Crypto collapse: Unbanking crypto, Genesis offers DCG shares to creditors, Binance suspends US dollar transactions, SEC goes after staking

By Amy Castor and David Gerard

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We expect Nocoin to moon any time now. In fact, we both have most of our net worth tied up in Nocoin, with a small portion in Nocoin Cash. Hard to believe it’s still so undervalued. Once everyone sees how awesome Nocoin is, they’ll flood in and the price will skyrocket. It’s inevitable.

 

 

Unbanking the banked: 1 BTC = 0 USD

In late January, the Federal Reserve, the FDIC, and the OCC sent a message to state banks to back off their crypto involvement. On February 7, that policy statement was entered into the Federal Register, turning it into a final rule. [Federal Register]

On January 30, three US Senators — Elizabeth Warren (D-MA), Roger Marshall (R-KS), and John Kennedy (R-LA) — sent an open letter to Silvergate Bank CEO Allen Lane demanding a better explanation of the bank’s role in the FTX debacle than the previous evasions Lane had given them. [Warren, PDF]

Silvergate was FTX and Alameda’s main actual-dollar bank. When FTX was falling apart in late 2022, Silvergate’s other crypto customers took out their money in a panic, and the bank lost $8.1 billion in deposits. They weren’t insolvent, they had loans to cover those deposits — e.g., to MicroStrategy — but didn’t have cash-on-hand liquidity. So they got a $4.3 billion bailout from the Federal Home Loan Bank.

This is the contagion the US government has been worried about — where the government becomes the bagholder of last resort. And they’re not having any of it. So banks — even previously crypto-friendly banks like Signature and Metropolitan — have been warned, and they’re dumping their crypto customers as fast as they can.

The crypto world is convinced this is the US government conspiring against them. If the government getting deeply pissed off at having to bail out crypto bozos is a conspiracy, then sure.

Bitcoin finance guru (cough) Nic Carter has an apocalyptic write-up of the unbanking disaster. His post is surprisingly reality-based — but with a few hilariously crazy bits. He tries to paint what’s going on as a massive evil conspiracy, rather than everyone finally having had it with crypto’s nonsense. Good thing crypto is uncensorable and unstoppable and doesn’t need banking. [Pirate Wires, archive]

AP_Abacus, a coiner whose record on rumors is not perfect but is pretty good, says venture capitalists “are starting to become very, very concerned that their crypto portfolio companies are being de-banked en masse.” [Twitter]

Fortune has written up the OCC’s misadventures in crypto banking under previous head Brian Brooks, and how Brooks’ successor Michael Hsu is winding back Brooks’ nonsense. [Fortune; House, PDF, archive]

Fed Governor Christopher J. Waller has a few thoughts on crypto. “If you buy crypto-assets and the price goes to zero at some point, please don’t be surprised and don’t expect taxpayers to socialize your losses.” [Federal Reserve]

Genesis: an IOU for future magic beans

Genesis filed the term sheet for its restructuring proposal. The plan, originally announced on February 6, was put together by Genesis, their parent company Digital Currency Group, and the two ad-hoc creditor groups. [Doc 80, PDF; press release]

The term sheet is stultifying. Your eyes will slide off it. That’s by design. It’s a scheme to pay creditors with an IOU for nothing, valued at something, and it’s written to obfuscate that.

Genesis had a massive hole blown in its accounts by Three Arrows Capital collapsing. DCG wrote Genesis a promissory note for $1.1 billion — payable over ten years at a 1% interest rate — so that Genesis could account for it as $1.1 billion of assets. A kited check that’s good as long as it’s never cashed.

The meat of this new deal is to take that $1.1 billion loan and turn it into shares in DCG, to be distributed to creditors along with some existing DCG equity. Gemini Earn creditors can take partial cash reimbursement if they don’t join the bail-in.

DCG’s existing obligations will be converted into new subordinated loans and preference shares. The shares in DCG that they’re promising to creditors don’t even exist yet. DCG will have to do an IPO by February 2025.

How much of a haircut do creditors take? No haircut at all! … if you think it’s worth your missing money to accept DCG’s left hand offering you equity in its loan to DCG’s right hand.

Always remember that Genesis is 100% a part of DCG — and DCG’s goal is to get out of Genesis’ bankruptcy unscathed, with nobody coming after them for the hole in their subsidiary’s accounts.

To this end, DCG is trying to pay off Genesis creditors with a currently-worthless share in a debt that was paper-shuffling in the first place, and will only be worth anything if and when bitcoin bubbles again.

This reminds us of the deal Bitfinex proposed to its users after it was hacked in August 2016. That hack left Bitfinex functionally insolvent, so it offered users equity tokens in the company instead of their money. Bitfinex did eventually pay back all the customers’ money! In tethers, anyway. Crypto has always been about creating “money” out of thin air.

