Molly White's Citation Needed - Issue 44 – Four

Episode Date: November 30, 2023

The Justice Department's interest in Binance isn't just "FUD" anymore. Originally published on November 21, 2023.

I'm Molly White, and you're listening to the audio feed of the citation-needed newsletter. You can see the text version of the newsletter online at newsletter.mollywhite.net. Issue 44. 4. The Justice Department's interest in Binance isn't just FUD anymore. This issue was originally published on November 21, 2023. In the Courts. The years-long DOJ. investigation against Binance has finally, finally been resolved, though not quite in the way

anyone expected. Until today, Binance's chief executive, Chang Peng Zhao, or CZ, has tended to be defiant towards any threat of legal action, usually dismissing claims as fud, vociferously denying any wrongdoing, even in the face of evidence, and vowing to charge forward for the benefit of the crypto industry. He's also seemed careful to avoid stepping foot in the U.S. or in countries with friendly extradition agreements. Today, however, he agreed to plead guilty to one felony money laundering charge, pay a $50 million fine, and step down as CEO of Finance, a company that is largely an extension of himself. He showed up in Seattle to enter his guilty plea in person. Prosecutors want him to do 18 months in prison, but he could easily get off with something like probation or house arrest.

Simultaneously, finance will pay a $4.3 billion fine over failure to implement proper anti-money laundering or AML processes, sanctions violations, and unlicensed money transmitting. The company has agreed to a three-year-long monitoring program to ensure they are complying with anti-money laundering and sanctions or not. requirements. Along with the DOJ actions, finance reached agreements to conclude outstanding complaints from the CFTC, the Financial Crimes Enforcement Network, or FinC, and the Office of Foreign Assets Control, or OFAC. Notably, the SEC case filed this summer was not wrapped up as a part of this, and so seems to be ongoing. Although the fine is massive, and the DOJ made some show of power against a company generally seen to be untouchable, the outcome is a little disappointing. Cost of doing business enforcement actions are far too common in the cryptocurrency world,

and Binance's fine doesn't look quite as big when put in context of Binance's estimated $12 billion in revenue in 2022. Meanwhile, CZ's $50 million fine is a drop in the bucket for a man who is extremely roughly estimated to be worth more than $20 billion. Binance will continue to operate, albeit with a likely more risk-averse CEO and a watchdog, and CZ will retire happily with his billions, that is, if he can resist starting some other crypto scheme, or perhaps pivoting to AI, as is in vogue. The SEC has filed suit against Cracken, a U.S. cryptocurrency exchange who has already had run-ins with the agency once this year. In February, Cracken agreed to end their crypto staking program and pay $30 million

to the agency over a complaint that the program constituted an unregistered securities offering. However, the SEC apparently wasn't done there. Now they've filed suit against Cracken for listing a whole bunch of crypto tokens that the SEC believes are unregistered securities. This is similar to the complaint against Coinbase, and in fact, many of the tokens, you know, At the tokens at issue are the same. However, the Cracken complaint also goes further. The SEC alleges that Cracken improperly commingled company and customer funds, quote, at times paying operational expenses directly from bank accounts that hold customer cash. Sound familiar? Oreliaon Michelle, the mastermind behind the mutant ape planet NFT rugpole, pleaded guilty to

conspiracy to commit wire fraud. You may remember him from January when he tried to argue that he had no choice but to rugpole because, quote, the community went way too toxic. After hearing that, prosecutors unbelievably still decided to charge him anyway. He's agreed to forfeit $1.4 million of the roughly $3 million he somehow raked in with the board ape knockoffs. The fate of the remaining proceeds and his sentence remain to be determined. Speaking of knock-off apes, I was correct in my prediction in the last issue that Yuga Labs and Rider Rips might have some trouble agreeing on the reasonable attorney's fees which Rips has been ordered to pay because of his less than stellar behavior throughout the trial. Yuga says they incurred $13.2 million in legal fees and costs, but are requesting a smaller sum, $7.89 million. Rips argues that this is a $1.2 million.

exorbitant, and that around $455,000 would be reasonable. Among other things, Rips points out that the requested attorney's fees are nearly five times the $1.6 million sum he was ordered to pay in disgorgement and damages. Yucca fired back to say, in so many words, that the case was so costly thanks to Rips' continued obstruction, and that perhaps he should have considered that before behaving so poorly he saddled himself with the bill. Tara Luna founder, Doe Kwan, appealed his four-month sentence in Montenegro for passport forgery, but was denied. There was also a Daubert hearing to determine the admissibility of some expert witness testimony held in Manhattan on November 17 as part of trial preparation in the SEC's lawsuit against Kwan.

as part of trial preparation in the SEC's lawsuit against Kwan and his company, Terraform Labs. Kwan, naturally, was not in attendance. After a South Korean court found former chair Li Zhang Hun of the Bitham Crypto Exchange, not guilty of an alleged fraud involving more than $110 billion, or $85.2 million, prosecutors have appealed and are once again, asking he be sentenced to eight years in prison. In bankruptcies.

