it was ever settled if the examiner should look into whether Celsius was operating as a Ponzi scheme. [Order, PDF]

Laughter is the best medicine, so SBF posting through it is effective altruism

Sam Bankman-Fried is no longer just tweeting through it — he’s launched a Substack. Everything is Caroline Ellison’s and CZ from Binance’s fault, and not in any way smol bean Sam’s. Also, FTX US is apparently fully solvent! [Substack]

This is really Sam’s — he tweeted the link. So sign up today for Sam’s new Substack, “mycrimes.txt.” [Twitter]

Molly White live-tweeted the January 11 hearing in FTX’s bankruptcy. The main substantive outcome is that the list of creditor names will remain sealed for another three months while they try to work out the possible harm to individuals in revealing them. [Twitter]

FTX top engineer Nishad Singh has met with prosecutors in a proffer session — spill the beans and see if it’s worth it for them to offer you a plea deal. He’s the third of the FTX inner circle to turn against Sam in an effort to save his own skin. [Bloomberg]

The FTX case is so sprawling it could exhaust the resources of the Southern District of New York — since it includes potential bribery, campaign contribution violations, and market manipulation on top of theft and fraud. [Twitter]

The SEC is now investigating venture firms who invested in FTX, to check the “due diligence” they all swore blind they’d bothered to do. [Reuters]

Unbanking the banked: Metropolitan jumps ship

The Federal Reserve, the FDIC and the OCC issued a “Joint Statement on Crypto-Asset Risks to Banking Organizations” on January 3.

A bank holding or issuing crypto-assets — e.g., Silverbank’s plan to issue a retail Diem stablecoin — “is highly likely to be inconsistent with safe and sound banking practices.”

Phrases like “significant safety and soundness concerns” are how a bank regulator says “your charter is at risk.” [Federal Reserve, PDF]

The regulators didn’t want to “prohibit or discourage” merely providing banking services to the crypto sector. But Metropolitan Commercial Bank announced on January 9 that it “will fully exit the crypto-asset related vertical.” It’s dumped all crypto clients, and will not be touching the area henceforth.

Metropolitan previously got dragged into the Voyager Digital bankruptcy, because they were Voyager’s US dollar banker. Voyager’s deposits were FDIC insured (in the event of Metropolitan failing) — so Voyager lied to their customers that the customers were FDIC insured in case Voyager failed!

Between Voyager, Silvergate Bank’s FTX issues, and the regulator letter, Metropolitan has said “LOL nah.” [press release]

Signature Bank is going fine

The Silvergate Exchange Network is how a lot of US crypto companies clear US dollar transactions between themselves. Signature Bank of New York operates a similar network, called Signet. This is actually a private blockchain — apparently based on Facebook’s old Libra/Diem code. (Update: it’s actually a private Ethereum instance.) Dirty Bubble summarizes the problems that Signet has led to. [Dirty Bubble Media]

Access to Signet requires a “strenuous” KYC/AML process. This “strenuous” process allowed in such high-quality clients as multiple FTX entities.

Once these FTX-quality entities are inside Signet, they can do whatever they like, and move internal stablecoin dollars around with no meaningful constraints or monitoring. Never mind that Signature promised New York strong monitoring to be allowed to run Signet at all. [NY DFS]

Signature was also heavily involved in the TrueUSD stablecoin, mostly used by Justin Sun and Alameda Research. [Medium; Cryptadamus]

Deltec’d has noticed that Signature was letting Binance bank with them under the name of a defunct corporation. Whoops! [Medium]

Signature has announced that it will be attempting to sell off $10 billion of its $25 billion of crypto customer deposits. “We are not just a crypto bank and we want that to come across loud and clear,” said CEO Joe DePaolo. Okay. [CoinDesk]

Silvergate Bank is going fine

Silvergate got bailed out by the Federal Home Loan Bank, in a $4.3 billion loan secured on “government securities”. [American Banker; Silvergate]

Frances Coppola read over Silvergate’s recent SEC 8-K filings. She tells us how these filings, after the 10-Q for third quarter of 2022, are bad news indeed: [SEC 8-K; SEC 8-K; SEC 10-Q]

“The 10-Q shows massive fair value losses on availability for sale securities. Lack of liquidity follows from insolvency. No-one will lend to a bank they suspect is insolvent. On these financials, Silvergate must be finding borrowing expensive. No wonder they had to sell assets at a discount. A solvent bank shouldn’t have to do that.

“According to its 8-K filing, Silvergate didn’t sell assets to maintain liquidity, it borrowed, firstly from wholesale markets (that would have been expensive, LOL) and secondly by issuing bonds. The accounts due on 17th January will show a large increase in debt and a corresponding reduction in capital. We know the bonds were issued at a heavy discount, so the interest expense must be punitive. It’s now cutting its expense base hard. This doesn’t look good to me.

“The public letter dated 5th December (8-K 12/5/22) is hilarious. If they did the due diligence they say they did, they must have known the payments to Alameda were fraudulent. This will come back to haunt them, I think.”


Image: A kite being flown at the Morecambe Kite Festival 2011 by Dave Craven, CC-by-sa 3.0.

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3 Comments on “Crypto collapse: DCG’s check kiting comes home to roost, Nexo raided, Voyager sale to Binance progresses, unbanking the banked”

  1. Is idiot the right word to use here for these people? I think it’s a little unfair to actual idiots. I’m hodling my comedy godl.

    Few understand how early we truly are.

  2. I have $0.72 in Nexo tokens and I see that I am unable to trade them or sell them. I’m not sure where to withdraw them to, so I leave them as a donation for the company.

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