Molly White's Citation Needed - Issue 49 – And so the Lord says "give them a 10x"

Episode Date: January 23, 2024

Bitcoin ETP approval, God-sent crypto scammers, and more trouble in Justin Sun's world. Originally published on January 22, 2024.

I'm Molly White, and you're listening to the audio feed for the Citation Needed Newsletter. You can see the text version of the newsletter online at citation needed. News. Issue 49. And so the Lord says, give them a 10x. This issue was originally published on January 22, 2024. Bitcoin ETP approval, God sent crypto-scammers, and more trouble in Justin's Son's world. The SEC approved those 11 applications to create the first ever Bitcoin Spot ETPs that I mentioned last week. Although most people knew it was coming, this was still big news in the crypto industry, which has been awaiting such a product for more than 10 years.

The approval came with it a statement from SEC Chairman Gary Gensler, and I've honestly got to hand it to him as a writer. I've heard people speak through gridded teeth before, but I'm not sure I've ever read anything so clearly written through gridded teeth until now. With all the sincerity of an apology that starts with, my mom said I have to apologize. Gensler announced the approval, which he voted for, explaining that the SEC was left with little choice but to approve the applications after an appellate court overturned a previous rejection decision. He ended his statement with a firm condemnation of Bitcoin. Though we're merit-neutral, I'd note that the underlying assets in the metals ETPs have consumer and industrial uses, while in contrast Bitcoin is primarily a speculative, volatile asset that's also used for illicit

activity, including ransomware, money laundering, sanction evasion, and terrorist financing. While we approved the listing and trading of certain spot Bitcoin-eastern, ETP shares today, we did not approve or endorse Bitcoin. Investors should remain cautious about the myriad risks associated with Bitcoin and products whose value is tied to crypto. Three other SEC commissioners also issued statements. The historically crypto-loving Hester Perce celebrated the approval and condemned her own agency for taking so long to get around to it. Similarly, Mark Uaida spoke positively about the approval while criticizing the SEC. process. Caroline Crenshaw, who voted against the approval, issued a strongly critical statement,

writing that the agency's, quote, actions are unsound and a historical, and worse, they put us on a wayward path that could further sacrifice investor protection. You would not imagine my surprise when I noticed she'd cited my work in her dissenting statement. Jaime Lazzaraga also dissented, but did not issue a statement of his own. Trading opened on Thursday, January 11, and there was indeed substantial early interest, although some of the reported billions in trading consisted of investors pulling funds out of the long-standing GBTC, or grayscale Bitcoin Trust, which was converted from a trust into an ETP as a part of these approvals.

Previously, GBTC holders had no option to redeem the bitcoins held in the fund. Now that they do, people are cashing out. Some are taking profits on a trade that was basically a bet on the GBTC conversion being approved. By the GBTC shares prior to approval when they were still trading at a discount to Bitcoin, then redeem and sell the Bitcoin post-approval, or just sell the GBTC shares, which are no longer trading at that discount. Others seem to be leaving GBTC in order to reinvest their funds into the new competing ETPs that offer lower fees. Bitcoin Futures ETPs also saw some outflows. The industry seems pretty split on whether the Bitcoin ETPs were the runaway success many had predicted.

Those who confidently predicted massive price surges on the fund's approval have either been disappointed or, more commonly, come up with reasons why the Bitcoin price hasn't surged yet, but soon will. Much like doomsday predictors, those who confidently predict Bitcoin prices are, are rarely stymied when their prediction dates pass by unfulfilled. Bitcoin price movement has looked pretty normal since the ETP approval. It's down somewhat, but that's not unusual for an asset class that constantly fluctuates. As far as price is concerned, the reaction to the ETP news was a resounding meh. Many insist that it's far too early to evaluate the ETP's success or failure, and I agree. and they say that massive institutional and layperson adoption is just around the corner.

