Crypto collapse: Gemini vs DCG, New York charges Mashinsky in Celsius, Voyager sale troubles, Silvergate troubles, Wintermute

By Amy Castor and David Gerard

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We’re all trying to find the guy who did this, but in stereo

 

The blame game: Gemini versus DCG

We’ve reached the stage in the crypto collapse where everyone is pointing at someone else. Everyone is a hero, and they’re going to work ceaselessly to find the guy who did this to you — because it definitely wasn’t them.

Cameron Winklevoss of the Gemini crypto exchange published an open letter attempting to shame Barry Silbert, of Genesis and its parent company Digital Currency Group, into paying the $900 million that Genesis owes Gemini. [Twitter, archive]

Genesis halted withdrawals on its crypto lending platform on November 16 — they had a massive hole in their books after the collapses of Three Arrows Capital ($2.4 billion gone) and then FTX ($175 million gone).

Gemini’s Earn program, which was promising 8% interest, was a pass-through fund to Genesis — so Gemini had to halt withdrawals from Earn in turn. Gemini are now trying to reclaim $900 million from Genesis of Gemini Earn customers’ cryptos.

Cameron says Gemini can’t even get a sit-down meeting with Silbert. “Every time we ask you for a tangible engagement, you hide behind lawyers investment bankers, and process.”

That’s what borrowers do when they have no money to pay  — they stop answering phones and hide from bill collectors.

Sure enough, Genesis is broke. Genesis is laying off 30% of its staff, and it’s weighing bankruptcy as an option. “While we are committed to moving as quickly as possible, this is a very complex process that will take some additional time. We believe we can arrive at a solution,” interim CEO Derar Islim told customers. [WSJ, paywalled; Bloomberg]

The Winklevoss twins can try to extract a billion dollars from Silbert all they want — but Silbert doesn’t have the money.

Like every other firm that lost money in the crypto collapse, Gemini put its customers’ money at risk because they failed to assess the risks. Gemini’s archived Earn page claims they do a bunch of due diligence on their “lending partners,” of which there was only one — Genesis. [Earn, archive]

Gemini versus Genesis is like a Bernie Madoff feeder fund suing Madoff.

In other news, DCG just told customers it’s shutting down its $3.5 billion wealth management subsidiary HQ Digital — apparently due to the “state of the broader economic environment and prolonged crypto winter presenting significant headwinds to the industry.” [The Information, paywalled; Twitter]

Three Arrows Capital: You’ve got mail

Zhu Su, co-founder of Three Arrows Capital, also took the opportunity to go after DCG. According to Zhu, DCG conspired with FTX to attack Terra and Luna, causing 3AC to collapse in turn. [Twitter, archive]

Zhu is sure that everyone else was behind the collapse of 3AC — and not himself or the other co-founder, Kyle Davies, both of whom are in hiding.

Teneo, the British Virgin Islands liquidators for 3AC, have been having some issues getting Zhu and Davies to respond to their queries. So Teneo went to court in October 2022 asking to be able to serve the pair in the U.S. Chapter 15 bankruptcy via email, or even via Twitter. This was finally granted on December 29. [Motion, PDF; Order, PDF]

On January 5, Teneo finally served Zhu and Davies via Twitter and email. Said Teneo: “The founders have unfortunately resisted cooperating in these efforts, and as such, we have received authority from courts in both the US and Singapore to serve them targeted and comprehensive discovery demands through email and their frequently-used Twitter accounts.” Who says crypto doesn’t bring innovation? [Twitter; Bloomberg]

FTX: what happened to the lawyer

We were wondering why FTX’s lawyer, Daniel Friedberg, hadn’t been arrested yet. It turns out that after Friedberg resigned from FTX on November 8 — after FTX closed withdrawals, but before the November 11 bankruptcy filing — FBI agents called him on November 14, and he met with the Department of Justice, the FBI, and the SEC in New York on November 22. “I want to cooperate in all respects,” he told the FBI. [Reuters]

Friedberg has not been charged. Instead, he expects to be called as a government witness when Sam Bankman-Fried goes on trial in October (maybe).

Friedberg previously worked at Canadian poker site Ultimate Bet with Stuart Hoegner, now general counsel at Tether. Ultimate Bet shut down after being fined $1.5 million for cheating its players. [PokerNews]

Sam Bankman-Fried has just entered the scrum to get back his multiply-pledged Robinhood shares, which the Department of Justice seized a couple of days ago. “Mr. Bankman-Fried has not been found criminally or civilly liable for fraud, and it is improper for the FTX Debtors to ask the Court to simply assume that everything Mr. Bankman-Fried ever touched is presumptively fraudulent.” He really, really needs the shares so he can pay his lawyers.

