Crypto collapse: The Fed takes on crypto banks, Coinbase earnings call is bad, FTX 2: Ex Harder

By Amy Castor and David Gerard

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“I think you’re really underestimating the superconductor’s ability to build AI on the blockchain so you can own it and import it in every game.” — Anusien

 

 

All my banks gone

Multiple banking crises in a single year would be unseemly. But hey, we have crypto!

A small US crypto banking network is springing up after the fall of Silvergate and Signature — but it’s a lot more fragmented and the banks don’t talk it up. [Bloomberg, archive]

Those banks include Cogent, Customers Bank, Axos Financial, Cross River, and Western Alliance. In Pennsylvania, Customers’ customers include Circle, Coinbase, Bitstamp, and trading firm GSR. Cross River in New Jersey services Coinbase and Circle. (We wrote earlier about Cross River and their shadowy history of getting into PPP loans.) Axos in Las Vegas was one of the banks used by Binance.US. Western Alliance in Arizona actively seeks out crypto customers. Cogent in Florida tried to borrow $100 million from MakerDAO. [CoinDesk]

These five banks all put their crypto customers on private Ethereum instances set up by Tassat (formerly known as TrueDigital, Virtuoso, and TrueAX). TassatPay was exclusive to Signature from 2019 to 2021 as Signet. Tassat later marketed the system to other banks. [Bank Director, 2022, PDF]

(We previously said that Signet was based on Facebook’s old code for its Libra/Diem blockchain — but it’s a private Ethereum.)

Tassat’s private blockchains trade a stablecoin dollar internally for a particular bank’s crypto customers. The tokens and the dollars they represent never leave that bank — the various banks’ blockchains aren’t linked. Now, you might think that’s a database, and wonder why the banks don’t use something that’s easier to audit and monitor conventionally. [American Banker, 2021]

Tassat also launched the Digital Interbank Network, a blockchain-based inter-bank settlement service, on October 1, 2022, for Cogent, Customers, and Western Alliance. DIN has, of course, been made obsolete by FedNow, which launched last month. [Ledger Insights, 2022]

Other banks getting into crypto include FV Bank in Puerto Rico and MVB in West Virginia, who have both serviced the Kraken crypto exchange.

What to do about these sorts of dissolute morons? The Federal Reserve brings us the Novel Activities Supervision Program. This is designed to head off dumb greedy assholes crashing their own banks and risking the entire banking system the way Silvergate and Signature did in early 2023. [press release; Federal Reserve]

The Fed has had it with your crypto malarkey: “Novel activities include complex, technology-driven partnerships with non-banks to provide banking services to customers; and activities that involve crypto-assets and distributed ledger or ‘blockchain’ technology.” This particularly includes “issuance of dollar tokens and tokenization of securities or other assets.”

State banks supervised by the Federal Reserve will have to show competence before “engaging in certain dollar token or stablecoin activity.” Specifically, “a state member bank should receive a written notification of supervisory nonobjection from the Federal Reserve before engaging in the proposed activities.” [Federal Reserve]

For a worked example of how to fail this process, see the Fed’s response to Caitlin Long’s Custodia Bank wanting to run its own dollar stablecoin — which pretty clearly inspired this new rule. Custodia wasn’t supervised by the Fed, only by Wyoming — but the new guidance makes it clear that even if Custodia had been Fed-regulated, it still wouldn’t get to do a stablecoin without showing much greater competence.

But we’re sure crypto will do just fine without as much ready access to US dollar banking. Freed at last from the bankster fiatailures. Satoshi would be proud!

Inch the Inchworm, his Ty askew, hitting the sauce after checking his altcoin portfolio

The Coinbase crypto exchange filed a 36-page motion to dismiss the SEC lawsuit on Friday, arguing that it doesn’t offer trading in securities — it offers a secondary market in Beanie Babies. Yes, really: [Doc 36, PDF]

On Coinbase’s secondary-market exchange and through Prime, there is no investment of money coupled with a promise of future delivery of anything. There is an asset sale. That’s it. It is akin to the sale of a parcel of land, the value of which may fluctuate after the sale. Or a condo in a new development. Or an American Girl Doll, or a Beanie Baby, or a baseball card.

