Crypto collapse: Fortress custody hack, Binance stonewalls SEC, FTX to dump its crypto, Genesis sues DCG, New York restricts crypto listings

By Amy Castor and David Gerard

• Help our work: tell just one other person. Word of mouth is the best way to get information out about any creative work. If you like this, tell someone. Thank you.
• You can also send us money! Here’s Amy’s Patreon and here’s David’s.
• We still have “Bitcoin: It Can’t Be That Stupid” stickers for patrons. Message one of us and ask!

“The bad actors in the crypto space are really giving the credulous simpletons a bad name.”

— bgreysk

David Golumbia, noted bitcoin critic and author of The Politics of Bitcoin, passed away on Thursday. He will be deeply missed. His last book, Cyberlibertarianism, is going through its final edit and is set for a 2024 release. He also put a free copy of The Politics of Bitcoin up on Academia.edu for all to read. [University of Minnesota Press; Academia.edu, PDF]

 

 

You had one job

Probably the hardest part of crypto custody is that every crypto company appears to be run by Bozo the Clown.

Fortress is the latest crypto trust to put on the red nose and floppy shoes. It was hacked in early September via a “third-party vendor” by some unspecified means. Then it didn’t tell anyone. Then it was bought and bailed out by Ripple Labs. Then the hack was revealed. [Twitter, archive]

Fortress claimed that no customer funds were lost. This turns out not to be true — instead, Ripple bailed Fortress out a day after the announcement. [The Block; Fortune, archive; Twitter, archive]

The Ripple deal had apparently been in the works for some time but was accelerated by the hack. It’s not clear why Ripple wanted Fortress quite so badly.

Prime Trust similarly failed to do its one and only job — safeguarding other people’s money — and went bankrupt. Coincidentally, Scott Purcell, the CEO of Fortress, was previously the CEO of Prime. This is called “experience.”

When Prime went belly up, Purcell stressed on Linkedin that Prime had no connection with Fortress. “This is a heck of a team running Fortress Trust,” he said. It sure was. Fortress has now scrubbed its team page. [LinkedIn, archive; Twitter, archive]

Everybody still hates Binance

Binance is not cooperating with the SEC. In June, BAM (the corporate entity of Binance.US) agreed to keep all Binance.US money inside the US and away from the sticky fingers of Binance International. You’ll be shocked to hear that this hasn’t been happening.

Binance.US is using custody provider Ceffu — formerly Binance Custody, which launched in December 2021 and became Ceffu in February 2023. [Binance, archive]

BAM is claiming that this completely Binance entity somehow isn’t a Binance entity and is refusing to provide the SEC with information on Ceffu: [Motion to Compel, PDF; Memorandum in support, PDF]

BAM has been unable to credibly explain its own relationship with Ceffu, including the extent to which it is owned and controlled by Binance or Zhao. And whether the entity involved is Binance, Ceffu, or another Binance Entity,

Ceffu is owned by Binance subsidiary Bifinity UAB in Lithuania, the only country left in the EU that welcomes Binance. It’s also the country where Binance parks billions of dollars. Bifinity was previously named Binance Connect, run by Helen Hai, Binance’s head of global fiat. [Forbes, archive]

The SEC also says Binance is barely coughing up discovery documents, thus the motion to compel:

As of the date of this filing, BAM has only produced a little over 220 documents. Many are unintelligible screenshots of bank account information, documents without dates or signatures, and letters from counsel and tables that appear to be prepared for purposes of this litigation, without any supporting evidence or verification by an individual with knowledge confirming the accuracy of the information.

Binance has no excuse, so it’s been pounding the table and complaining that the SEC’s requests are overly broad.

These are the stonewalling and delay tactics we predicted previously. Binance knows this case is life or death. Their expensive lawyers — estimated to cost over $1 million a day — have nothing to do here except pound the table, argue it’s the wrong table, and cast doubt on the existence of tables.

Meanwhile, Binance.US is bleeding staff. It’s fired another 100 people — a third of its workforce. CEO Brian Shroder has quit and Chief Legal Officer Norman Reed has stepped in as interim CEO. Krishna Juvvadi, head of legal, and Sidney Majalya, chief risk officer, are also jumping ship. [Bloomberg, archive; WSJ, archive]

Binance.US’s only purpose was access to US business and US banking — and it doesn’t have those any more. We expect Binance to shut down its US affiliate as soon as it thinks it can get away with it.

