Binance Hits Reserves, FTX’s Singh Sings, Miners’ Creative Accounting, Bitcoin Markets Are Thin – Attack of the 50 Foot Blockchain

Of Amy Castor and David Gerard

“Your honor, please, Sam is a growing boy and he needs his crimes. this is cruel and unusual punishment, sam is a very smart boy and I think if we just let him explain we can clear this up and be home for dinner and then sam tells us he expects more crimes.” – Beef tweeter

Binance Shuffle

More documents have come out about Binance’s “Tai Chi” plan to subvert US regulation with the creation of Binance US. The new documents show how thoroughly entwined Binance US is with Binance.com, and that they are not really separate at all. We all knew this, but it’s nice to have everything clear.

The regulators’ big concerns are that Binance is another FTX waiting to blow, and that Binance US customers’ funds are commingled with Binance.com. Both of these are true, of course.

According to the Wall Street Journal: “If U.S. regulators conclude that these links mean Binance has control over a U.S. company, they could demand the power to oversee Binance’s entire business, which for many investors has been a black box since its inception.” [WSJ]

Forbes wrote about the “Tai Chi” plan in November 2020. Binance sued Forbes for defamation before withdrawing the case. Binance later bought part of Forbes.

Anyway, Forbes is not softening on Binance. From August 17, 2022 to early December 2022, 1.1 billion USDC bridged on Binance’s BNB chain was unsupported. In other words, there was no actual USDC behind the tokens.

The missing reserve was channeled to Cumberland – the crypto subsidiary of Chicago-based trading firm DRW – and one of Binance’s main liquidity providers. Cumberland may have helped Binance transform the USDC security into its BUSD stablecoin. Amber Group, Alameda Research and Justin Sun’s Tron also received $100 million in moved collateral from Binance.

Forbes details Binance’s long history of trading the backing reserves for its bridged tokens. Patrick Hillmann, Chief Strategy Officer at Binance, says it is fine — they only hold a private set of books as well as the public set of books. It’s no problem, right? [Forbes, archive]

Three US senators – Elizabeth Warren (D-MA), Chris Van Hollen (D-MD) and Roger Marshall (R-KS) – sent a scathing letter to Binance. They call the exchange a “hotbed of illegal financial activity,” citing largely Reuters’ coverage of Binance’s various shenanigans. They have requested a bunch of documents from Binance and Binance US about corporate finance, compliance and risk management practices. They want the documents by March 16. [Warren, PDF]

Your money is safe with Binance. The exchange is again trying to get a license in Singapore, but this time as a custodian. Binance rebranded its custody arm to Ceffu, a version of “SAFU”, earlier this month. [Nikkei Asia]

Coinbase suspends trading of BUSD starting March 13th. This is apparently due to “liquidity concerns”. [Twitter; CoinDesk]

Bitcoin miner accounting

We told you in August that bitcoin miners were fiddling with their accounts. Marathon Digital Holdings and Riot Platforms have both delayed their 2022 10-K filings after unhappy letters from the SEC. Both companies will likely have to restate parts of their audited 2021 results and their currently unaudited 2022 quarterly reports. [Marathon press release; Marathon NT 10-K; Riot NT 10-K]

Bitcoin miners are in desperate need of cash to fund their operations and keep up with their exorbitant executive salaries. Marathon sold almost all the bitcoins it mined in February – 650 BTC out of the 683 BTC mined. This is after selling 1,500 BTC in January, which marked the first time Marathon had sold any of its holdings. [Press release]

Riot started selling some of its mined bitcoin last year. [Reuters, 2022]

FTX: Singh sings

Nishad Singh, the former director of engineering for FTX and FTX US, has entered into an agreement. Singh pleaded guilty to six fraud and conspiracy charges, including conspiracy to make illegal campaign contributions. [Doc 90 US v Singh, PDF]

The SEC and CFTC have also filed civil charges against Singh. [SEC press release; SEC complaint, PDF; CFTC complaint, PDF]

Here is a list of Singh’s political donations. [OpenSecrets]

Singh allegedly wrote the “backdoor” that allowed FTX customer funds to be diverted to Alameda. He also withdrew $6 million from FTX for personal use and expenses, including the purchase of a multi-million dollar house, and to transfer money to organizations for effective altruism.

We’re still waiting to hear from Sam Trabucco, former co-CEO of Alameda — he hasn’t tweeted since November, and he escaped before FTX completely collapsed — and Ryan Salame, former co-CEO of FTX Digital Markets and another enthusiastic political donor . We’re sure if they can just explain everything will be fine.

In Sam Bankman-Fried’s criminal case, Judge Lewis Kaplan threatened to throw Sam in jail unless lawyers on both sides could come up with stronger bail restrictions. The government and the defense have agreed on an almost complete internet ban.