I'm not so sure on that one. A portion of my writing from the last issue was quoted in a coin desk piece about industry reactions to the ETPs, and I just had to highlight one other quote in there. It was as if I was reading my own writing, except this appears to be completely genuine, rather than dripping with sarcasm as it would have been out of my own mouth. Anil Lula, the CEO of Delphi Digital, said, Now the process will be straightforward to buy Bitcoin for retirement accounts with much lower fees. Today is the last day ever, where the only people incentivized to shill, BTC, and crypto are us and the community.

Tomorrow, all these ETF issuers will have teams of people incentivized to call our parents and grandparents up to talk about Bitcoin. God help us all, and especially our grandparents. In the courts. Sam Bingman-Freeds retained some new lawyers to his team as he prepares for his sentencing hearing, Mark Mukasey and Tori Young, both from a law firm called, you guessed it, Mukasee Young. Mukasey is a former federal prosecutor who previously worked on white-collar cases, including the defense of Trevor Milton, the fraudster sentenced in December to four years in prison for lying about non-existent technical achievements by his Nikola Electric Car Company. Mucasey has also participated in some high-profile political litigation and was once described as, quote, the lawyer at the center of the Trump universe, end quote, before apparently stepping back from

that role. As for crypto, Mucasey and Young are also defending Alex Mishinsky in his criminal fraud case pertaining to the Celsius collapse, which is scheduled for September. Busy, busy. At least at this stage, they don't seem to be replacing SBF's previous lawyers, just adding to them. I still think he's almost certainly going to appeal his conviction, so maybe they're working on that. Speaking of Mishinsky, he's moved to have two counts dismissed in his criminal fraud case. He wants charge two, commodities fraud, dismissed, as, quote, repugnant to an inconsistent with, end quote, charge one, which is securities fraud. And he wants charge six, security price manipulation, dismissed, because he says he didn't know

it was a crime. More precisely, the filing says that Mishinsky knew the market manipulation could be a civil violation, but that, quote, the government decided to invent a criminal offense out of what was, according to the only available precedent, a civil regulatory violation. Doquan asked for his trial in the case filed by the SEC to be postponed from late January until late March, in hopes that Montenegro will have decided where to extradite him by then, and that he might thus be able to participate in the trial. The SEC agreed this was a reasonable request. The judge decided to grant it, but noted that he would not grant further extensions,

even if Kwan is still in limbo by then. Kwan's day in court is now scheduled for March 25th. Former OpenC. Head of Product, Nathaniel Chastain, is appealing his May 2023 conviction. He's arguing that the insider information that he was trading upon was not property of any particular value to OpenC, and thus can't be the object of a wire fraud charge. Worth a shot, I guess. Leaving the topic of criminal courts, there was a hearing on Coinbase motion to dismiss the SEC versus Coinbase lawsuit this week. Among other things, Coinbase's lawyers argued their crypto is not like stocks, it's like

Beanie Babies, Your Honor, argument they'd first made in the written filing back in August. Perhaps this is a useful argument to make when trying to argue that your company isn't selling unregistered securities, but it does seem somewhat unhelpful as far as Coinbase's marketing strategy, which relies on convincing buyers that crypto is the future of finance and not just a speculative bubble akin to the Beanie Baby's craze. Still, Judge Catherine Polkfaila did seem sympathetic to some of Coinbase's arguments. Quote, I want to understand how your standard does not sweep in the collectible market or commodities. It's a real fear that I have that your argument is just sweeping too broadly, she said to SEC lawyers. On the other hand,

she also showed some skepticism towards Coinbase's arguments that the SEC is violating the major questions doctrine by enacting highly significant regulations without congressional instruction. I'm just not sure the crypto industry is so major and so extraordinary that the doctrine would apply, she said. Fyla didn't make any decision on dismissal during the five-hour-long hearing. Class action litigants are having the same kind of trouble serving soccer star Cristiano Ronaldo in their lawsuit over his finance promotion, as did the class action litigants in serving Shaquille O'Neal in the lawsuit relating to his FTX promotion. Shaq was finally located and served at his home in Atlanta.