FTX is going after the By-Bit cryptocurrency exchange for almost $1 billion, hoping to recover funds that the firm was able to withdraw just before FTX stopped processing withdrawals. According to the lawsuit, By-Bit used its VIP access to FTX to successfully withdraw their funds even when other customers could not, and pressured FTCS employees to prioritize their withdrawals. The FTCX team also alleges that ByBit is holding $125 million in FTC's assets hostage on its own exchange, trying to use them as leverage to regain access to their $20 million that remain on FTCS.

FTCS also alleges in the lawsuit that ByBit is part of a fraudulent scheme involving BitDow, later named to Mantle, a supposedly decentralized and community-run organization that a bi-bit executive reportedly admitted the company actually controlled. After the FTX bankruptcy and the crash of the FTT token price, BitDow tried to undo a past deal where they had agreed to exchange Bit for FTT. When the FTX bankruptcy team did not agree to let BitDAO go back on the deal, the group came up with a scheme to effectively erase FTCS's bit hole. which was agreed upon by so-called community vote involving voters who certainly seem to be by-bit executives. Free word of advice here. If you're an exec who wants to avoid getting caught

doing this, maybe don't cast 20 million votes from your first initial last name.eath wallet. After extensive negotiations between the remnants of the imploded Three Arrows Capital Hedge fund and the bankrupt Genesis cryptocurrency lender, Genesis is seeking permission from the bankruptcy court to settle $1 billion in claims from Three Arrows by issuing a $33 million unsecured claim. Three Arrows had also borrowed extensively from Genesis to the tune of around $1.2 billion. Hodelnot, a crypto lender based in Singapore that halted withdrawals in August 2022, is going to be liquidated. It's not exactly been smooth sailing over there. First it came out that the CEO apparently lied when he said they had no exposure to the Terra collapse,

when in fact they had realized a $190 million loss. Then the founders tried to hide financial records from court-appointed advisors brought in to oversee the company's affairs, while they evaluated if they would need to liquidate. BitTrex, a one-time major player among U.S. cryptocurrency exchanges, is closing up shop completely. This is not exactly a surprising development, given that they paid a then-record $29 million fine for sanctions violations in October 2022, shut down U.S. operations in March 23, filed for bankruptcy in the U.S. in May, and then paid $24 million to settle a loss. from the U.S. SEC in August.

There's been one more unfortunate event for CoinCloud to add to the whole series of them I wrote about in February. Hackers have claimed to have exfiltrated private information belonging to around 300,000 of the crypto ATM firm's customers and around 70,000 selfies taken by ATM cameras as a part of know-your-customer processes. The personal information includes details like Social Security numbers, dates of birth, names, and addresses.

The hackers also claim to have obtained the company's source code. In Governments. Some of the usual suspects in Congress are really worried about proposed legislation on crypto taxation, writing that it could, quote, threatened to prevent a large swath of the digital asset ecosystem from continuing to exist in the United States. Cryptobbbyist Kristen Smith wrote in an op-ed, If the broker rule proceeds as is, it will surely spell the near total collapse of the

crypto industry in the United States. Don't threaten me with a good time. Speaking of crypto-gecko says crypto says crypto-lobbyists have spent over $20 million on their efforts already this year and are on pace to outspend last year's $22.23 million. This is somewhat remarkable, given that FtX was taken out of the picture, but Coinbase has stepped in to fill their shoes in the lobbying department. Interestingly, crypto made up almost 20% of Wall Street lobbying this year, far outsizing the industry's footprint in that sector.

Argentina has a new president, the right-wing libertarian and self-described anarcho-capitalist Javier Malay. As you might expect, he's a fan of Bitcoin, which has some in the crypto world all excited. In AI? You might have heard. that Sam Altman was ousted from his company, Open AI, in a dramatic and tumultuous few days. The company almost seemed to go back on the plan, employees threatened to quit, and a statement by the board about his firing included verbiage that, for a board statement, seemed to suggest

he had engaged in something truly heinous. You will find no shortage of explainers and think pieces about what happened and what might have happened. Instead, I'm here to bring you the crypto angle. You may recall that Altman is also behind WorldCoin, which he promises will be the universal basic income adjacent solution to all of the AI problems he is also creating. WorldCoin holders watched the prices of their tokens Yo-Yo as crypto-speculators reacted to the news of Altman's firing and drew inferences on what it might mean for the token. The token price slipped around 25% on the news of his ouster, but fluctuated wildly as more news and speculation continued. Personally, I can't wait for the future in which tokens I've been allocated to pay for basic

necessities once AI takes my job, suddenly can only pay for three-quarters of the groceries they once could because an affiliated guy maybe did something bad at another company. In funnier related news, crypto prediction markets went nuts with the extremely vague announcement about his firing. Around $250,000 have been wagered on one website over whether Altman will be reinstated as OpenAI's CEO. Over on a non-crypto prediction site, where people bet with play money, the question, why was Sam Altman fired, has more than 150 answers. The top bet, as I write this, is the board caught him lying several times. But other responses range from the plausible, like he lied about training data, misalignment with non-profit mission, raising money without prior board agreement, and sexual

