Molly White's Citation Needed - Issue 54 – Cases continue

Episode Date: April 2, 2024

Crypto-related litigation is in full swing, as the Terra civil fraud trial has kicked off and two other cases against crypto companies have survived motions to dismiss. Originally published on April 2, 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 54. Cases continue. Crypto-related litigation is in full swing, as the Terra Civil Fraud Trial has kicked off, and two other cases against crypto companies have survived motions to dismiss. This issue was originally published on April 2, 2024. Sam Bankmanfried's trial is finally over, and he has been returned to his jail cell to begin his 25-year-long sentence. He will appeal, but he almost certainly won't succeed.

He will keep trying to claim he was just a small dumb boy who made mistakes but committed no crimes, as though if he just repeats it enough, people might begin to believe him. Soon the media will stop writing about him. The rest of the world will move on. Sadly, for anyone within the cryptocurrency industry's ever-expanding blast radius, the United States regulatory and legal environment has not changed in any ways that would prevent the next Sam-Bankman-Fried from emerging. I said as much in a piece for the Guardian last week, titled Sam-Bankman-Fried is going to prison. The crypto industry isn't any better for it. Regulators and prosecutors will continue their slow game of lacamole, while more people are taken for,

for all their worth by thieves who use the same old playbooks. As Bankman Freed becomes a more and more distant memory, the industry will try to convince people that it's cleaned itself up since its chaotic Wild West days. Without intervention, it may succeed, and the cycle will begin anew. But I will be here, shining a light on it to the best of my abilities. In the courts, Q-Coin. Federal prosecutors have filed charges against Q-Coyne. a major cryptocurrency exchange registered in the Seychelles, and two of its founders, who were both Chinese nationals and at large. According to the complaint, the exchange operated as an unlicensed money transmitting business

and failed to implement proper know-your-customer programs. Although Q-Coyne claimed not to serve U.S. customers, they had a history of making wink-wink-nug-nudge statements that pushed U.S. customers towards the exchange's no-Kyc accounts, where they wouldn't have to disclose their residence or citizenship. Simultaneously, the CFTC announced a civil suit against the platform, alleging multiple violations of CFTC regulations and the Commodity Exchange Act. Customers began fleeing the QCoin platform en masse after the enforcement actions were announced, with more than $1 billion pouring out of the platform within 24 hours.

Some complained of withdrawal delays, although those seemed to eventually work themselves out. Coinbase. The case by the SEC against Coinbase will move forward, as Judge Catherine Polk-Fila has concluded that, quote, the well-pleaded allegations of the complaint plausibly support the SEC's claim that Coinbase operated as an unregistered intermediary of securities, and that, quote, the SEC adequately alleges that Coinbase, through its staking program, engaged in the unregistered offer and sale of securities. She did, however, dismiss the SSC adequately alleges that SEC's claim that Coinbase's wallet offering made them an unregistered broker. Although it would have been surprising to see Fyla dismiss the case at this stage, as I noted

in an earlier issue, this decision has still been widely described as a major victory for the SEC. Even though in past hearings, Fyla has seemed to seriously consider some of Coinbase's arguments and question some of the SEC's actions, in this opinion, Fila largely endorsed the SEC's stance on cryptocurrency. Despite Coinbase's frequent cries that new legislation is needed to regulate the so-called innovative and unique field of cryptocurrency, Fyla opined, quote, the crypto nomenclature may be of recent vintage, but the challenge transactions fall comfortably within the framework that courts have used to identify securities for nearly 80 years. Much of Coinbase's arguments have also hinged on the major questions doctrine, in which

they argue that the SEC is overstepping its authority by enacting significant new regulations without congressional instruction. Fyla had been skeptical of this claim in the past, and in this ruling found that this is not among the most extraordinary cases in which that doctrine might apply. Quote, while certainly sizable and important, the cryptocurrency industry falls far short of being, quote, a portion of the American economy bearing, quote, vast economic and political significance, she wrote. She also noted that the SEC's actions with respect to cryptocurrency seemed to fall well within the bounds of its authority. Genesis. Gemini and Genesis also lost a motion to dismiss a case from the SEC as Judge Gardo Ramos found the agency's allegations to be plausible.