Litigants are trying to get the courts to allow them to serve Ronaldo, who owns at least six homes but doesn't seem to live in any of them, through less traditional means, like via tweet. In bankruptcies, an independent examiner will be appointed in the FTCS case, after the Third Circuit overturned Judge Dorsey's decision not to appoint one. Dorsey was mostly concerned at the potential cost of an investigation that could be duplicative with FTC's own efforts, and which he estimated would be north of $100 million. Although creditors had broadly agreed with this decision, not wanting to see their payouts dwindle even further, than they already have, thanks to the exorbitant costs of the bankruptcy case, the U.S. trustee has been pushing hard for it, arguing that the bankruptcy judge was required to appoint an independent examiner, because of a clause in the U.S. bankruptcy code seeming to mandate one in

cases where ones requested and where debts exceed $5 million. When the appeal was first filed, the trustee was joined by a group of law professors who filed a spicy amicus brief, raising concerns about the debtor's ability to investigate themselves, and about possible malfeasance by Sullivan and Cromwell, a prominent law firm that has provided services to FTX before and after its collapse. The Third Circuit has agreed with the trustee's interpretation of the statute. They've also pointed out that an examiner could be useful to shed light on common cryptocurrency industry practices, and they called out specifically the practice of companies using tokens they

create to boost their own valuations. In the opinion, they wrote, the collapse of FTX caused catastrophic losses for its worldwide investors, but also raised implications for the evolving and volatile cryptocurrency industry. For example, an investigation into FTX group's use of its own cryptocurrency tokens, FTT, to inflate the value of FTCX and Alameda research, could bring this practice under further scrutiny, thereby alerting potential investors to undisclosed credit risks in other cryptocurrency companies. I was delighted to see this call-out because they're practically repeating the calls for scrutiny I made in an op-ed for the New York Times in November, where I tried to call attention to this very practice. There, I wrote,

What prosecutors never focused on in the FTX trial is the practice that helped generate that enormous loss, which is similar to the practice that propped up FTX and Alameda, pumping up the price of a token with no real value behind it and using that inflated valuation to lay the foundation of a business's balance sheet or to borrow dollars. I believe that the same practice is still propping up vast swaths of the cryptocurrency industry today. Not only are crypto firms operating with massive undisclosed credit risk, they have also often manage to sidestep that kind of outside scrutiny that might have been invited by more traditional funding models. And when a business funded in this way collapses, or in FTX's case, explodes because

of fraud, it is the people who've given up their money for a whole bunch of nothing who suffer. While I do understand the concerns over the cost of an additional investigation, I am glad to see an independent examiner being installed, and I am very much looking forward to their report. For a taste of what these reports look like, you might enjoy my writing on the one that came out of the Celsius bankruptcy last year. Meanwhile, the bankruptcy court is also being inundated with objections to a motion FTX filed that would allow them to estimate the values of digital assets. involved in the case, based on their dollar prices at the time of the bankruptcy filing. Although I don't think approval of this motion would actually explicitly grant FTCS the right to eventually repay creditors in dollars rather than in kind, it does seem like a step in that direction, and that has creditors very worried.

Although it's pretty standard for asset prices to be estimated in dollars based on the price at the petition date, this has been enormously unpopular among creditors in crypto bankruptcy cases who generally want their crypto back, not those filthy dollars. It really doesn't help that crypto prices have generally rebounded since November 2022, meaning people are looking at getting back about $16,800 per Bitcoin instead of today's $41,700. Had prices gone in the other direction, I suspect there might be fewer objections, although perhaps the FTX bankruptcy team would also be more amenable to in-kind repayments in that case. Many of the objections are identical to one of two form letters that must be going around for people to print and sign. And most are letters, form or otherwise, from individual creditors without any lawyer's involvement,

meaning there are some somewhat entertaining gems in there, such as the person warning the judge, that their language might be inexact and unlawyerly, quote, since I am a normal person. Other bigger and beloyered groups, including Avalanche, Oros, Layer Zero, and the liquidators for Three Arrow's Capital have also registered objections. If you're in the market for luxury property in the Bahamas,