Given Genesis has been broke since July and bitcoin isn’t bubbling again any time soon, it’s possible that this deal is about as good as creditors can get — if they can’t somehow claw their money straight back from DCG. Also, any bankruptcy plan has to be approved by the court and voted on by all creditors.

It’s low tide, and Binance is butt-naked

The tide has gone out on crypto — retailers have taken their actual cash and gone home. Banks want nothing to do with offshore crypto exchanges and dubious crypto hedge funds. The remaining firms are standing butt-naked, covered only with a transparent gauze of their own internal tokens.

Binance suspended all US dollar bank transfers February 8. Apparently, this only affects Binance.com, not Binance US. Users cannot deposit or withdraw USD. [Coindesk]

Bitfinexed thinks the USD being stuck at Binance is why the price of bitcoin has gone from $16,000 a few weeks ago to over $20,000. Bitcoin trading is that thin, and the bitcoin price is pretty much set at Binance. When you can’t get cash off an exchange, you trade whatever you’ve got for bitcoin, so you can move it to Coinbase and cash out. The demand pushes up the price.

We saw the same thing happen at Bitfinex in 2017 after they lost their banking. People used their trapped dollars to buy bitcoins, sending the price up. This helped kick-start the 2017 bitcoin bubble. Prolific tether printing kicked off soon after. [Twitter]

Tether now accounts for a greater share of stablecoin value on Binance than Binance’s own stablecoin, Binance USD — if you accept tethers are worth a dollar. [Twitter]

Binance has hundreds of coins, and most have a trading pair against both USDT and BUSD. The tether version of a trading pair tends to trade as if tethers are worth just a little bit less than BUSD. [CoinGecko]

You can’t cash out with tethers because tethers aren’t redeemable. But Binance BUSD is often worth a dollar, and mostly matches the Paxos BUSD that it’s bridged from.

Binance is only solvent if you count its supermarket loyalty card points (BNB) as money. FTX worked the same way, only their supermarket points were FTT.

The SEC puts a stake through your heart

The SEC is coming down hard on crypto’s rampant securities law violations. SEC Chair Gary Gensler told Squawkbox’s Andrew Ross Sorkin that it’s time for crypto firms to comply with securities laws and make the proper disclosures. “The runway is getting awfully short, and we are here to try to protect the investing public.” [YouTube]

Kraken settled SEC charges by agreeing to shut down its staking products, which offered up to 24% returns. Kraken is paying $30 million in disgorgement, prejudgment interest, and civil penalties. [SEC press release; complaint, PDF]

Here’s a video from Gary Gensler, for your daily quota of dad jokes about staking! [YouTube]

Frances Coppola on Celsius

Frances Coppola published her deep dive on the Celsius examiner’s report, combined with her close reading of Celsius’ UK accounts up to December 31, 2020 — the last accounts that exist. It’s a heck of a tale and worth a read. “The U.S. Examiner’s report reveals deep and long-lasting insolvency, concealed by layer on layer of fraud.” [Coppola Comment]

Celsius was never at any point a viable business, says Frances. It was a shadow bank that promised unfeasible returns — up to 18% yield on customer deposits. Even in the good times, Celsius couldn’t manage to turn a profit.

The heart of Celsius’s operation was the “flywheel,” a fraudulent perpetual motion scheme that involved Celsius buying and selling its own CEL tokens, the currency of its various frauds.

Celsius used CEL tokens freely to pump up its balance sheet. Without it, “Celsius would have failed in its first year of trading.” The company was insolvent except for its own CEL magical money. Frances is pretty sure the accountants doing their audits realized Celsius was insolvent too, based on their disclaimers.

Celsius spent May 2020 manipulating the price of CEL through buybacks. This is the market manipulation called “painting the tape,” and it’s illegal in both the UK and the US.

Celsius could dump unlimited CEL on retail investors. But buying CEL to control the price required actual money and other tokens — relatively liquid crypto like USDC, bitcoin, and ether — that it couldn’t create. When it ran out of those, the game was over.

Celsius and Mashinsky’s personal corporation AMV loaned each other cryptos to buy the company’s own share capital. “Lending to purchase own shares is illegal in most jurisdictions,” says Frances. “It was a clever deception devised by someone well-versed in corporate finance and accounting. Celsius’s management knew this scheme was fraudulent.”

Coppola  thinks Mashinsky wasn’t bright enough to come up with the schemes outlined by the examiner. Someone else would have come up with the schemes, and Mashinsky would have approved them. “This fraud was a team effort.”

The FCA issued a warning in June 2021 about crypto companies operating in the UK without a licence. Celsius in particular was warned that it could no longer market to retail customers in the UK.

