By Amy Castor and David Gerard
“Sidenote: referring to this as a house of cards is insulting to cards, which have a consistent value and utility, unlike cryptocurrency.” — Ed Zitron
Celsius strikes back
Jason Stone of KeyFi, a.k.a. DeFi whale 0x_b1, used to manage Celsius’s investments. Stone sued Celsius in July, claiming he hadn’t been paid. Celsius has now filed a countersuit against Stone and KeyFi. The pair were doing business based on a handshake agreement, so it should surprise nobody that they’re now suing each other.
Celsius claims that KeyFi were incompetent investment managers and also thieves. KeyFi allegedly bought NFTs with Celsius’ coins and then sold them for millions of dollars (equivalent). Celsius alleges that KeyFi ran the ether through Tornado Cash. Celsius also claims that KeyFi’s July complaint was drafted in September 2021, but KeyFi only filed it when bankruptcy was imminent — because of confidential negotiations they can’t share. [Complaint, PDF]
In a separate lawsuit, Celsius is seeking to claw back $17 million in crypto that’s being “wrongfully held” by Prime Trust, one of the biggest custodians in crypto. Celsius had put New York and New Jersey users’ crypto into Prime Trust, who already returned $119 million worth of cryptos to Celsius when it ended its relationship with Celsius in June 2021, citing “red flags.” [Complaint, PDF; The Block]
Under section 345(b) of the Bankruptcy Code, debtors’ cash assets must be deposited in an insured manner. This is easy with cash — that’s what the FDIC is for. Cryptos are another matter — it’s not even clear that they’re “money,” even if Celsius accounts their value in dollars. So the US Trustee wants Celsius to show that it’s protecting crypto assets suitably before any Final Order on the debtors’ cash management goes through — whatever form of protection they come up with. [limited objection, PDF]
In the recent collapse of the CeFi pyramid, BlockFi looked to be as utterly screwed as everyone else. Then FTX swooped in, offering to buy out BlockFi for up to $240 million!
That’s “up to.” The actual amount could be just $15 million. Well, Zac Prince of BlockFi did tweet in June, “I can 100% confirm that we aren’t being sold for $25M.” He just didn’t say it was even less than that. [Twitter]
Apparently, the deal is that FTX US will pay $15 million base, plus:
- an additional $25 million if BlockFi gets SEC clearance by 31 December 2022 to offer BlockFi Yield;
- another $100 million if BlockFi client assets reach $10 billion (currently $4.4 billion) by the time of the FTX purchase;
- and 25% of BlockFi’s annual operating income, to a maximum of $100 million.
BlockFi filed a confidential S-1 with the SEC for BlockFi Yield in February 2022, so they can’t release any details as yet. [blog post]
What’s in it for FTX US? A large US retail client base, especially if BlockFi can get that SEC blessing. The FTX purchase option can be exercised no earlier than October 2023. In the meantime, BlockFi still has a $250 million line of credit from FTX. [Coindesk]
Prince has blessed us with his wisdom concerning the crypto collapse, in the form of an article that he sent out as a press release on the Dow Jones newswire.
You’ll be shocked to hear that Prince’s plans for BlockFi all assumed the crypto bubble would keep inflating for at least the rest of 2022. But looking back, it turns out bubbles pop! Prince places the critical moment at 11 June, shortly before Celsius went down, followed soon after by 3AC — and not in May, when Terraform’s UST/luna went down. Perhaps he means when BlockFi was suddenly in a ton of trouble.
Prince’s innovative new approach is “disciplined risk management, financial transparency, and robust regulatory compliance” — all of which would be heretofore unseen novelties in crypto.
“Crypto was created to be separate from the global economy and central banks,” says the guy running an investment firm that’s absolutely and totally about the US dollars. [Barron’s]
SkyBridge Capital, Anthony Scaramucci’s investment firm, suspended redemptions from its “Legion Strategies” fund in mid-July. [Bloomberg]
Around 18% of the $230 million fund is crypto-related investments, including a large pile of bitcoins, ether, and Algorand, and an investment in the FTX crypto exchange.
Scaramucci says the redemption suspension is temporary. “This is the first time we have ever had a suspension,” he told CNBC Squawkbox. The fund is down 30% in the year to date. According to Scaramucci, the suspension was because they didn’t want to “damage investors that want to stay in the funds,” if a lot of the investors decide to exit in a less than “orderly” fashion. He reassures investors that funds are safe. [CNBC, video]
Just like everything else in crypto, it works as long as number goes up and not too many people try to cash out. When they do, accounts get frozen, crypto firms file for bankruptcy, and yachts go back on the market.