Sam can use a non-internet flip phone. He cannot contact any current or former FTX employees. His laptop will be restricted to certain sites and his use will be monitored.

All of this is a step up from the kind of isolated discovery laptop you’d keep in prison. Since Sam is at home with his parents, their devices will also be monitored.

League of Legends is not on the list of approved sites, but Sam specifically has access to mlb.com and nfl.com for all his effective sports ball needs. Substack and Twitter are not on the list, so he must list more crimes on his Wikipedia user page or something. [Doc 100, PDF]

Bankrupt FTX finally has an estimate of how much is missing from customer funds – $8.9 billion. Only $2.2 billion in customer assets have been found. Of that, only $694 million is in liquid assets such as fiat, stablecoins, BTC and ETH. [Doc 792, PDF; press release]

FTX US also showed a loss of $116 million – it has $191 million in liquid assets but owes $335 million.

The number is increasing!

BTC and ETH liquidity is at its lowest since the Terra-Luna collapse – there is no volume because the supply of actual dollars has dried up. It is easier to rig the price than it has been for a long time. [CoinDesk]

So that $1000 drop in BTC/USD in five minutes in the bitcoin price around 02:00 UTC on March 3rd was probably pretty cheap.

Ethereum’s Shanghai upgrade is likely to happen in April and will allow all the staked ether stuck in the validators to be unstaked and sold. Although a profitable validator is unlikely to simply dump their stake. [CoinDesk]

Mt. Gox bitcoins are finally will be released…anytime now! Probably. The deadline for claims is March 10, 2023. We are confident that all Mt. Gox holders who have been waiting for their bitcoins since 2014 will definitely continue to hoard and will not immediately dump them. [Mt. Gox, PDF]

New Zealand has issued a restraining order to lock up NZD 140 million worth of bitcoins stolen by BTC-e operator Alexander Vinnik. If these are recovered, they can be added to Mt. Gox bankruptcy estate eventually. [Mt. Gox, PDF]

A working paper from the National Bureau of Economic Research from December 2022 discusses what a rigged nonsense the crypto trading markets are. “Anomalous distributions of first-significant digit, size rounding, and transaction tail distributions on unregulated exchanges reveal widespread manipulations that are unlikely to be driven by strategy or exchange heterogeneity. We quantify wash trading on each unregulated exchange, which averaged over 70% of reported volume.” [NBER]

Matt Binder: Don’t be fooled: Crypto is rising because of market manipulation – every time you see cryptocurrency prices suddenly rise, that’s probably why. With quotes from David. [Mashable]

More good news for bitcoin

Bitcoin may wave goodbye to institutional money. Crypto is “effectively non-existent” for large institutions, says Jared Gross, JPMorgan’s head of institutional strategy. “The volatility is too high, the lack of a specific rate of return that you can point to makes it very challenging.” [Bloomberg]

Illinois wants to adopt strict crypto business regulation in line with the New York BitLicense. “It happens too often where there’s some fraud or collapse that hurts consumers directly in their wallets,” said regulator David DeCarlo. [CoinDesk]

Ohio’s Division of Securities has joined the multistate settlement against Nexo. We have heard no more from Bulgaria about what is happening with the office raids and the accusations against Nexo. [Ohio]

A bunch of accountants from FTX’s old accountant Armanino have set up shop as The Network Firm, specifically to serve crypto firms. Good luck guys. [CoinDesk]

Grayscale is moving to court to try to have GBTC converted to an ETF, following the SEC’s 73-page response letter in December 2022. Oral arguments are set for March 7. Good luck, guys. [CoinDesk]

Reuters says Visa and Mastercard have put new crypto partnerships on hold. Clearly took its time. Visa rejects the report. Mastercard said efforts “continue to be focused on the underlying blockchain technology”, which has the advantage of underperforming existing alternatives, so is unlikely to cause financial contagion. [Reuters; Twitter; CoinDesk]

Almost all the tokens launched on UniSwap turned out to be bogus. There’s a simple and obvious heuristic to use here: If you assume that all DeFi is a scam, you’re right 97.7% of the time. [arXiv, PDF]

Oh no, your cryptographer is washed up! Why don’t you go into gold instead? Here is an ad in the Financial Times pitching gold to crypto bros. Or you can realize that gold isn’t that good either, and invest in companies that do things in the economy. [FT]

Media star status

New Kids on the Blockchain has its latest documentary out: “The Rise Of DeFi — Dark Side Of The Moon?” It’s very positive about the fabulous hypothetical future of DeFi, NFTs and the Metaverse – but David is in on it too, gobbling up the party. [YouTube]