as I'm sure many readers of this newsletter are, a few more options might hit the market pretty soon. FTX has filed a motion to be allowed to sell various properties, including the penthouse-turned nerd commune known as the Orchid. Also on the list are various other condos in the Albany Resort Complex, some office suites, and a property in the gated community of Old Fort Bay, the same community where Bankman Fried's parents signed the documents for a beachfront home. Speaking of Sam Bankmanfried's parents, Joe Bankman and Barbara Freed have asked the court, to dismiss the adversary lawsuit against them from FTX, which claims that the millions of dollars their son's company sent to them

were fraudulently transferred, and in Bankman's case, were a breach of fiduciary duty. They're arguing that Bankman had no such fiduciary duty, and that both parents lacked the requisite intent with respect to the fraudulent transfer claim. Over in the Celsius bankruptcy, people who were either savvy enough or lucky enough to withdraw their funds before the company halted withdrawals, are now discovering their luck may have run out. Those who withdrew more than $100,000 in the three-month period

leading up to the bankruptcy may see a portion of their money clawed back. They would then join the group of creditors who were hoping for some, but likely not all, of that money back. In Governments and Regulators The United Nations called out Tether, and particularly tethers issued on the Tron blockchain, as a major player in money laundering and other criminal activity in Southeast Asia. Quote, USDT on the Tron blockchain, has become a preferred choice for regional cyber fraud operations and money launders alike, due to its stability and the ease, anonymity, and low fees of its transactions, they wrote in a report.

They cited an audit by BitTrace, which found around $17 billion in tether transactions connected to illicit activity between September 2022 and September 2023. Tether is, of course, disappointed in being, quote, singled out in the report and whipped out the you just don't understand the technology argument. CBDCs, or Central Bank Digital Currencies, are becoming a topic on the campaign trail in the, United States. Although they'd been condemned by some of the various unlikely hopefuls for the Republican nomination in the past, Donald Trump himself brought them up at a campaign rally in New Hampshire, pledging that he would never allow such an example of government tyranny. Something that, by the way, has not actually been seriously proposed in the U.S. However, it's unlikely that his audience actually knows altogether that much about CBDCs and what

they would entail. Instead, the idea has become more of a broad metaphor for government overreach, particularly given that China is among the countries to have introduced one. I suspect we'll keep hearing about CBDCs in the lead-up to the presidential election, though I doubt the discussion will be much of actual substance and instead will remain shorthand for big government trying to take away your financial self-sovereignty. To be clear, I'm not a huge fan of CBDCs. as they've generally been described either. But I do prefer my conversations to actually involve the topic at hand, rather than using that topic as a vague metaphorical allusion to a shadowy big bad.

Over in the regulatory world, there's now an investigation into the Twitter account compromise that enabled the fake tweet from the SEC's Twitter account that prematurely announced the approval of the Bitcoin spot ETPs. The FBI is now helping out, too. Evidently, the SEC never bothered to turn on two-factor authentication, allowing an attacker to sim-swap the account. Elsewhere in crypto. The cold snap in Texas seems to have had a noticeable impact on the Bitcoin hash rate. Due to minor curtailment, the practice in which crypto mining firms are paid to stop mining

during periods of high electricity demand that often accompany temperature extremes, the Bitcoin hash rate dipped around 34%. The British actor who played the role of the fake hyperverse CEO has apologized for his part in the scam, saying that he was assured by his agent that, quote, many people do this in the business. This is perfectly normal. His agent might not be far off. Deception in the crypto industry is pretty normal.

He was paid $5,000 and got a free suit for his troubles. The Web 3 is going just great recap. There were 12 entries between January 10 and January 20, averaging 1.1 entries per day. $21.3 million was added to the Gryft counter. Your Honor, God told me to start a crypto scam. A pastor for an online ministry in Colorado, Eli Regalado, and his wife were just charged by the State's Securities Division for allegedly taking more than $1.3 million. of the money he raised from the Christians he targeted for his index coin crypto scam.

He's not the first person to try to combine prosperity, gospel, and cryptocurrency, but he sure is among the most forthright about it. He released a video to the followers of his index coin project to try to explain what had happened, saying, So the charges are that Caitlin and I pocketed $1.3 million, and I just want to come out and say that those charges are true. So there's been $1.3 million that's been taken out of, I think it was a total, $3.4 million.