abuse, to the more absurd, two suspicious constant half-smile, hidden, poorly internally labeled Fiat-At account, and copy-pasted chat GPT answers. to the board. Elsewhere in Crypto. Crypto Media Outlet CoinDesk has finally sold, as parent company Digital Currency Group, or DCG, sought to offload the organization as it handles its current financial and legal difficulties. The buyer is a firm called Bullish, a cryptocurrency exchange that's also among the groups vying for the remains of FTX. Bullish claims they plan to maintain CoinDesk's current leadership team and keep CoinDesk as an independent subsidiary,

so fingers crossed that that bodes well for their reporting and editorial independence. An early advisor to the Ethereum Project, Stephen Naryov has for months now been heavily promoting what he says is evidence that Ethereum and its co-founders Vitalik Buterin and Joseph Lubin were engaged in massive fraud, quote, than FTX.

However, he's been cagey and slow about actually releasing any evidence or going into detail on what the supposed fraud even was, and ultimately decided he would release a recorded conversation with Beuterin as NFTs on a platform he created. He dropped the recording on November 16, only for people to be somewhat underwhelmed by its general lack of substance. That is, except for fans of some of Ethereum's competitors, who believe the recordings cast their own tokens and the founders of those tokens in a better light. The Web 3 is going just great recap.

There were 14 entries between November 9 and November 21, averaging 1.1 entries per day. $320.3 million were added to the grift counter. Poloniacs definitely isn't bluffing after a $100 million plus theft. Justin Sun's Polonex cryptocurrency exchange suffered a theft of crypto assets including Bitcoin, Ethereum, and Tron's TRX token, altogether priced at over $100 million. On the day of the hack, they offered a 5% bounty, or around $5 million, to the hacker if they returned the stolen assets. Now they've triumphantly announced that they have definitively identified the thief.

Despite that, they've upped the bounty to $10 million, and they sent their on-chain messages with their offer in 15 different languages. Okay, then. A hacker steals millions and then destroys them. A hacker managed to discover a bug in the Raft Defi project that allowed them to mint 6.7 million of the R-stable coin. They then tried to convert these into Ethereum, which would allow them to launder and then cash up. out the stolen funds. However, the intrepid thief had written a bug into their own code, which ultimately caused 1,570 of the 1,57Eth in profits, or around 3.25 million, to be burned, that is effectively destroyed by sending it to a destination where it is permanently inaccessible

to anyone. Adding insult to injury, despite the remaining 7 Ethereum, around $14,000, The upfront costs paid by the attacker to enable the attack meant they ultimately lost around four Ethereum or $8,000 in the whole fiasco. The R-stable coin lost its $1 peg as a result of the attack, dropping to 70 cents shortly after, and then drifting towards its current price of around $2.00 over the next couple of days. In fairness to the hacker, perhaps this was all intentional. It's not about money. It's about sending a message. Everything burns. Everything else.

Aragon Dow has voted to sue its founding team. The DOJ cracked down on a $225 million crypto-romance scam. DYDX's insurance fund lost $9 million in an apparent attack. The Kronos trading firm suffered a key breach that cost them around $26 million. A network of fake Twitter accounts impersonating crypto security firms have fished panicked victims. Up to $1 billion stored in early Bitcoin wallets may be at risk due to a vulnerability called Randstorm.

A wallet drainer has stolen more than $60 million in six months, and a wallet linked to the Binance deployer has lost $27 million in an apparent hack. In the news, I went on the Levers podcast to have a conversation with Frank Capello about the FTX trial and its likely impacts on the cryptocurrency industry and possible regulation. It's titled, What the Sam Bankman-Fried verdict means for crypto. Worth a read. For those of you curious about the OpenAI saga, Dave Karp has you covered in The Future Now and Then, with his piece on Open A.I. let them fight. Over in tech dirt, there's an article called,

Congrats to Elon Musk. I didn't think you had it in you to file a lawsuit this stupid, but, you crazy bastard, you did it. This refers to the lawsuit he filed against Media Matters for America over an article in which they observed that you can, in fact, see advertisements next to post by neo-Nazis, despite whatever Linda Yakorino says. It's an absolute trash fire of a lawsuit.

So if you're someone who likes reading about lawyers filing ridiculous lawsuits to placate their egotomaniacal clients, this one's for you. For folks who are on Blue Sky, lawyers Mike Dunford and Akiva M. Cohen both did great threads also as they read through it. That's all for now, folks. Until next time, this has been Molly White. Thanks for listening to this issue of the citation needed newsletter. To learn how to support my work, visit mollywhite.comnet slash support. If you would like to read the text versions of these episodes, sign up to receive the newsletter in your email, or support my work on a recurring basis, go to newsletter.mollywhite.net.