This lawsuit involves the Gemini Earn Program, in which Gemini customers loaned their cryptocurrencies to Genesis to earn interest. Only days after Ramos's decision, the SEC announced they had reached a settlement with Genesis. The bankrupt firm will pay a $21 million penalty, although the settlement terms put the SEC in line to collect this behind Genesis' creditors, which include the Gemini Earned creditors. Genesis also agreed to an injunction, borrowing them from offering or transacting in unregistered securities. The portion of the case against Gemini, which, as of writing, is not bankrupt, remains ongoing. Terra. The SEC's multi-billion-dollar civil fraud case against Terraform Labs and its founder Doquan has kicked off, despite the fact that Doquan remains in

extradition limbo in Montenegro. Although normally the SEC would wait to argue its case until after an associated criminal trial had wrapped up, as they have with FTX, for example, the U.S. criminal trial against Kwan won't proceed until he is in the United States, so the SEC goes first. Although Terraform Labs is bankrupt and not likely to meaningfully continue in the cryptocurrency world, the case has very interesting implications for some different entities, including Jump trading. Jump is a powerful and wealthy U.S.-based trading firm, with an active cryptocurrency arm, and their name just keeps popping up in shady places. You might also recognize the name from my writing about the Oasis counterhack of the wormhole exploiter. The SEC wrote in their complaint that

it was only thanks to a May 2021 bailout from a, quote, U.S. trading firm, later confirmed to be jump, that the Terra Stablecoin was able to restore its peg, although Doquan had widely claimed that Terra's restabilization was thanks to its so-called self-healing algorithm. After buying heavily discounted Terra tokens, which served to move the Terra price back up to its intended peg, Jump later reportedly sold them for a profit of $1.28 billion. No lawsuits or criminal charges have been filed against Jump or its executives, but if we're lucky, the ongoing Terra lawsuit could shine a light on some of what's been going on behind the scenes. And of course, it will provide more information into the terror collapse and the

culpability of those behind it. Binance. A saga has been unfolding in Nigeria since the country detained two executives of the Binance Cryptocurrency Exchange in late February. One of the two executives, the British and Kenyan citizen Nadim Andirwala, slipped away from Nigerian guards on March 22nd after he was taken to a mosque to pray and somehow managed to feel. And somehow managed to the country despite having had his passport confiscated. The other executive, U.S. citizen Tigran Gambarian, remains in Nigerian custody. Before joining Binance to lead its investigations team in 2021, Gambarian had been a special agent in the U.S. IRS's Criminal Investigations Division.

On March 25th, Nigeria's Federal Inland Revenue Service charged Binance, Andrawla and Gambarian with tax evasion. The charges were related to. both to Binance's handling of its own taxes, as well as allegations that the platform had assisted its customers in evading taxes they owed to the country. On March 29th, Nigeria's Economic and Financial Crimes Commission added even more criminal charges in a case alleging money laundering and operating without a license. Underwala and Gambarian have both sued Nigeria's National Security Advisor and its Economic Financial Crimes Commission for violating their human rights by detaining them.

Tornado Cash. Roman Storm has moved to dismiss the criminal case against him, which includes charges of money laundering, conspiracy to violate sanctions, and conspiracy to operate an unlicensed money transmitting business. In the motion, his lawyers describe the case against him as, quote, fatally flawed, and make several arguments for its dismissal.

