Celsius sues KeyFi, BlockFi’s FTX deal, Scaramucci’s SkyBridge, Voyager suit, 3AC going to jail? – Attack of the 50 foot blockchain
Of 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, aka DeFi whale 0x_b1, is used to manage Celsius’ investments. Stone sued Celsius in July, claiming he had not been paid. Celsius has now filed a countersuit against Stone and KeyFi. The pair did business based on a handshake agreement, so it shouldn’t surprise anyone that they are 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 claims 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 — due to confidential negotiations they cannot share. [Complaint, PDF]
In a separate lawsuit, Celsius is seeking to recover $17 million in crypto “wrongfully held” by Prime Trust, one of the largest custodians in crypto. Celsius had put New York and New Jersey users’ crypto into Prime Trust, which already returned $119 million worth of crypto to Celsius when it ended its relationship with Celsius in June 2021, citing “red flags.” [Complaint, PDF; The Block]
Pursuant to 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 are “money”, although Celsius calculates their value in dollars. So the U.S. trustee wants Celsius to show it’s adequately protecting crypto-assets before any final order on debtors’ cash management goes through — whatever kind of protection they come up with. [limited objection, PDF]
BlockFi
In the recent collapse of the CeFi pyramid, BlockFi seemed to be as completely screwed as everyone else. Then FTX stepped in and offered to buy out BlockFi for up to $240 million!
It is “up to”. The actual amount may be as little as $15 million. Well, Zac Prince of BlockFi tweeted in June, “I can 100% confirm that we are not being sold for $25 million.” He just didn’t say it was even less than that. [Twitter]
Apparently the deal is that FTX US will pay $15 million in base, plus:
- an additional $25 million if BlockFi receives SEC approval by December 31, 2022 to offer the BlockFi Yield;
- an additional $100 million if BlockFi client assets reach $10 billion (currently $4.4 billion) by the time of the FTX acquisition;
- and 25% of BlockFi’s annual operating revenues, up to a maximum of $100 million.
BlockFi filed a confidential S-1 with the SEC for BlockFi Yield in February 2022, so they cannot release any details yet. [blog post]
What is it for FTX US? A large US retail customer base, especially if BlockFi can get that SEC blessing. The FTX call option cannot be exercised until October 2023 at the earliest. In the meantime, BlockFi still has a $250 million line of credit from FTX. [Coindesk]
Prince has blessed us with his wisdom regarding the crypto collapse, in the form of an article he sent out as a press release on Dow Jones News.
You will be shocked to learn that all of Prince’s plans for BlockFi assumed that the crypto bubble would continue to inflate for at least the rest of 2022. But looking back, it turns out that bubbles do pop! Prince places the critical moment at June 11, shortly before Celsius went down, followed soon after by 3AC — and not in May, when Terraform’s UST/luna went down. Maybe 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 have been previously unseen news in crypto.
“Crypto was created to be separate from the global economy and central banks,” says the guy who runs an investment firm that deals entirely in US dollars. [Barron’s]
SkyBridge capital
SkyBridge Capital, Anthony Scaramucci’s investment firm, suspended redemptions from its “Legion Strategies” fund in mid-July. [Bloomberg]
About 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’ve ever had a suspension,” he told CNBC’s Squawkbox. The fund is down 30% so far this year. According to Scaramucci, the suspension was because they didn’t want to “hurt investors who want to stay in the funds,” if many of those investors decide to exit in a less than “orderly” manner. He assures investors that funds are safe. [CNBC, video]
Just like everything else in crypto, it works as long as the number goes up and not too many people try to cash out. When they do, accounts are frozen, crypto firms file for bankruptcy, and yachts go back on the market.