But out of that $1.3, half a million dollars went to the IRS and a few hundred thousand dollars went to a home remodel that the Lord told us to do. And on the eighth day, the Lord said, let there be granite countertops. The whole video is nine minutes long, but I made a quick supercut of some of the highlights. which you can find on YouTube. I'm also going to put a few of the best quotes right here for the audio listeners. And so the Lord says, give that to them, but also give them a 10x. And I'm like, well, where's this liquidity going to come from? And the Lord says, trust me. As money was coming in, we were sewing. We would, money would come in, we'd tithe, we sew, more money would come in. And so

we were just always under the impression that God was going to provide, that the source was never ending, that God was doing a new thing, and that we had nothing to worry about. What we're praying for, and what we're believing for still, is that God is going to do a miracle. God is going to work a miracle in the financial sector. He's going to bring a miracle into index coin. The charges are civil, so Regalado isn't yet facing any jail time. Perhaps he should add avoiding criminal charges to the list of miracles he needs to be praying for. His scam victims, meanwhile, seemed to mostly believe his claims that he was just doing what God told him to do.

Either that, or God also told him to make some fake replies to his video. True U.S.D. DePEGs Avid readers of this newsletter, and of Web3 is going just great, will already know that the various projects Justin Sun pretends not to be closely connected to have had a tough few months. First, his Poloniacs exchange was hacked for $120 million on November 10. Then, not even two weeks later, his H-TX exchange and its related HECO chain were hacked for $115 million. Meanwhile, Sun's been acting weirder than normal. Concerns about Sun-affiliated projects didn't help matters when True USD's supposed real-time reserves attestations were paused because the systems behind,

them began reporting that liabilities exceeded assets. TrueUSD quickly came out with a statement that this was just a system malfunction, then deployed a new system to try to assuage the concerns, but concerns did not seem to be assuaged. All of these factors, combined with some mining activity on finance launch pool that reportedly created some arbitrage opportunities, have contributed to TrueUSD losing its intended dollar peg. Prices slipped below 99.5 cents on January 15 and have largely remained below 99 cents since then, at times dropping as low as 97.3 cents.

For stable coins, even a one cent dip is bad news, and larger deviations, especially for days-long periods, is pretty devastating. Everything else. The CFTC filed a complaint against Debbie X for using romance scam tactics to steal at least $2.3 million. Luis Rubialis NFT launch condemns radicalism and feminist extremism and describes an alleged assault as a small mistake. $2.7 million disappeared from funds meant to compensate Hector Network's investors. The socket service and its bungee bridge suffered a 3.3.3. million theft. GameStop announced it'll be shutting down its NFT marketplace. The Harmony blockchain

encountered an infinite mint bug and now accusations of wrongdoing are flying. Genesis announced it will settle with New York for $8 million. Oiler Finance's co-founder lost his private key and with it $3.8 million. A trader lost $5.7 million in slippage to a meme coin. trade, and Twitter got rid of those hexagonal NFT profile pictures. Worth a read. After unsuccessfully trying to convince their customers that NFTs were the future of gaming, Ubisoft is now trying to convince everyone that actually owning the games you buy is so passe.

A lot of people are up in arms about this, but Nathan Grayson over at Aftermath has pointed out the fact of the matter, with subscription services and company-run game servers, and intermediary platforms like Steam, the days of buying a game in the way we once went to GameStop and purchased a physical cartridge are already largely passed. This is in an article titled Video Game Ownership is already dead. In the news, Christopher Mims wrote about three massive technology fads that seem to have passed into the trow of disillusionment phase of the Gartner hype cycle. Among them is blockchain, and so I gave him my thoughts in his article titled,

After a sugar high of free money, these billion-dollar technologies need a nap. I also joined the SEC Enforcement Division's Associate Director, Caroline Walshans, as a guest on Our Curious Amalgam, a podcast put out by the American Bar Association. It was a fun conversation about crypto, money, and regulation. It's titled, Is Crypto a Giant Pump and Dump Scheme?

The Art of Selling Nothing for Something. 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.net. If you'd 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.

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