Among them is the argument that writing code is First Amendment-protected speech, which cites precedent established in Bernstein v. United States, a set of cases pertaining to the other crypto, cryptography. They also make what is now becoming a classic argument in the cryptocurrency world, that Tornado Cash was decentralized and that Storm had relinquished the ability to modify the smart contracts, he wrote, by the time the DOJ alleged they were used by bad actors, including North Korean hacking groups. Worth a shot, but I don't see this case being dismissed at this stage. Storm also filed motions to try to stop the feds from seizing his cryptocurrency assets

and to compel them to turn over their records pertaining to him, as well as any communications they had with Dutch authorities. Over in the Netherlands, prosecutors are reportedly looking for fellow tornado cash developer Alexei Perzov to be sentenced to 64 months, or 5 in a third years. A verdict in his trial is not scheduled until May 14. He's already been in custody for over a year and a half. Craig Wright. The evidence was so overwhelmingly against Craig Wright's claims to be Satoshi Nakamoto

that the judge overseeing the five-week-long trial in the United Kingdom ruled on the matter immediately as arguments came to a close. Justice Miller was expected to take some time to consider the case before issuing a ruling, but was apparently so firmly convinced that he announced his decision then and there. A written judgment is still forthcoming and will include a decision on related matters, including whether Wright will have to pay the plaintiffs roughly $6.7 million pounds or $8.4 million U.S. dollars in court fees. Apparently anticipating such a decision, Wright immediately began transferring assets out of the country.

The rather perturbed Meller promptly granted a freeze on Wright's assets, noting in the order that Wright had boasted in the past about, quote, having made himself untouchable by structuring his assets such that they would be out of reach of court judgments. Everything else. Justin Sun wants the judge to dismiss the SEC's case against him, the Tron Foundation, the BitTorrent Foundation, and others. He boldly claims that his sales of Tron and BitTorrent tokens took place entirely overseas and were not meant to target U.S.-based investors, despite the fact that Sun paid for promotions from American celebrities, including Lindsay Lohan, Jake Paul, Solja Boy, and Austin Mahone.

In total, eight American celebrities were charged by the SEC in March 2023 for illegal touting, and all except for Solja Boy and Mahon immediately settled. Soljiboy and Mahon later lost the case, Solgiboy by default. Michael Petrin, aka Omar Donani, aka Omar Patrin, the surviving co-founder of the Quadriga CX cryptocurrency exchange, is facing court scrutiny in Canada as officials probe how he happened to acquire more than $250,000 in cash, 45 gold bars, a diamond Rolex, and other jewelry. According to a filing, chat messages between Patrin and his late co-founder Gerald Cotton show them talking about stealing customer funds in 2014 and 2015.

Patrin has pleaded guilty to multiple felonies in the past and changed his name twice to try to dodge scrutiny. In January 2022, two days after people lost a ton of money to cascading liquidations across the Wonderland project, Crypto-slooth Zach XPT, revealed that it was Patrin who had been managing the project's treasury. Before he was unmased, he had been hiding behind a pseudonymous account called Zero X-Sifu. All normal cryptocurrency stuff, really. Custodia, a crypto bank that's been facing off against bank regulators, sued the Federal Reserve in 2022 after they delayed and then denied Custodia's request for a master account.

They've lost that lawsuit. If the judge had decided that they'd, indeed were entitled to a master account as a chartered state financial institution, this, quote, would effectively mean that every depository institution chartered under the laws of a state, regardless of how soundly crafted, is entitled to a master account, allowing it direct access to the federal financial system, he wrote. In bankruptcies, FTX. The same law professor who spearheaded a nine professor amicus brief in the FTX bankruptcy case, which argued for the appointment of an independent examiner due to concerns over legal conflicts of interest,

now has a paper coming out in Stanford Law Review. In FTX, conflicting public and private interests in Chapter 11, he and another co-author have argued that mega law firm Sullivan and Cromwell had undisclosed potential conflicts of interest which have undermined the bankruptcy efforts. Quote, FTX is a cautionary tale about the power that lawyers have to frame, control and profit from claims about the public interest in Chapter 11, they write. They go on to argue that thanks to Sullivan and Cromwell's substantial work for FTCS prior to the bankruptcy, the firm either knew or should have known that FTX was commingling customer funds,

but that they still vouched for FTCS to contractual counterparties and to U.S. regulators. The concerns over legal conflicts of interest in this bankruptcy case are messy. The judge overseeing his criminal case described Bankman Freed's continued allegations against FTC's lawyers and bankruptcy team as little more than a strategy to try to bend the public narrative in his favor and deflect blame. And Sullivan and Cromwell have since pointed to those same statements from the judge when defending themselves in statements to the press against Sam Bankman Fried's claims. However, it is possible for there to be shady business among the legal team and for this to be largely inconsequential as far as exonerating Bankman-Fried from his own misdeeds. In Governments and Regulators. Ethereum ETPs