ChainArgos points out that many ERC20 tokens have flowed out of Binance.US — even after the CFTC suit. A large part of the funds are flowing to CZ’s market maker Sigma Chain — which is the precise thing the regulators wanted to prevent. [Twitter, archive]

FTX: Salame slicing

FTX in bankruptcy has court approval to start dumping its crypto — selling up to one hundred million dollars’ worth of crypto (of its $3.4 billion total) per week. It will also do hedging and staking on its bitcoin and ether. FTX is hiring Mike Novogratz of Galaxy Digital as an advisor to manage risk — in the hope that removing $100 million a week in precious actual money US dollars from the crypto trading market doesn’t tank said market. Coinbase wants to reassure us that everything will be fine. [Doc 2505, PDF; Coinbase]

Ryan Salame, the former co-CEO of FTX Digital Markets — a.k.a. Sam’s Bahamas party fund — is copping a plea. Salame donated millions to crypto-sympathetic politicians with “loans” from FTX. He pleaded guilty to campaign finance law violation and operating an unlicensed money-transmission business. He’ll forfeit $1.5 billion in assets — including two properties in Lenox, Mass., and a 2021 Porsche 911 Turbo S — and pay $6 million in restitution before his sentencing in March. Salame was released on a $1 million bond, which may or may not have been linked to him showing up in court wearing bitcoin socks. The New York Times says that Salame is not cooperating with the Sam Bankman-Fried investigation. [NYT; Twitter, archive, Plea document, PDF; Order of forfeiture, PDF]

In the Sam Bankman-Fried criminal case, Judge Lewis Kaplan rejected Sam’s request for a pre-trial release. Sam’s claims that he does not have unimpeded access to discovery material are “unsupported,” the judge said. He noted that Sam had failed to request more time, and doesn’t personally need to inspect every piece of discovery because he has an entire legal team at his disposal. Sam’s appeal is set to go before a panel of three judges on September 19. [Order, PDF; Order, PDF]

More of Sam’s tawdry ramblings have found their way to the New York Times. He once again blames it all on his ex-girlfriend, Caroline Ellison. Should you care? No. Will it help his appeal for pre-trial release? Definitely not. But at least we didn’t suffer his planned 15,000-word Twitter thread. [NYT]

A hundred and four degrees with a head full of steam

Celsius Network founder and former CEO Alex Mashinsky’s bank accounts and a property in Texas have been frozen by federal prosecutors, according to an August 31 filing that was unsealed on September 5. Mashinsky put his Austin house up for sale for $2.4 million in August 2022, just a year after he bought it. The house is now off the market. [Doc 28, PDF; Twitter, 2022, archive]

Since his arrest in July, Mashinsky has been out of jail on a $40 million bond.

Mashinsky has asked the court to dismiss the FTC’s complaint against him for lying and lying and lying to customers. He says the FTC complaint “cannot substantiate a claim that Mashinsky ‘is violating’ or is ‘about to violate’ the law because Mashinsky resigned from his position as CEO of Celsius” in September of last year. (The filing says 2023, but it was 2022.) Yeah, that’s great, thanks. [Doc 44, PDF; Doc 45, PDF]

Former Celsius CTO Nuke Goldstein, who was also sued by the FTC, has filed a similar motion to dismiss. In his supporting memorandum, Nuke explains he did nothing wrong. It was all Mashinsky who “was responsible for leading almost all of the acts of misconduct alleged in the Complaint.” It’s a hoot. [Doc 40, PDF; Doc 41, PDF; Docket]

Revelations and Apocrypha

Genesis Global Capital is suing its own parent company Digital Currency Group and DCG International for failure to repay a loan of $620 million in cash and bitcoin. [Doc 681, PDF; Bloomberg, archive]

DCGI borrowed 18,697 BTC from Genesis in 2019 and DCG borrowed $500 million in 2022 — at 10%-12% interest. The loans had an extended maturity date of mid-2023 — and DCG has not paid Genesis back. (It’s paid some of the BTC back, but it still owes about 4,550.5 BTC.) [Blockworks]

Genesis is owned by DCG — but the corporation is in bankruptcy, so it has its own obligations to its creditors. So when DCG failed to pay back a loan, Genesis had no choice but to file an adversary complaint.

DCG has proposed a plan that offers unsecured creditors 70%–90% baseline recovery with a “meaningful portion of the recovery in digital currencies.” [Doc 698, PDF]

Genesis is finally closing all trading activity as of September 21, according to an email it sent out to clients. It closed spot trading on September 5. [The Block]

Making the Turkish Lira look good

Faruk Fatih Özer, founder of Turkish crypto exchange Thodex, sought to expand internationally! Specifically, he expanded his personal holding with $2 billion in crypto from Thodex and fled to Albania on 21 April 2021. The exchange shut soon after.

He was finally caught in Albania in August 2022. Özer, his sister Serap Özer, and his brother Güven Özer have all been sentenced to 11,196 years in jail — down from the 40,562 years the prosecutor had asked for. Number go up! [BBC]

New York takes on the securities fraud gig economy

The New York Department of Financial Services has put stronger controls on how New York-regulated crypto exchanges — “virtual currency entities” — list and delist coins. Trading entities are now required to have their listing and delisting policy documents approved by the NYDFS. Of particular note: [NYDFS; NYDFS; NYDFS]

Any actual or potential conflicts of interest in connection with the review and decision-making process have been assessed, effectively addressed, and fully disclosed to the public, whether such actual or potential conflicts of interest are related to the VC Entity, the VC Entity’s affiliates, and the VC Entity’s owners, principals, employees, or their respective families.

This is aimed squarely at Coinbase. The “conflicts of interest” bit is about Coinbase listing Web3 minor altcoins that were invested in by Coinbase Ventures or by Coinbase’s very good friends at a16z.

This is big news — even if it’s a year and a half late.