These are the Robinhood shares that Sam bought using money he’d borrowed on an IOU from Alameda, which he owned 90% of — that is, he was using Alameda as his personal piggy bank. Alameda’s CEO, Caroline Ellison, already confessed to extensive fraud at the company. Who could ever call any of that “presumptively fraudulent? [Doc 387, PDF]

Celsius Network: All your coin are belong to us

The New York Attorney General is suing Alex Mashinsky, ex-CEO of Celsius Network, on allegations of fraud. The complaint documents at length all the times that Mashinsky lied to investors. The state is demanding disgorgement, fines, and an officer/director bar in New York. [press release; complaint, PDF]

In the Celsius chapter 11 proceedings, Judge Martin Glenn has ruled that “Earn Assets in Earn Accounts constitute property of the Estates, and that the Debtors may sell stablecoins outside of the ordinary course of business.” [Doc 1822, PDF]

Celsius’ terms of service for Earn accounts said that the company owned deposited cryptos — despite Mashinsky’s statements to customers that these were their own cryptos. The judge ruled that the terms of service took precedence. The assets are now part of the general bankruptcy estate.

Celsius wanted to sell stablecoins to pay operating expenses. Since $18 million of the stablecoins were in Earn accounts, and the court had ruled that Earn accounts belonged to Celsius, the judge agreed.

What was going to happen with the stablecoins and Earn accounts was extremely contentious — as we’ve covered at length previously (November 1, December 5, December 7). So the order is a single paragraph, but it’s preceded by 45 pages of the judge’s reasoning.

At a hearing on December 20, Celsius discussed the company’s financial position and ideas for a standalone reorganization plan (NewCo). Interim CEO Chris Ferraro says there are 30 potential bidders to buy Celsius’ assets. The Unsecured Creditors’ Committee says the initial bids have been sent to the various regulators for their approval. The judge wants to announce “a path forward” by mid-January.

Celsius will run out of money as early as March. The sale of GK8 to Galaxy, once it’s approved, could extend that as far as April or May. The stablecoin sale will only add an additional month of runway. By June, the company will be dead in the water — unless they come up with a reorganization plan or find a buyer.

Here’s the presentation that Ferraro gave in court. Simon Dixon live-tweeted the hearing. [Doc 1758, PDF; Twitter]

Celsius has agreed to let Core Scientific shut off more than 37,000 bitcoin mining rigs that Celsius wasn’t paying for anyway. It took Core filing for bankruptcy in December to resolve this issue. [Bloomberg; CNBC]

Voyager Digital: everybody still hates Binance

Voyager wants to accept a bid from Binance US for a “363 sale” of assets in bankruptcy. The sale would be for $20 million of incremental value (actual money) and the assumption of $1.022 billion of Voyager’s liabilities. Voyager will seek court approval for the asset purchase agreement at a hearing on January 10, 2023. [PR Newswire; Notice of successful bidder, PDF; rescheduling, PDF]

It’s going to be controversial.

The CFIUS (Committee on Foreign Investments in the US) may block or delay an unspecified sale of Voyager assets over possible “national security concerns.” The filing doesn’t indicate the specific concerns — but it’s gonna be the Binance bid. Changpeng “CZ” Zhao, who is Canadian and Chinese, owns Binance US indirectly through a series of corporate shells. This also suggests the CFIUS wouldn’t be happy with Binance swooping in to rescue Celsius either. [Doc 797, PDF; Reuters]

The Texas State Securities Board objects to selling Voyager to Binance. There’s a new affidavit from Enforcement Division Director Joe Rotunda — we commend to you his previous affidavit in Voyager — about what a dismal organization Binance is, based on TSSB’s investigations of Binance since August 2019:

• There is no effective separation between Binance and Binance US;
• Regulators have great difficulty in getting information out of Binance;
• CZ, owner of Binance, has previously refused to provide necessary information about his personal finances to Texas;
• Binance is sloppy as hell with sanctions and keeping criminals out;
• Binance US offers staking, which almost certainly constitutes an unregistered security — but the company specifically wants to open staking to the Voyager customers it hopes to acquire with this purchase.

[Doc 815, PDF; Doc 817, PDF]

Vermont and New Jersey join in Texas’ objection. They also note that Binance is not licensed to operate in four states (Hawaii, New York, Texas, and Vermont) that contain Voyager customers, neither Voyager nor Binance are in compliance with state laws, Binance’s solvency is unclear, New Jersey still bars Voyager’s Earn product from the state, and Binance US may transfer customer crypto outside the U.S. [Vermont filing, PDF; New Jersey filing, PDF]

New York notes that neither Binance nor Voyager is licensed to operate in New York — though Voyager unlawfully signed up New York customers anyway — and wants the purchase blocked until Binance obtains a suitable New York license (presumably a BitLicense). [New York filing, PDF]

Other objectors include:

• Alameda-in-bankruptcy says the sale would make a mess of the bankrupt companies’ loans to each other, which  need to be resolved first;
• The U.S. Trustee says the sale is too hasty and needs more due diligence;
• The SEC has filed a limited objection, wondering how Binance can afford this, and wanting more detail on how Voyager and Binance will safeguard customer assets;
• Oracle — yes, the computer company — wants clarity on how Voyager’s NetSuite contracts with Oracle will carry over.

