3AC’s two-step grayscale — and where in the world are Zhu and Davies? – Attack of the 50 foot blockchain

By Amy Castor and David Gerard

Bitcoin price is going up again. It is currently around $23,200, having dipped to $19,000 in June. Does this mean crypto crash is over? No.

When the price of bitcoin goes down, so does the trading volume. When volume goes down, so does liquidity. It doesn’t take much to push the price up again. The amount of actual cash in the system is still very low.

Tether is printing again as well, but only in small amounts of 100 million USDT at a time. So far. [Twitter]

You can see our previous report on crypto collapse here. For a better understanding of how this all happened in the first place, read how 2020 set the stage for the 2021 bitcoin bubble.

When all the money is gone

In liquidation and bankruptcy proceedings, it can easily take two to three years just to come up with a settlement plan, and several years to disperse the funds. Mt Gox went dark in early 2014 – and creditors are still waiting for their money. Ditto for QuadrigaCX, which went dark in early 2019.

Bankruptcies are expensive! Celsius and Voyager use the same law firm, Kirkland and Ellis. The lawyers just submitted a bill to Voyager for $3 million for three weeks’ work. [Bloomberg Law]

We expect professional fees to rise to $100 million or more. The professionals get paid first – that’s money creditors will never see.

Voyager and Celsius must come up with settlement plans that their creditors can vote on. But first they must submit a disclosure statement – a lengthy document of over 100 pages explaining how they got into this situation and revealing their financial details.

After filing for bankruptcy, Voyager and Celsius have 120 days to come up with a settlement plan, but the court can extend that by up to 18 months if necessary. After that, the creditors can submit their own plans. [Bankruptcy Basics]

Adam Levitin and Wassielawyer spoke to Laura Shin’s “Unchained” podcast about the 3AC liquidation and the Celsius and Voyager bankruptcies. They both expect these bankruptcies to continue for a long, long time. [Unchained]

Terraform, UST and luna

Russell Wong at the Federal Reserve Bank of Richmond, Virginia, wrote up how UST and luna worked. He says Anchor was not technically a Ponzi: “Anchor’s deposit is more like an MMMF [money market mutual fund] with a huge sign-up bonus, thanks to its private investors.” [Richmond Fed]

While we agree it wasn’t technically a Ponzi scheme, it still worked like one. Early investors could only be paid out with actual dollars coming in from later investors, just like in the rest of the crypto markets.

From Argentina to Nigeria, people wanted US dollars instead of their local currency, due to instability and high inflation – but governments often regulated against actual US dollars. Stablecoins like UST were advertised as a low-cost alternative, so buyers went all-in. They lost everything. “I felt betrayed by Binance for promoting this as safe and stable.” The collapse of UST has hit the crypto market worldwide: “The consequence of what happened will be by far the biggest negative impact that crypto has ever had in Latin America.” [RestofWorld]

Roche Freedman has made a business out of filing class action lawsuits against deep-pocketed crypto firms. They have now sued Binance US for the collapse of UST. Yes, Binance US actually listed UST and luna. The class action alleges that both UST and luna are unregistered offerings of securities. [Complaint]

The law firm Bragar Eagel & Squire has filed a class action lawsuit against Terraform Labs and others. They also allege that Terra’s tokens were unregistered securities and that Terraform Labs tricked investors into buying tokens at inflated prices. [Press release; Blockworks]

3AC

3AC had its second bankruptcy hearing in the US on July 28. The lawyer for Teneo, 3AC’s liquidator, says the whereabouts of 3AC founders Su Zhu and Kyle Davies remain a mystery – and the pair are handing over financial information piecemeal. [Yahoo Finance]

3AC was based in Singapore and incorporated in the British Virgin Islands, but Teneo filed for Chapter 15 bankruptcy in the US – bankruptcy of a foreign entity with US assets. In a US bankruptcy case, knowingly hiding assets is a felony. If Zhu and Davies continue to be uncooperative, they could face up to five years in prison. [Cornell Law]

Of course, neither Zhu nor Davies is in the United States. And they’re not in Singapore either – where the Monetary Authority of Singapore issued a reprimand to 3AC in June.

Based on what Zhu and Davies previously told Bloomberg, they are headed to Dubai, which has no extradition treaty with the United States.

Frances Coppola took a deep dive into the 1,157-page affidavit filed by Teneo in Singapore.

3AC’s failure was not from the UST collapse – it had been coming for years. 3AC’s accounts for December 2020 show just how indebted and overstretched it was, with hard-pressed cash flows.

3AC referred to “Ponzi loans” – borrowing cash to pay past debts – which last only as long as there are multiple lenders. Come UST’s crash…it wasn’t.

“After Luna blew a huge hole in its balance sheet, it robbed Peter to pay Paul, lied to its customers and scammed the creditors whose loans it defaulted on.”

3AC declared bankruptcy … and thereafter started moving stablecoins (and NFTs!) to unknown addresses, via the KuCoin crypto exchange. Teneo requested the freezing of assets.

