The Great Bankruptcy Continues, Bitcoin Pumps, FTX, Voyager, Tether – 50 Foot Blockchain Attack

by

Factor: Amy Castor and David Gerard

“We’re still early for the party. The kind of early where most of the guests have left, only empty bottles of good booze left on the floor, a hint of morning and you hope that if you keep drinking and pass out, you’ll sleep through the hangover. That kind of early.” — Dr. Orrery

How things are going

The crypto bubble of 2021 burst in May 2022 when Terra-Luna collapsed. We started collaborating on a newsletter series about the ongoing collapse.

Everything that has happened since and is happening now – Celsius, Voyager, FTX and their victims – followed directly from Terra-Luna. The collapse continues.

Binance looks more and more like FTX in the months leading up to its collapse – “money” created out of thin air, reserves largely from their own internal token, worse and worse excuses and regulators sniffing around.

Bitcoin and its descendants failed miserably as payment systems. There is no separate crypto economy. Crypto is a dollar derivative – you get into crypto because you want dollars. The only consistent ideologies are “the number goes up” and “don’t subject me to laws”.

Crypto’s biggest challenge now is that it is increasingly disconnected from precious dollars. The rails of US banking are disappearing as regulators finally do things they should have done years ago.

If “Operation Chokepoint 2.0” is real, it will be the best program ever presented to crypto by US regulators.

Bitcoin price is on the rise again! At press time, it was $27,020. Someone’s pumping it hard. An important factor is BUSD holders who can’t bypass KYC on Paxos and have to drop their pseudo-dollars, so they buy BTC with them – most bitcoin trading happens on Binance, and that’s where the price search happens. The Tether printer is also going haywire again.

There is no evidence of new retail dollars coming into crypto. The public still seems pretty sure this is all a hoax.

What we expect to see in the future:

  • Crypto companies are trying to go through all the dodgy community banks in the US.
  • More claims of government and regulatory collusion.
  • More wishful thinking, wishful thinking and just made up claims about crypto.
  • More hopium in the crypto press because the actual news is bad.
  • Floods of stablecoin printing to pump up the price.
  • No evidence of new retail interest – and in fact evidence against it, such as Coinbase’s SEC filings.

This is obviously good news for bitcoin.

Enter your name

The deadline for Signature Bank carcass purchase offers was Friday, March 17. Regulators are trying to sell the bank in its entirety as a going concern. If that doesn’t work, it’s cut into pieces. Any potential buyer of Signature may have to abandon the crypto business. [Reuters]

When Signature was abruptly taken down and shot down on March 12, DOJ investigators in Washington and Manhattan were already looking into its crypto clients — and especially Signature’s anti-money laundering efforts. Signature had also been investigated by the SEC. [Bloomberg]

Barney Frank, a former member of Signature’s board and one of the guys behind Dodd-Frank, defended Signature: “I wonder if we’re the first bank to close completely without being insolvent? And if so, why? I think the folks at DFS, New York State should answer this. So I guess it was because we were used as the poster children to say “stay away from crypto”. Good NYDFS then. [New York, archive]

But if your loan book is bad enough, technically solvency may not be enough. Signature’s real estate loans in particular turn out to be garbage. [The Real Deal]

The signing was related to Paycheck Protection Program loans during the pandemic — it granted dozens of PPP loans to cryptocurrency companies than previously disclosed in public documents. “DePaolo said the bank’s crypto PPP loan volume was because other crypto-serving banks didn’t have the resources to offer a similar program.” [CoinDesk]

Dissolving banks from unbankability

Silicon Valley Bank didn’t have many crypto clients — except for Circle’s portion of its USDC reserve — but SVB’s UK unit had a few. HSBC bought SVB UK and all its assets and liabilities for £1 – and HSBC doesn’t like cryptos. “Crypto materials will probably go away, either of their own volition or politely abandoned,” said one of those involved in the purchase. “They understand that life would be too difficult as an HSBC customer.” [FT]

Federal Home Loan Bank of San Francisco did not do is requesting its $4.3 billion loan to Silvergate Bank, an FHLB spokesperson told CoinDesk. “Silvergate decided to pay the advance based on their own judgment.” We’re pretty sure if FHLB-SF didn’t pressure them, someone else did. [CoinDesk]

Circle has put all USDC cash holdings at one bank: BNY Mellon. This happens to leave “crypto-friendly” Customers Bank with $1 billion of its $18 billion in customer deposits suddenly removed. [Circle]

Customers Bank ( NYSE:CUBI ) isn’t that big, and it’s had some uncertain times. CUBI’s 10-K mentions “digital currency” customers, though not in any detail. They also have their own version of Signature’s Signet, CBIT, which they also license from Tassat, who built Signet. [SEC]