[Alameda filing, PDF; Trustee filing, PDF; SEC filing, PDF; Oracle filing, PDF]

Silvergate is doing just great

We’ve talked before about Silvergate Bank — how they are the main actual-money bank for crypto in the U.S. If anything happens to them, all of U.S. crypto is screwed.

In just the two months since FTX collapsed, customers have withdrawn $8.1 billion from Silvergate. The bank had to sell off assets at a loss to cover the cash demand. Silvergate has now laid off 40% of its staff. [WSJ, paywalled]

U.S. senators wrote to Silvergate on December 5 asking about Silvergate’s relationship with FTX, and whether Silvergate had noticed any of the glaring red flags — such as how money for FTX was being sent to Alameda accounts. Silvergate responded with four pages of non-specific non-answers. [Twitter, archive]

Silvergate: Libra is even deader

In January 2022, Silvergate bought the remaining assets of the Diem Foundation — formerly Facebook’s Libra cryptocurrency project — for $50 million in cash and $150 million in shares.

Silvergate is writing this expense off entirely. They’ve been unable to get the regulators to go along with their plan for a Diem dollar stablecoin for use by ordinary retail consumers. So they’ve all but shut down the Diem unit, and will be taking a $196 million impairment charge for Q4 2022.

CEO Alan Lane said on the Q4 preliminary earnings call that there were still staff working on the Diem project — but “there’s significant headwinds to launching something in the near future, so we’ll have to look at the expenses that we’re incurring.” [Seeking Alpha]

If anyone wanted to give David money to publish an updated second edition of Libra Shrugged, the final chapter would be an epic of corporate slapstick.

So much for crypto attestations

We now know why Paris-based accounting firm Mazars backpedaled out of crypto at the speed of light — the SEC is looking into accountants’ work for crypto companies. The SEC is concerned that companies might be overstating what the narrow reports say when the crypto companies do things like call a document an “audit” when it’s just an “everything is fine” letter that doesn’t even list numbers. [WSJ, paywalled]

It was hot, the night we burned Wintermute

Now that FTX has gone belly-up, the cryptocurrency world is in dire need of a new crypto derivatives platform — one that can suddenly burst into the big time, the way FTX did in 2019. And to prop up crypto the way FTX did.

In December, there was a huge publicity push for the idea of London-based Wintermute starting up such an exchange — though there’s been no mention of the idea since. [Forbes]

A crypto “hedge fund,” Wintermute was founded by Evgeny Gaevoy in July 2017. His wife Marina Gurevich is the COO.

Wintermute is amply qualified for the role of FTX substitute. It’s run by fast talkers who are very good at getting hacked — or “hacked” — and doing bad trades that lose a fortune.

Wintermute lost $160 million in a September 2022 “hack” on their DeFi operation and another $59 million in FTX — in fact, they have a seat on the FTX Unsecured Creditors’ Committee. [Bloomberg; CoinDesk]

Gaevoy claims to have made tens of millions of dollars in profits on the failing TerraUSD stablecoin via “arbitrage” in May 2022, while everyone else was losing their shirts. Remember how SBF’s origin myth was a supposed arbitrage?

Gaevoy’s supporters, and those who invested in Wintermute, love to claim that Gaevoy is a mathematical genius — all the same stories we heard about SBF. “He’s very smart … it’s almost like the cliche of the extremely smart Russian mathematician type,” Jeremy Liew at Lightspeed Venture Partners told Forbes. Compare Sequoia Capital’s ludicrous paean to the video-gaming financial genius of Sam Bankman-Fried.

If Wintermute wants to set up an offshore crypto casino, they’ll need a way to get actual dollars in and out — their very own Farmington/Moonstone Bank arrangement, to keep that money fresh and clean. Wintermute will also likely need to come to some arrangement with Tether.

The inside scoop on Wintermute suggests it runs as smoothly as FTX as well: “staff with real experience come for a month and are quickly gone … when 4 (yes f-ing 4) people message you to tell you about how much of a sh-tshow a firm then you know it is bad. Most of my knowledge was from people complaining in interviews/ their clients coming to me (Imma eat their lunch), but this takes the cake.” [Twitter, archive]

Why is it that every time you look inside a crypto firm, there’s nothing in the box but cobwebs and dead snakes?

Gaevoy insists Wintermute doesn’t take careless risks the way FTX and Alameda did. We would suggest caution.