Regulatory clarity

Avi Eisenberg was the first DeFi player to get busted hard by the CFTC — and the Department of Justice — but he won’t be the last. The CFTC considers DeFi firmly in its ambit, and it’s now gone after three DeFi protocols, with settled charges against Opyn, ZeroEx, and Deridex. All three were charged with illegally offering leveraged and margined retail commodity transactions. Deridex and Opyn were also charged with failing to register and failing to comply with the Bank Secrecy Act. Opyn was fined $250,000, ZeroEx was fined $200,000, and Deridex was fined $100,000. [CFTC press release]

The International Organization of Securities Commissions (IOSCO) recommends that regulators go after DeFi “developers,” in that they’re usually the protocol operators as well: “In reality, regardless of the operating model of the DeFi arrangement, ‘responsible persons’ can be identified,” said Tuang Lee Lim, chair of the IOSCO fintech task force. [IOSCO Report, PDF; Bloomberg, archive]

David Rosenthal says that the IOSCO report on DeFi seems to have been heavily influenced by his advice. He urged regulators to always look for the man behind the curtain. [DSHR blog]

The SEC has hit another bunch of NFTs. Stoner Cats 2 LLC raised $8.2 million by selling NFTs to finance a web series called Stoner Cats — a show about cats that become sentient after smoking weed. The NFTs were marketed as investments in the production. The company is paying a $1 million penalty and returning investors’ money. The project was backed by Mila Kunis’ production company. Kunis, her husband Ashton Kutcher, and Chris Rock all appeared in the show, which only holders of the NFT could watch. Kutcher also backed Bored Apes Yacht Club. [SEC press release; complaint, PDF; CoinDesk]

SEC just busted Linus Financial for offering crypto lending accounts. We were surprised to see there was no financial penalty. It seems that Linus saw the SEC’s February 2023 settlement with BlockFi, realized they were in trouble, called the SEC, closed down their offer, and cooperated fully. If the SEC’s crypto lending enforcement follows the pattern of its ICO actions, we don’t expect the next violators to get such a good deal. [SEC press release; complaint, PDF]

My beautiful launderette

The bitcoin use case shows up again! It’s money laundering. Caio Marchesani, an Italian fintech owner in the UK, allegedly converted hoards of cash into crypto via Binance for Sergio Roberto de Carvalho —  who Interpol called “one of the world’s most wanted kingpins” — and Flor Bressers, a.k.a. “the finger cutter.” Nice. De Carvalho and Bressers were both arrested in 2022. [Bloomberg, archive]

We didn’t note it at the time, but Venezuela’s Petro — the first government cryptocurrency — is dead. In March, the government suspended crypto mining. In June, Venezuela banned crypto mining altogether and blocked the bank accounts of local crypto exchanges. This came after payments for Venezuelan oil were apparently diverted by the office of the crypto regulator, Joselit Ramírez. In May, Venezuela shut down what little trading there was in Petro. It looks like Venezuela’s crypto enthusiasm hinged substantially on this one guy. [Bloomberg, archive]

Bittrex US declared bankruptcy in May. In a bizarre turn of events, so few of their creditors filed to withdraw their funds that the company might come out ahead on the bankruptcy! We wonder what sort of creditors those might have been who just decided to give their crypto away — surely not the sort who wouldn’t want too much documentation around what they were doing? It’s a mystery. [CoinDesk]

More good news for bitcoin

The Monetary Authority of Singapore has issued an order prohibiting Three Arrows Capital founders Zhu Su and Kyle Davies from operating regulated financial services in Singapore for nine years. It seems that Zhu and Davies lied to MAS a whole lot. [press release]

The Salesforce Park NFT restaurant Sho — one of the dumbest ideas in restaurant history — is now officially dead. Sho Group CEO Joshua Sigel pitched Sho as a fine dining experience for the sort of people who would spend $7,500 to $300,000 on an NFT. The finest gourmet chicken tendies and a can of vintage Monster. [SFGate; SFGate]

After launching in India in April 2022, Coinbase never could quite gain traction in the country. It sent an email to all Indian customers on September 25 closing the service. Coinbase later clarified the email was only sent to account holders who breached its “updated standards.” But they’ve also banned new Indian users from signing up. [TechCrunch]

Remember Telegram’s ICO in 2018 for a new cryptocurrency called Grams on a new blockchain called TON (Telegram Open Network)? The SEC beat Telegram into the dirt and TON was shut down. So a bunch of Telegram investors in Russia took the open-source code and started FreeTON, which later renamed itself TON (The Open Network). Anyway, Telegram has now endorsed TON as its official Web3 infrastructure. Good thing they aren’t violating their SEC settlement by restarting TON themselves, hey. [CoinDesk]

LastPass is a web-based password manager. It suffered a nasty breach in December 2022. Amazingly, it’s taken this long for the hackers to start scouring the breached data for crypto keys and seed phrases. [Krebs on Security]

The ransomware guys are forming a cartel. The Lockbit ransomware group will be requiring its “affiliates” to charge their victims no less than 1.5% of their annual revenue. Some of them have just been too soft on the suckers, see. Victims with ransomware insurance will be considered particularly juicy targets. [Twitter, archive]