Cross River Bank, a small community bank in New Jersey, is Circle’s new USDC payment processor. It’s the kind of bank that gets into crypto and tells you all about it right away. Cryptadamus dug into Cross River and found all kinds of interesting stuff. [Twitter]

Cross River also liked PPP loans – it somehow managed to get over 106,000 PPP loans during the pandemic, making it the fourth largest issuer of PPP loans. The $4.7 billion PPP loans were almost double the bank’s assets. Cross River made 15 of the 97 loans involved in the Justice Department’s first 56 fraudulent PPP loan indictments. [NYT; POGO]

Crypto bank Anchorage Digital started out as a crypto custodian, joined Facebook’s Libra project in 2019, and in January 2021 received a national digital asset charter from the Office of the Comptroller of the Currency—in fact, it was one of the last. digital bank charters approved by Brian Brooks, later of Binance US, during his time as supervisor.

Anchorage just laid off 20 percent of its staff. The San Francisco-based bank blames regulatory uncertainty and “broad macroeconomic challenges and volatility in crypto markets” for the downturn in business. The biggest regulatory uncertainty appears to be that the OCC was unhappy with Anchorage’s anti-money laundering oversight and lack of adequate staffing or processes. [Bloomberg]

Elsewhere, the OCC says Washington crypto bank Protego cannot transform itself into a national trust bank. Until the last minute, Protego did not meet the capital requirements. It can now try some other form of charter, e.g., state bank or apply again. [Fortune]

FTX

Sam Bankman-Fried wants the bankruptcy court to force FTX to ask its insurance companies to cover up to $10 million of his legal bills with liability insurance for FTX’s directors and officers. Sam wants this for the civil lawsuits filed against him for stealing all the money, but also for his criminal cases—even though D&O insurance doesn’t usually cover criminal cases. Sam’s attorney also attached a portion of FTX’s insurance policy, which excludes intentional criminal activity in the United States. [Doc 964, PDF]

FTX released the Schedules and Financial Affairs (SOFA) – detailed documents about the company’s payments before bankruptcy. Sam raised $2.2 billion, the other executives millions. But other dollar transfers are hidden for confidentiality. [press release]

The leaders of the effective altruism movement were warned about Sam’s unprofessional and fraudulent behavior in 2018 and did nothing. EA’s star philosopher William MacAskill reportedly threatened one person who tried to blow the whistle on Sam. Alameda management had actually tried to buy Bankman-Fried out of Alameda at this time because he was so clearly a ticking time bomb. The posters on the Effective Altruism forum are deeply disappointed. [Time; Effective Altruism Forum]

Tether get up

Tether now has 75 billion shares, which is 9 billion more than at the beginning of the year. We suspect it’s because BUSD is a zombie and pumpers need to pump.

We are shocked to learn that Russia is using bandages to evade sanctions. You buy the tapes in Russia for rubles and sell them in London for pounds. [CoinDesk]

Tether/Bitfinex money mule Reggie Fowler has a gambling addiction. Who knew? Fowler has blown hundreds of thousands of dollars at an Arizona casino. Currently, he has failed to pay his previous lawyers. Federal prosecutors want Judge Andrew Carter to change Fowler’s bail restrictions — even this late in the proceedings. Fowler will be sentenced next month. [Letter, PDF]

More good news for bitcoin

The DoJ and the US Trustee have filed their complaint against the sale of Voyager to Binance US. Their main dispute concerns claims of immunity from prosecution. “Nothing in the Bankruptcy Act allows the courts to absolve the parties of liability to the government for past and future conduct.” The government wants the deal to be terminated or the entire deal canceled and has asked for the deal to be put on hold in the meantime. Judge Michael Wiles has told them rather harshly that he won’t stop the sale pending an appeal – especially as he ordered them to make specific allegations of offences, which they failed to do. [Doc 1182, PDF; Doc 1190, PDF]

Coinbase is considering setting up a non-US trading platform as the US crypto environment is still sour. Well, it worked for Binance and FTX! [Bloomberg]

Brian Quintenz, former CFTC commissioner and now head of crypto policy at a16z, laments at the Futures Industry Association conference that “The SEC is completely out of control. They’re going rogue!” Oh no, how sad. “The United States has to make a decision about whether it’s going to accept and support innovators in this country,” he said with great timing. [CoinDesk]

Cryptoblogger Ignacio de Gregorio wrote a Medium post claiming that Ethereum is decentralized because he is concerned about claims by the New York Attorney General that ETH is a security. David SH Rosenthal points out all the flaws in his argument: [DSHR]

de Gregorio and others base their case on the fact that in 2018, William Hinman, director of the SEC’s Division of Corporation Finance, argued that ETH was not a security because the Ethereum blockchain was “sufficiently decentralized.” But Hinman’s claim was wrong then and is wrong now. And Hinman now works for A16Z, a “crypto-softbank.”

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