But no worries! Scaramucci comes 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 good sign. And he admits he was wrong in guessing $100,000 per BTC last year. [CNBC, video]
Voyager Digital
Voyager’s Key Employee Retention Program payouts for 38 employees are continuing — even though unsecured creditors negotiated down the amounts. The employees are mainly in accounting and IT; no one is a leader. 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 who claimed that Voyager had run a Ponzi scheme. Their argument is that bankruptcy protection against lawsuits should extend to key people in the company. With the lawsuit against Erlich and Cuban tied together, the company wants the court to throw out the case. The answer is only pages 1–12; the other 199 pages are exhibits. [adversary complaint, PDF]
In addition to FTX, Binance and Coinbase are also hoping to buy what’s left of Voyager, and apparently there are some other smaller players. Voyager’s own VGX token made headlines because everything is stupid. [CoinDesk]
Three Arrows Capital is considering prison
Teneo had the British Virgin Islands liquidation of Three Arrows Capital (3AC) recognized in Singapore. This gives Teneo greater leeway to investigate locally, and request access to accounts that 3AC kept in Singapore. Teneo wants to find out what assets 3AC held locally.
Teneo is represented in Singapore by WongPartnership LLP.
Teneo has secured over 40 million dollars in 3AC assets! Creditor claims against 3AC are currently around $2.8 billion. We think the money is gone and it won’t come back. [Bloomberg]
3AC co-founder Zhu Su filed an affidavit in Bangkok, Thailand, on August 19, accusing Teneo of misleading the High Court of Singapore regarding 3AC’s corporate structure. Zhu says 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 you. [Bloomberg]
Stock markets go down
Cryptocurrency “digital banking platform” Nuri GmbH – formerly known as Bitwala – filed for insolvency on 9 August. The company blames COVID-19, Russia invades Ukraine, capital markets cool down, and yes, UST/Luna and Celsius collapse. Nuri assures 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 bankruptcy lender/stock exchange Vauld. The ED was investigating Yellow Tune Technologies in relation to the Chinese loan sharking scandal that hit WazirX – which may not be the Indian arm of Binance – a few weeks ago. The ED says Yellow Tune Technologies helped the companies launder their money in crypto, with the assistance of Flipvolt, a local entity in the Vauld. [The Block]
Binance continues to operate in the Netherlands without a license, despite repeated warnings. Binance benefited from a “competitive advantage” by not paying fees to the regulator, De Nederlandsche Bank, and skipping compliance costs. It had started violating the rules in May 2020. Binance was fined EUR 3,325,000 by the DNB in July. The original fine in April was EUR 2 million. Binance has now started the registration process. [Coindesk; DNB, PDF, in Dutch; DNB notice from April, in Dutch; FT, archive]
German “sparefintech” Rubarb is broke. The company was run by Fabian and Jakob Scholz, nephews of Chancellor Olaf Scholz. Rhubarb entered DeFi mostly in March 2022, and had EUR 40 million in Celsius. Fabian Scholz assures his customers that the money is safe. [Business Insider, in German; FinanceFWD, in German]
Hotbit, a crypto exchange registered in Hong Kong and Estonia, ceased operations on August 10 – and that was not it because they played the DeFi markets. A Hotbit executive employee, who left in April 2022, joined a dubious GameFi project in 2021, mixing funds from the project with Hotbit funds, so law enforcement assumed the exchange was in on the scam. The exchange cannot function while all the money is frozen in the investigation – but they promise that the money is safe. [Hotbit, archive; Hotbit, archive; Hotbit, archive]
So what happens next?
Are all off this (we wave our hands around anything that catches fire) … it 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 who can give them the money.
Will crypto continue to be a financial instrument that you can make and lose fortunes on? It is a matter of regulation.
The original use case for bitcoin was money that could avoid 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 to the extent that it is a financial instrument. When you touch real money, you are expected to play by the rules of real money. That shouldn’t surprise anyone.
Genuine hyper-inflated Zimbabwe One Hundred Trillion Dollar notes cost over $100 in good condition. We say “genuine” because they’re popular enough that you have to watch out for fakes. So there is hope for bitcoin!