So Celsius set up in the US instead — but kept its UK entity going. The US company took deposits, and the UK company invested the funds. Celsius didn’t distinguish between the entities — this was “merely an inconvenient device to evade the FCA.”

Would Celsius have survived if crypto hadn’t entered a bear market and if Terra-Luna hadn’t crashed? No, says Frances: “It would simply have taken longer to die, and lost even more of its customers’ and investors’ money.”

Paxos

The New York Department of Financial Services is apparently sniffing around the Paxos stablecoin business. What they’re after is not yet clear. [Bloomberg]

PayPal was going to do a white-label Paxos stablecoin dollar — in the manner of BUSD — but “is pausing work” now that NYDFS is sniffing around Paxos. “If and when we seek to move forward, we will, of course, work closely with relevant regulators.” Like Paxos, PayPal has a New York BitLicense. [Bloomberg]

UPDATE: The SEC has sent Paxos a Wells Notice alleging BUSD is a security! More details next episode! [WSJ]

FTX

The Financial Times has an amazing tale of the last days of FTX that you must read. “It felt like being at the collapse of Rome,” said a person who attended one of the last gatherings at Sam Bankman-Fried’s Bahamas penthouse. “The chocolate pudding topped with gold flakes seemed like something from a previous era.” [FT, archive]

As expected, Bankman-Fried is appealing the judge’s ruling to make the two additional sureties on his bail public. Who are these SBF supporters? [Notice of Appeal, PDF]

In an FTX bankruptcy hearing on February 6, Judge John Dorsey heard arguments for and against appointing an examiner. John Jay Ray III said the examiner report for Enron cost $90 million and wasn’t even helpful. “When you review the reports, the reports are very topical, very general,” he said. The Trustee hammered on the letter of the law, which says an examiner must be appointed in circumstances such as these. The judge told the parties, including lawyers for the Unsecured Creditors’ Committee, to work out a “consensual resolution.”

FTX is sending notices to recipients of political donations to send the money back. Ray did tell them in December that this was coming. [PRNewswire]

FTX also made political donations in Australia to the main two parties, via Alameda-owned HiveEx — AUD$27,540 in the 2021-2022 financial year. This was AUD$18,440 to the Liberal Party NSW, AUD$6,500 to the Australian Labor Party NSW, and AUD$2,400 to the ALP nationally. [Protos]

Sullivan & Cromwell, the law firm that Ray retained to represent FTX, billed $7.5 million for work in November, a period covering just 19 days. [Doc 648, PDF; CoinDesk]

The Wall Street Journal speaks to FTX’s in-house psychiatrist, George Lerner. “Dr. Lerner said one of his goals at FTX was helping employees go out on dates.“ [WSJ, paywalled]

Patrick McKenzie talks in his payments blog about how anti-money laundering works. He goes into some detail about FTX, Alameda, and SBF’s “kimchi trade” origin story — which we’re pretty sure was mostly Sam lying, but anyway — and the point at which Alameda was technically money laundering: “No later than January 2018.” Alameda also appears to have polished and shined billions of dollars for Bitfinex/Tether. [Bits About Money]

Getting stabbed in a parking lot, on the blockchain

The venerable peer-to-peer bitcoin exchanging service LocalBitcoins is closing down. They say it’s because there’s no money in the business anymore, and it’s only coincidental that they were named as one of the largest channels for Bitzlato users. Trading stops on February 16. Users have a year to withdraw their bitcoins. [Local Bitcoins, archive; Cointelegraph]

Here is the greatest LocalBitcoins story ever told: the guy who swallowed the USB stick with his bitcoins on it because he saw a black person and panicked. [Buttcoin Foundation]

Crypto.com is now charging customers up to a mere 50% fee to withdraw. “If the tokens are worth £231, then why are they only worth £138 when I go to sell?” [Crypto.News]

Zhu Su and Kyle Davies of Three Arrows Capital — in liquidation — have unveiled OPNX, their new exchange for distressed crypto debt! Or they’ve opened the waiting list, at least. “Our vision is unlocking trapped claims, radical transparency,” tweeted Zhu. [Twitter; The Block]

Meanwhile, Zhu and Davies are transparently not answering subpoenas from Teneo, 3AC’s liquidators, in the US Chapter 15 part of the 3AC bankruptcy. [The Block]

The Bitzlato crypto exchange was shut down by the US in January for money laundering for the Hydra darknet market. Bitzlato cofounder Anton Shkurenko tells CoinDesk he could totally restart the exchange tomorrow — most of the users’ funds are under the control of the exchange team. “I could launch the exchange from my apartment. Two small servers are enough.” Shkurenko was questioned by Russian police because he’s on the Interpol wanted list, but he hasn’t been charged with anything in Russia as yet. [CoinDesk]