The SEC uses the Howey test to determine if something qualifies as an “investment contract” and is thus a security under federal law. Coinbase itself has relied on the Howey test to work out whether to list a token — and then listed tokens that its own internal assessment suggested were likely to constitute securities.

The Coinbase motion also invokes Judge Analisa Torres’ widely questioned decision in the Ripple case, which is pretty much certain to be overturned.

Coinbase’s second-quarter earnings are out. The traders have gone home and volume has plummeted. Transaction revenue, where Coinbase sees its biggest profits, fell to $327 million for Q2 2023 from more than $655 million in Q2 2022 — which crypto crashed halfway through. Institutions are down 54% and consumers 70% year on year. [10-Q; earnings call]

In the earnings call, Coinbase CEO Brian Armstrong admits that crypto trading is dead, and he doesn’t think it’s coming back: “the next 10 years in crypto will become predominantly about nontrading use cases.” That’ll be why Coinbase insists on trading in cryptos that even its own staff think are securities.

Armstrong floats various other ideas — crypto for payments, “layer 2 solutions,” decentralized identity systems, decentralized messaging, and social apps.

All of these have been tried repeatedly for the past decade and failed hard. But it’s not philosophically impossible they’ll work one day!

Armstrong also makes it clear that the SEC suit is good news for bitcoin: “Coinbase is driving regulatory clarity.” It sure is.

Coinbase needs more income streams, pronto. So for their in-house layer-two chain Base, which launched today, August 9, they’re promoting … NFTs. Given there’s near-zero volume on Coinbase’s existing NFT marketplace, will they remember this time that the NFT market was always fake and that NFTs fail if they’re not sufficiently stimulus-led? [blog post]

Sam’); DROP TABLE Defendants;-‍-

Hey, someone needs to give Jacob Silverman a job covering the Sam Bankman-Fried trial! Jacob is precisely the man you want. He even has a crypto book out now! [Twitter, archive]

I'd like to cover the SBF trial for an outlet. It starts in October but there are important hearings and pre trial matters (eg questions about witness intimidation) before then. Please pay me a livable wage to do this and I will file good copy.

— Jacob Silverman 🤌🪨 (@SilvermanJacob) August 2, 2023

After leaking Caroline Ellison’s diary to the NYT, SBF is on the verge of having his bail revoked. Judge Lewis Kaplan issued an interim gag order on July 26, before a formal hearing on August 11 at 2pm. Mr Bankman-Fried is required to be present. [Order, PDF]

Sam has a constitutional right to speak with reporters — but he doesn’t have a right to intimidate witnesses. If the DOJ wants Sam’s bail revoked, they’ll have to convince the judge that Sam was doing just that when he shared Ellison’s journal.

Sam’s lawyer Mark Cohen says Sam did nothing wrong and will find it much harder to prepare for his trial if he’s in MDC Brooklyn and cut off from the internet. [Doc 185, PDF]

The New York Times argues that Sam has a First Amendment right to speak to reporters, and specifically to continue feeding the NYT the dirt. Sam has had over 100 phone calls with the NYT. [Doc 187, PDF]

Filmmaker Nanette Burstein is doing a documentary on Sam, which would be derailed by Sam going back to jail. Filming was scheduled to start this week. [Doc 191, PDF]

Sam may have a right to talk to reporters, but that’s a right to use with greater care than Sam has managed so far. Ken White, a.k.a. Popehat, told CoinDesk that Sam talking to reporters ahead of the trial was “astoundingly dumb.” Sam “really doesn’t understand the sort of theories behind the government’s charges and what admissions by him are harmful to him.” [CoinDesk]

Sam’s criminal trial is set for October 2. Prosecutors are planning to file a superseding indictment next week with the first seven charges from the original Indictment. The campaign finance changes are still on the table, but they will be rolled into the existing fraud and money laundering charges. [Doc 195, PDF]

FTX 2: Ex harder

FTX in Chapter 11 is seriously considering a plan to use some of the bankruptcy estate to start a new crypto exchange.

