News: UST fallout, Central African Republic fallout, Coinbase Custody not safe in bankruptcy, Catalonia and Russian bitcoins

- by David Gerard - Leave a Comment
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History always repeats, but only the dumb stuff

The UST algorithmic stablecoin collapsed, and took Bitcoin with it! The crypto markets were a sea of red this week. While it’s true that overleveraged nonsense crashes in crypto all the time — a sort of perpetual motion revolving dumpster fire — this one made the papers.

What happened to the “$3.5 billion” of bitcoins that was in the Terra reserve, and was supposedly used to prop up UST when it was failing? Blockchain analysis company Elliptic follows the bitcoins. [Elliptic]

Izabella Kaminska has left the Financial Times and struck out on her own with her newsletter, The Blind Spot. Izzy explains the problem with stablecoins — the inexorable temptation to ever-more-precarious financial engineering in the interest of bigger returns, until you get to UST and it’s all intricate cleverness and no foundation at all. The Blind Spot Discord’s #crypto channel is pretty good — you’ll find me in there, along with a lot of the crew from the now much less active FT Alphaville unofficial channels. [The Blind Spot]

Do Kwon, creator of the UST stablecoin disaster, was the pseudonymous  “Rick Sanchez” who created the failed stablecoin Basis Cash. CoinDesk spends a couple of paragraphs apologising for doing journalism by revealing his name, and not keeping to their previous scammer identity protection rule. [CoinDesk]

An upset investor got into Do Kwon’s apartment building and rang his doorbell to talk to him. Kwon has called the police. [Money Today, in Korean]

Euronews: Terra Luna stablecoin collapse: Is this the 2008 financial crash moment of cryptocurrency? With quotes from me. [Euronews]

There’s nothing more quintessentially libertarian than expecting a government bailout. It’s apparently a news story in crypto when the financial regulators don’t give a hoot about bailing out UST holders when the crypto market sets itself on fire. I expect the regulators are delighted that crypto got on with self-immolating before they had to do something. [CoinDesk]

 

 

La Chute

COBAC (Commission Bancaire de l’Afrique Centrale) sets regulations across the Economic and Monetary Community of Central Africa (CEMAC) for banks dealing in central CFA francs.

COBAC met on 6 May 2022 to discuss cryptocurrencies with some urgency — because the Central African Republic had just declared Bitcoin to be legal tender, without warning anyone else first. [Twitter]

COBAC has prohibited banks in the zone from performing any transaction in relation to crypto-assets:

  • Holding cryptocurrencies on account, for yourself or third parties;
  • Converting between cryptocurrencies and CFA francs;
  • Using Bitcoin or any other cryptocurrency as a unit of account.

COBAC will be setting up a system for identifying and reporting operations related to cryptocurrencies.

The Central African Republic is a sovereign nation, so they can declare that bitcoins are currency. They can even force banks in the CAR to accept bitcoins, or risk a jail term — but the banks may then have problems exchanging CFA francs with the rest of the zone.

Quite a lot of banking in the CAR is apparently done in rubles, and banks across the zone are delighted to get into a spot of money laundering. But bitcoins seem to be just that step too far.

 

 

According to the postman, it’s like the bleeding Bank of England

In April, the SEC put forward new accounting rules for holding cryptocurrencies on behalf of a customer: you should account these as liabilities. [SEC]

So Coinbase duly stated in their quarterly 10-Q SEC filing that: [SEC]

because custodially held crypto assets may be considered to be the property of a bankruptcy estate, in the event of a bankruptcy, the crypto assets we hold in custody on behalf of our customers could be subject to bankruptcy proceedings and such customers could be treated as our general unsecured creditors.

Not just cryptos on deposit for trading — but cryptographic private keys that customers gave Coinbase to look after, because keeping your keys safe turns out to be super-hard.

Proper banks cannot rifle through the safe deposit boxes to pay their bills — but Coinbase isn’t a bank, it just wants to pretend it’s as safe as one, when it absolutely isn’t.

Coinbase put on its “no risk of bankruptcy” shirt, which promptly raised a lot of questions answered by the shirt. [FT, paywalled; Twitter]

The 10-Q filing also revealed that Coinbase had somehow managed to lose buckets of money running a casino. Shares in Coinbase fell 23%. [Bloomberg]

 

 

I’m going to Spain

In 2017, Catalonia held a referendum over whether it should declare independence from Spain — and it turns out to have had a bizarre tale of Russian bitcoins attached.

Nikolai Sadovnikov, a Russian diplomat, visited Barcelona in 2017. He met with Catalonian president Carles Puigdemont, and offered the independence movement $500 billion — with a “b” — to turn independent Catalonia into a haven for cryptocurrencies.

The Russians sent the Catalonians photos of suitcases full of cash and of a certificate of deposit worth $500 billion — though the only money-like thing Sadovnikov ever ended up sending them was one single bitcoin.

Puidgemont’s associate Victor Terradellas thought these guys were the Mafia, or the political equivalent.

“Combining both parts, it sounds like we’re looking at covert, intelligence-backed support for a separatist movement with a scam or fraud component on the side,” said Christopher Nehring from the University of Potsdam.