But no worries! Scaramucci’s coming out with a new fund, focusing on Web3 and fintech startups! [Business Insider]
Scaramucci is still incredibly optimistic about bitcoin — but then, he has to be, really. He thinks Fidelity’s offering of bitcoin in 401(k) retirement funds is a great sign. And he admits he was wrong at guessing $100,000 per BTC last year. [CNBC, video]
Voyager’s Key Employee Retention Program payouts for 38 employees are going ahead — though the Unsecured Creditors Committee negotiated the amounts down. The employees are mainly in accounting and IT; none are executives. The payments will be 22.5% of each employee’s annual salary. [Bloomberg; Twitter]
Voyager has asked the court to pause or throw out the lawsuit against investor Mark Cuban and CEO Steven Ehrlich that claimed Voyager had done a Ponzi. Their argument is that the bankruptcy protections against lawsuits should extend to key figures in the company. With the lawsuit against Erlich and Cuban tied together, the company wants the court to throw out the case. The response is only pages 1–12; the other 199 pages are exhibits. [adversary complaint, PDF]
As well as FTX, Binance and Coinbase are also hoping to buy whatever’s left of Voyager, and apparently there are some other smaller players. Voyager’s own VGX token went up on the news, because everything is stupid. [CoinDesk]
Three Arrows Capital contemplate prison
Teneo got the British Virgin Islands liquidation of Three Arrows Capital (3AC) recognised in Singapore. This gives Teneo greater scope to investigate locally, and request access to financial records that 3AC kept in Singapore. Teneo wants to work out just what assets 3AC held locally.
Teneo is being represented in Singapore by WongPartnership LLP.
Teneo has secured over $40 million in 3AC assets! Creditor claims against 3AC are currently around $2.8 billion. We think the money is gone, and it’s not coming back. [Bloomberg]
3AC co-founder Zhu Su filed an affidavit in Bangkok, Thailand, on 19 August, accusing Teneo of misleading the High Court of Singapore as to 3AC’s corporate structure. Zhu says that 3AC may therefore be unable to comply with Teneo’s requests for information, risking contempt of court — with consequences up to imprisonment for 3AC officers! Threaten us with a good time, will ya. [Bloomberg]
Exchanges go down
Cryptocurrency “digital banking platform” Nuri GmbH — formerly known as Bitwala — filed for insolvency on 9 August. The company blames COVID-19, Russia invading Ukraine, capital markets cooling down, and oh yeah, the UST/Luna and Celsius collapses. Nuri reassures customers that funds are safe. Nuri laid off 20% of its employees two months ago. [Reuters; Nuri blog post]
India’s Enforcement Directorate has frozen 3.7 billion rupees (around $46 million) held by bankrupt crypto lender/exchange Vauld. The ED was investigating Yellow Tune Technologies in relation to the Chinese loan sharking scandal that hit WazirX — which may or may not be the Indian branch of Binance — a few weeks ago. The ED says that Yellow Tune Technologies helped the companies launder their takings in crypto, with assistance from Flipvolt, a local entity of Vauld. [The Block]
Binance continues to operate in the Netherlands with no license, despite repeated warnings. Binance benefited from a “competitive advantage” from not paying fees to the regulator, De Nederlandsche Bank, and skipping out on compliance costs. It had started violating the rules in May 2020. Binance was fined 3,325,000 EUR by DNB in July. The original fine in April was 2 million EUR. Binance has now started the registration process. [Coindesk; DNB, PDF, in Dutch; DNB notice from April, in Dutch; FT, archive]
German “savings fintech” Rubarb is broke. The company was run by Fabian and Jakob Scholz, nephews of Chancellor Olaf Scholz. Rubarb got into DeFi big time in March 2022, and had 40 million EUR in Celsius. Fabian Scholz assures his customers that funds are safe. [Business Insider, in German; FinanceFWD, in German]
Hotbit, a crypto exchange registered in Hong Kong and Estonia, suspended operations on 10 August — and it wasn’t because they were playing the DeFi markets. A Hotbit management employee, who left in April 2022, joined a questionable GameFi project in 2021, and commingled funds from the project with Hotbit funds, so law enforcement assumed the exchange was in on the scam. The exchange can’t function while all the money is frozen in the investigation — but they promise that funds are safe. [Hotbit, archive; Hotbit, archive; Hotbit, archive]
So what happens next?
Is all of this (we wave our hands around at everything catching fire) … the end for crypto?
We think it’s obvious that bitcoins and crypto will be around for decades. All you need is the software, the blockchain data, and two or more enthusiasts.
But nobody cares about the bare-bones technical definition — they’re in it for the money, and the complicated system of people that might get them the money.
Will crypto continue to be a financial instrument that you can make and lose fortunes on? That’s a question of regulation.
The original use case for bitcoin was money that could evade government scrutiny. A decade later, that’s still the use case for crypto.
Sure, governments can be annoying and stupid. But we don’t think dodging regulations is really sustainable on any long-term scale.
So we predict increasing regulation of crypto insofar as it’s a financial instrument. When you touch real money, you’re expected to play by the rules of real money. That shouldn’t surprise anyone.
Genuine hyperinflated Zimbabwe hundred-trillion dollar notes go for over $100 in good condition. We say “genuine” because they’re popular enough that you have to watch out for fakes. So there’s hope for bitcoin!