If this plan moves forward, creditors may be able to opt for shares in the new offshore exchange company rather than a cash payout.

FTT tokens will be wiped out — they’re a bit too much like equity in the existing FTX, and equity holders come last in a bankruptcy. [Doc 2100, PDF; Bloomberg, archive]

The exchange idea has been tentatively floated with the Unsecured Creditors’ Committee — which is mainly large crypto companies who want to see bitcoin moon again — and they’re not happy. The UCC wants someone with crypto experience to run the rebooted exchange — someone of their choosing. They also want a “regulatory compliant” recovery token — which is, of course, impossible. [Doc 2103, PDF]

Another FTX plea

Former FTX Digital Markets co-CEO Ryan Salame is negotiating a plea deal with the Justice Department. In his time at FTX, Salame made $24 million in political donations to Republicans — including to his girlfriend, Michelle Bond, for her run in a Republican primary. FTX fixer Daniel Friedberg also donated to Bond’s campaign. FBI agents seized Bond and Salame’s phones from their homes in March. [Bloomberg, archive]

The Australian Securities and Investments Commission has pulled FTX Australia’s license as of July 19. ASIC suspended the license shortly after FTX went down, but now it’s permanent. [ASIC]

Venture capital firm Sequoia’s crypto investors have left the company in the wake of the collapse of FTX. Sequoia lost about $214 million on FTX and FTX.US — and took down their hilarious paean to Sam Bankman-Fried in embarrassment. [Bloomberg, archive]

More good news for bitcoin

If the crypto press is writing about superconductor hype on the basis that some random DeFi guy says he’s trying to reproduce the LK-99 results, then there is absolutely no crypto news. [Decrypt, archive]

PayPal has launched PYUSD, a white-labeled Paxos Dollar stablecoin. PYUSD has no fees! Except for converting to and from other cryptos inside PayPal. And Ethereum gas fees if you move it outside PayPal, which averaged $5.37 per transaction on August 7. It’s not clear at what point it will be possible to cash out PYUSD anywhere other than PayPal itself. [press release]

The New York Attorney General is looking into Digital Currency Group and its subsidiary Genesis, though we don’t know precisely what they’re investigating. Federal prosecutors and the SEC are apparently already looking into the two companies. [Bloomberg, archive]

New York sued Alex Mashinsky of Celsius Network in January for fraud. Justice Margaret Chan has ruled that New York has presented sufficiently substantial allegations that Mashinsky must face the case. Mashinsky is still facing separate federal criminal charges. [Reuters]

Hillary Allen, a professor at the American University Washington College of Law, talks about why the new crypto market structure bill, which offers a way for digital assets that begin as securities to eventually be regulated as commodities, is really bad. The pressure is coming from venture capitalists, the crypto industry, and their lobbyists. Crypto desperately needs new investors — as Coinbase made clear in their Q2 2023 earnings call — and this bill is their only hope of legitimizing the industry. [Twitter thread, archive; paper, PDF; draft legislation, PDF]

Hong Kong’s brick-and-mortar crypto shops are thriving.  Holders are getting literal bags of cash for bitcoins at over-the-counter desks. There’s a $200,000 per transaction limit, but unlimited transactions are allowed. You can also exchange CNY for USDT. [Twitter, archive; FT]

Good news! A tourist visits El Salvador and discovers that the alternate national currency, bitcoin, is great if you deal with bitcoin evangelists! Though even the driver with the Chivo Wallet on his phone wouldn’t accept bitcoin. The tourist says that “adoption is still clearly in its infancy here” and not, you know, a complete failure. [CoinDesk]