Coppola is pretty sure all the money is gone and creditors will be lucky to get anything. [Coppola Comment]

This spells bad news for Voyager’s creditors as well – most of Voyager’s money was in 3AC.

Two-step grayscale

Data Finnovation believes – based on publicly available data, including Teneo’s 1,157-page filing in Singapore on 3AC’s bankruptcy – that 3AC and Digital Currency Group, along with DCG’s Grayscale and Genesis subsidiaries, worked together to extract a premium from GBTC.

Genesis lent BTC which 3AC then used to buy shares in GBTC. “At this point we have absurd coincidence #1: 3AC sold 15 million shares [of GBTC] in a period where DCG bought somewhere between 15 and 18 million shares. If these are arm’s length operations it feels extraordinarily unlikely. It is possible. But come on.”

Genesis also messed about whether GBTC was accounted for at market price or net asset value. Greyscale’s accounting treatments also varied wildly.

3AC appears to have gone insolvent during the UST luna collapse weekend as their GBTC loan was margin called. “Genesis funded this fiasco. They lent out 3AC BTC. And then, effectively, lent them more USD against those BTC. It sounds absurd. And that is.”

Of course, all of this would be solved if GBTC was converted into a proper ETF. No wonder Grayscale is suing the SEC to try to force an ETF through.

The other danger now for DCG is that Grayscale is an SEC-registered securities issuer and Genesis is an SEC-registered broker-dealer – so there is quite a bit of data about their dealings with 3AC that the SEC can only ask them for. [Data Finnovation]

Celsius

Tether repaid an $840 million loan to Celsius ahead of Celsius’ bankruptcy by selling bitcoin that Celsius had pledged as collateral. This will not necessarily protect Tether from clawbacks.

Crypto companies have treated such loans as “secured” by the security, believing that simply owning crypto security protects their position as a secured lender – but this is not at all clear legally. Under the 90-day rule, they may still be required to return the assets, and be left with an unsecured claim in the bankruptcy. [Tether blog, archive; FT, archive]

Celsius in the Daily Telegraph (UK): “’It’s very analogous to 2008,’ says David Gerard, author of Libra Shrugged: How Facebook Tried To Take Over the Money. “They couldn’t resist playing the market with customer funds.” [Telegraph]

Molly White continues to track excerpts from Celsius letters of credit. .[Molly White]

Celsius Network discovered on July 8 that the company’s customer mailing list had been leaked. Celsius says one of Customer.io’s employees gained access to a list of Celsius client email addresses and transferred the list to a third party. Celsius finally told everyone on July 28, twenty days later. [Reddit]

Voyager

Voyager’s creditors’ committee has its own lawyers now: Will & Emery LLP, which has set up a website for updates to creditors. You can even subscribe to receive email alerts. [WM]

The FDIC and Federal Reserve issued a cease-and-desist statement and gave Voyager two days to remove all misleading marketing materials about being FDIC insured. Nice of them to care, about a year too late. Voyager filed for bankruptcy three weeks ago, and customer deposits are already frozen. [Press release; Letter]

FTX and Alameda have offered to purchase all of Voyager’s crypto assets and loans (except the 3AC loan) and pay the cash purchase price into an escrow account. The idea is that any Voyager user can then create an FTX account and withdraw their share of the cash earnings. [FT, archive; Coindesk]

Voyager does not like Sam Bankman-Fried’s partial rescue proposal, calling it a “low-ball bid dressed up as a white knight rescue”. But also, if you’re a creditor, you should “really read it” anyway. [Stretto, PDF]

Metropolitan Commercial Bank is asking the court to allow it to release Voyager customers’ cash. Metropolitan has two accounts that were opened by Voyager and are governed by an FBO (for the benefit of) agreement between the bank and Voyager – but which hold Voyager’s customers’ money. As of the bankruptcy filing, the accounts at Metropolitan have $270 million. [Filing, PDF]

Babel

Babel Finance, the Hong Kong-based crypto lender that froze withdrawals on June 17, has retained Kirkland and Ellis to advise on the restructuring. [Bloomberg Law, paywalled]

Babel proposes a rescue plan that would turn creditors into shareholders, raise $250-300 million in convertible bonds, and then secure a $200 million line of credit from creditors for “business recovery.”

Babel lost $230 million (in bitcoin and ether) of customer funds on bad trading. [The Block]

Vauld

Crypto exchange and lending platform Vauld has been granted a three-month moratorium by the Singapore High Court. The court also asked Vauld to form a creditors’ committee. (Vauld operates from India but is incorporated in Singapore.)

Vauld filed for a moratorium on July 8, shortly after suspending withdrawals. Vauld claims no exposure to 3AC or Celsius. Vauld owes $402 million to creditors – $363 million of which are deposits from private investors.

London-registered (but Bulgarian-operated) Nexo has until September 5 to make a decision on whether Vauld should be bailed out. [The Block]