Sadovnikov also offered Puigdemont 10,000 Russian soldiers if Catalonia became independent. I’m sure that would have worked out just fine. [OCCRP]

 

 

Fol de rol

Coinbase has opened its shiny new NFT marketplace to the world! The site had 110 transactions total on its first day of operation, and no day has had more than 200 transactions since. Coinbase, of all people, forgot that the NFT market was fake. [Bloomberg; Web 3 Is Going Great]

Amy Castor has two stories on the NFT market’s apparent decline — the polite version in Artnet, and the opinionated version in her own blog, cataloguing the arrant lies and BS of the largely-fake market. The NFT market hasn’t crashed — it was never not crashed. [Artnet, paywalled; Amy Castor]

Instagram is adopting NFTs — what does it mean for Web3 adoption? With a quote from me about how the NFT market is basically fake, and if Facebook ever start an NFT marketplace, they’ll need to do a pile of fake trading to make this look like it’s working. [Metaverse Post]

NFTs: Why people are paying $100,000 for a shoe they cannot wear — with a quote from me. [ITV]

 

 

I fought the law

The Department of Labor warned investment advisors that promoting crypto for retirement plans meant their license was on the line. Fidelity’s 401(k) platform for employers now lets employees put up to 20% of their retirement savings into Bitcoin-based investments — if the employer enables it.

The Department is not happy, and will be asking employers what the hell they’re thinking if they switch this on. Nor are Senators Elizabeth Warren and Tina Smith, who have written a letter to Fidelity asking them to explain themselves, the risks, and the company’s conflicts of interests. [CNN; WSJ, paywalled; WSJ, paywalled; Senate; Senate, PDF]

FinCEN has previously prosecuted operators of crypto mixers — but, for the first time, a mixer has been directly sanctioned by the Office of Foreign Asset Control: blender.io, which North Korea has been using. [Treasury]

The other obvious thing to do is to sanction Tornado Cash. Nicholas Weaver writes up an interesting way this could be done. [Lawfare]

The New York State Assembly has passed a bill imposing a moratorium on “proof-of-work authentication methods to validate blockchain transactions” at old fossil fuel plants. The idea is that you can’t start new crypto mining installations powered by fossil fuel. [Thomson-Reuters Trust; CNBC]

Anchorage is a Bitcoin custody company that got itself a shiny new Wisconsin bank charter! It turns out they didn’t quite get their backsides into gear about anti-money-laundering compliance. The Office of the Comptroller of the Currency just slapped a consent order on them. The order’s very gentle — not even a fine, Anchorage just has to follow these detailed instructions on getting its AML into bank-quality order. Expect future OCC consent orders not to be this gentle. [OCC, PDF]

A new Bitcoin ETF has launched in Australia — on the day that Bitcoin went down $4,000 in step with NASDAQ. It’s not getting a lot of volume as yet. The Commonwealth Bank’s CommSec securities trading app has a splash screen warning of the special risk of the new ETF, and a warning page that’s much longer than their regular ETF warning page. [Blockworks; CommSec]

Welcome to the world of crypto muggings — when idiots flash around their phones with CoinBase apps in the pub, and are forced to transfer their coins to an attacker. “A third victim said he had been vomiting under a bridge when a mugger forced him to unlock his phone using a fingerprint, then changed his security settings and stole £28,700, including cryptocurrency.” No chargebacks! With quotes from me. [Guardian; Guardian]

Over CAD$2.6 million was lost to cryptocurrency frauds in less than four months in Richmond, British Columbia — just one city of 200,000 people. Remember, it’s about the community: “Police also urge investors to do considerable homework before handing over their money and warn that if a new online friend avoids invitations to meet in person but frequently discusses ‘investment opportunities,’ it might be best to end the relationship.” [Globe and Mail, archive]

 

 

New facts emerge

David Marcus, co-founder of Facebook’s Libra, unveils his new payments startup, Lightspark — which is focused on Bitcoin and the Lightning Network. He has venture capital backing from a16z and Paradigm. [The Block]

GitHub is a site where programmers store computer code. Co-Pilot is an AI-based tool to generate code based on GitHub’s archive. The model sometimes just regurgitates existing code fragments — including private keys to Ethereum addresses that have ether in them. [The Register]

Tether’s tech chief Paolo Ardoino says that providing specifics on the company’s vast holdings of US debt would divulge the “secret sauce” of its arbitrage skills with international reply coupons. [FT, paywalled]

Having lost their Russian oligarch Roman Abramovich to sanctions, Chelsea Football Club reliably finds an even shonkier backer: some crypto bozos called WhaleFin, who are paying £20 million a year to put their logo on players’ shirts. [Sky News]

Sam Bankman-Fried of crypto exchange FTX is spending his money on trying to buy elections. His first move is to parachute Carrick Flynn, one of his fellow weird LessWrong rationalists, into an Oregon Congressional seat — flooding local television with ads for Flynn. [Willamette Week; Oregon Capital Chronicle]

Fabio Panetta from the European Central Bank is just straight-up calling cryptos Ponzis now. [ECB]

“The Wikimedia Foundation has decided to discontinue direct acceptance of cryptocurrency as a means of donating.” [Wikimedia; Wikimedia]

Instead of cashing out your cryptos and incurring capital gains tax, why not use them to back a mortgage? Nothing can possibly go wrong here! For the bank, anyway — you secure the mortgage by putting up the entire value of the property. ”To account for the volatility, Milo will ask the borrower to put up more crypto or cash if the crypto-to-loan amount drops below 65%. If that figure drops below 30%, the company liquidates the assets and stores them in U.S. dollars.” [Bloomberg]

The actual Wall St hedge fund Jane Street is hitting crypto and DeFi hard, and will absolutely clean up. [Bloomberg]

 

 

Guest informant

A crypto group named a new frog species, and people aren’t thrilled: Experts are concerned that promoting cryptocurrency is counterproductive to conservationist and environmentalist goals. With quotes from me. [Popular Science]

I went on Jason Ingber’s legal podcast to talk about cryptocurrency and blockchain. It was fun. A lot of the discussion presaged what just happened to UST and Luna. [LibSyn]

 

 

 

 

 

 

 

 

 

 

 



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