In the wake of the SEC's approval of Bitcoin Spot ETPs, the cryptocurrency industry has been eagerly anticipating a decision by the SEC on an Ethereum version. Many within the industry see the Bitcoin Spot ETPs. ETPs as largely responsible for cryptocurrency's recent price revival and hope Ethereum equivalents could further pump their bags. Those hopes were dampened somewhat when reports came out that the SEC is investigating the Ethereum Foundation, supposedly in hopes of classifying Ethereum as a security. This report first emerged when CoinDesk noticed that the Ethereum Foundation had removed a warrant canary from its homepage and was bolstered by reporting out of fortune, such as a

citing people at other companies that had received subpoenas pertaining to the Ethereum Foundation. One source told Fortune that the probe seemed to have started around September 2022 when Ethereum completed the merge and moved to a proof-of-state consensus model. Another source confirmed that they had received a subpoena within the last few weeks, though, suggesting the investigation remains active. Designation as a security could hinder the path to an ETP approval, not to mention hurt Ethereum's status in the cryptocurrency world, where cryptocurrency issuers avoid their tokens being designated as securities at all costs

due to the accompanying regulations. The SEC faces a May 23rd deadline to approve or deny one of the seven pending applications. Hong Kong Hong Kong regulators have added by-bit and 11 of its offerings to their suspicious virtual asset trading platforms alert list. and warned of enforcement action against the Dubai-based company. ByBit is not registered with Hong Kong's Securities and Futures Commission. HKVAEX, a cryptocurrency exchange whose bid to obtain a Hong Kong crypto license was reportedly backed by Binance,

has announced it's withdrawing its license application and shutting its doors. They have given customers only 30 days to withdraw their assets. Everything else. U.S. and U.K. investigators have reportedly teamed up to investigate more than $20 billion in Tether that have flowed into the Moscow-based Garrentex cryptocurrency exchange since it was added to wartime sanctions lists in April 2022. This would be among the largest violations of the sanctions that have been imposed against Russia, Bloomberg reported. A later report from the Wall Street Journal focused on Tether, which they described as fueling Russian weapon smugglers, with the help of Garrentex.

County Commissioners in Navarro County, Texas, declined riot platforms proposed request for millions of dollars in tax breaks for a planned mining facility. According to one commissioner, the decision to reject a request was influenced by vocal opposition to the facility by residents who were concerned about factors

including massive energy consumption, water usage, and noise pollution. Furthermore, promises by Bitcoin mining companies that their facilities will provide jobs and stimulate economic activity have fallen flat, with mining facilities requiring fairly few employees to operate. The UK's Financial Conduct Authority has confirmed that social media influencers, termed fin influencers when they focus on financial topics, fall within new advertising regulations.

Even those who are not being paid by a firm, but who are promoting a firm's services in hopes of future compensation, or those who are promoting services in hopes of attracting social media engagement could be subject to the new guidance if they are deemed to be acting in the course of business. The FCA was explicit that the kinds of memes prevalent within the cryptosphere fall under their remit and have to be fair, clear, and not misleading. Portugal is the latest country to crack down on WorldCoin, ordering the eyeball-scanning orb company to stop collecting biometric data for 90 days.

Elsewhere in crypto, Ethereum completed its Denkin upgrade, which sought to reduce fees on layer two blockchains like optimism and arbitram. The goal was to make Ethereum more scalable, moving it towards its goal of becoming the world computer. Some community members celebrated by uploading the entire script of The B-movie, an endeavor which evidently costs about $14. I respect that. Backed is a cryptocurrency exchange that loves to brag that it was founded and is majority owned by the Intercontinental Exchange, which is the same group that owns the New York Stock Exchange. Now, though, backed stock has tanked so badly that that very same New York Stock Exchange is threatening to delist them. Thanksgiving dinner is going to be so awkward this year.

The Web 3 is going just great recap. There were 26 entries between March 13, and April 1st, averaging 1.3 entries per day. $68.07 million was added to the grift counter. Prisma finance hacker demands thanks for over $11 million theft. After stealing $11.5 million from the Prisma finance defy protocol, the attacker got the Prisma team's hopes up when they announced via on-chain message that they were a white-hat hacker,

simply rescuing funds that were vulnerable to a bug they had to start. discovered. Those hopes seemed to wear off pretty quickly, though, when the attacker became upset that the Prisma team had not responded quickly enough, thanked them for their efforts, or apologized to their users. The attacker then transferred the funds to tornado cash, indicating they were beginning the process of laundering them to evade detection. The team has gone back and forth with the hacker a few more times, but has expressed that they don't believe the attacker is sincere in their claims that they intend to return the money. Snibbles, Sniblets, and Snuggories.

Somehow, a game involving Munchables that eat shniblets and live in snuggies, managed to amess more than $60 million, which was then stolen by an attacker who discovered a flaw in the project's smart contract. The attack has been attributed to one individual who managed to obtain a developer job with the Munchables project and gain access to its internal infrastructure. structure. In fact, according to blockchain sleuth, Zach XPT, the individual behind the theft was actually pretending to be four different developers working for that same project. A couple more and he could have become a mythical 10x engineer. Later, likely thanks to his identity being

discovered, the attacker agreed to return the stolen funds, and the munchables will live to munch another day, safe in their snuggeries. Everything else. The fixed float exchange was again. Solana faced a wave of drain attacks linked to trading bots including Solarium. Sam Bankman-Fried was sentenced to 25 years in prison. The Lenk's co-founder was accused of a $10 million rug pull. Q-coin and its founders have been criminally charged. The Curio Real World Assets Project suffered a $16 million exploit. The Solana meme coin frenzy has sparked a trend of incredibly racist meme tokens. The previously rug-pulled Lucky Star Currency Project has somehow rugged again. A developer for a project called Ticker stole $900,000. A game called Super Sushi Samurai was exploited

by a white hat hacker for $4.6 million. Air Dow was exploited via a social engineering attack. The Dolomite Exchange was exploited for $1.8 million. The SEC launched an investigation into the Ethereum Foundation. Bitcoin flash crashed on Bitmex. The slurf meme coin meltdown only added to the mania around Solana meme coins. The Wilder World game suffered a $1.8 million theft, which they've blamed on a contractor. A Fisher impersonating an influential crypto trader in Twitter replies scammed over $2.6 million. The Remilia Collective reported a multi-million dollar hack,

An AI NFT project called NF Prompt disclosed a hack. Someone accidentally burned $1.36 million in tether. Mosaic was exploited for $2 million, but recovered 90% of it. The Mobox lending platform was exploited for $750,000. Massachusetts prosecutors have sought to seize $2.3 million from crypto-romance scammers, and a fishing attack drained $2 million from one victim. victim. Worth a read. An episode titled Fake Toshi, The Perfect Client in the Alab podcast, is more than four years old, but describes some of Craig Wright's early shenanigans in trying to claim that he is

Satoshi Nakamoto. They do a great job of going through only some of Wright's incredibly long backstory, and it's very funny. In the News, I joined Brent Goff on the day to talk about Sam Bankman-Freed sentencing and whether something like FTX is likely to happen again. The television program was titled Crypto King Sam Bankman-Fried sentenced to 25 years in prison. I was also briefly quoted, along with fellow crypto-skeptic David Gerard, in a piece in the Sunday Times titled How and Why Bitcoin's Price was able to rise from the brink. And finally, I also went on to BBC shows to talk about Sam-Bankman-Fried sentencing, although I'm not sure if those were posted online because most of the BBC's content is geolocked.

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 slash support. 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, go to citation needed.