Molly White's Citation Needed - Issue 59 – Hot damn, this is going to get interesting quickly

Episode Date: June 7, 2024

Are US legislators warming to crypto? The SEC approves Ethereum ETPs, and a crypto bill gets through the House. Originally published on June 7, 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 59. Hot damn. This is going to get interesting quickly. Are U.S. legislators warming to crypto? The SEC approves Ethereum ETPs, and a crypto bill gets through the house. This issue was originally published on June 7, 2024. I've got some catching up to do, as I've been so busy with my cryptocurrency industry election influence project and other writing, that it's been a minute since I've published a recap post. That project is coming along well, by the way, and I'm hoping to have it out by the end of the

month at the latest. Hopefully sooner, but I have a trip to Switzerland for a conference that will pull me away from my computer for a few days, and so I don't want to over-promise. In a surprise move two weeks ago, the SEC approved Ethereum Spot ETP applications. As I mentioned in a previous issue, early optimism around the chances of a speedy approval had dwindled as the SEC delayed decisions and had put off the kind of back and forth with issuers that preceded the Bitcoin ETP approval. Some analysts still predicted an eventual approval, but the SEC's rather abrupt decision to engage with applicants and then approve the applications only days later on May 23rd, took many people by surprise. It's not clear why the SEC approved the ETPs now, rather than continuing

to delay the decision or even deny the applications, as many had predicted. A denial could have provoked legal action similar to that from Grayscale on the Bitcoin ETP denial, where the court decision to overturn the SEC's action seemed largely responsible for forcing the Bitcoin EPP approval. There's been a bit less hunger for an Ethereum ETP than there was for a Bitcoin one, so it's hard to say which of the prospective issuers might have decided to spend millions on a potentially years-long lawsuit against the SEC, but then again, the grayscale court decision and Bitcoin ETP precedents might have made the legal battle less grueling. Some have described the approval as part of a perceived broader softening towards crypto by U.S. lawmakers and regulators,

and there might be something to that, which I will discuss later in this issue. But first, in the courts, FTX. FTX executive Ryan Salem was sentenced on May 28 to 90 months, or seven and a half years, in prison. The first of the four co-conspirators to be sentenced, he was the only one to plead guilty without a cooperation. agreement, and the only one not to testify in Sam Bankman-Fried's trial. One of his charges, conspiracy to operate an unlicensed money transmitting business, pertained to his role in transmitting FTX customer funds without a license via FTX, Alameda Research, and the North Dimension Shell Company they set up to obscure to wary banks

the cryptocurrency-related nature of the funds. Salem's second charge was to do with violations of campaign finance laws, through his role as a straw donor to funnel millions of dollars of FTX funds, which we now know were co-mingled corporate and customer funds, to Republican candidates who are friendly to crypto. Unlike the other co-conspirators, Salem was not charged with wire fraud or money laundering, and he was not implicated in knowingly misappropriating customer funds. He emphasized this heavily in his sentencing memo, where his lawyers wrote that Salem, quote, was duped, as was everyone else, into believing that the companies were legitimate, solvent, and wildly profitable.

Salem had requested to be sentenced to no more than 18 months imprisonment. The probation office recommended in their pre-sentence report that he received the maximum penalty of 10 years imprisonment. prosecutors asked for a slightly less severe sentence of five to seven years. Judge Kaplan ultimately opted to impose a sentence above what prosecutors had requested, commenting during the hearing that Salem, quote, knew precisely what he was doing, and the whole idea was to hide it from the world, astonishing. Kaplan also seemed to factor in the fact that Salem tried to pull his own money off the exchange as it was collapsing, successfully withdrawing $5 million and attempting to withdraw millions more.

Quote, quote, it was me first, I'm getting in the lifeboat first, to heck with all these customers, commented Kaplan. Unlike his former boss, Salem had seemed to listen to lawyers' advice to keep quiet about his ongoing criminal case. But his return to social media only hours after he was sentenced suggests this may have been painful for him. Post-sentencing, he eagerly jumped back in to, crypto-Twitter, even trying to join in on some of the memes that came out of the FTX collapse by

replying H in response to a person who tweeted, one, what, below one of his tweets, a callback to the string of cryptic tweets by Bankman Freed shortly after FTX declared bankruptcy. Salem seems to have woefully misread the room, because he was certainly not embraced upon his return. It seems he may have believed people would receive him more warmly, because he would, he wasn't implicated in the actual theft of funds, but he's discovered that either people don't realize that, or more likely, don't much care that he didn't steal the funds when he still profited enormously from them, and actively funneled them to various causes. He spent much of the subsequent days after his sentencing arguing over this distinction, including responding to a tweet

by Tiddy Respector to say, no, I'm going to jail for campaign finance fraud and unlicensed money transmitting. Despite the frosty reception, he kept tweeting away and seems to be feeling rather sorry for himself. It's hard to say what I would do if I suddenly found myself staring down the barrel of more than seven years in prison, but I'd like to think it wouldn't be tweet through it. It will be interesting to see how Salem's sentence compares with the sentences of Ellison, Wong, and Singh. On the one hand, their cooperation against Bankman Freed should earn them some points,

but on the other, their charges are both more numerous and more serious. Everything else. The developer who allegedly stole $2 million from the Pump. Fund project and then bragged about it on Twitter, was reportedly arrested only a day or so after the whole incident. He tweeted that he had been arrested and kept overnight before being released on bail and placed in a mental hospital. The SEC has been ordered to pay $1.8 million in legal fees to the defendants in the debt box case, after the judge determined that the SEC had engaged in bad faith conduct

when their lawyers lied to obtain a temporary restraining order to freeze the company's assets. The judge did, however, approve the SEC's motion to dismiss the case without prejudice, which means the SEC could potentially take a second swing at it later on. The whole thing was a really bad look for the SEC, and the sanctions seemed completely warranted to me. There have been a slew of crypto-related enforcement actions out of the Justice Department. These were once a rare occurrence, but now we're becoming so numerous as to be onerous to track on Web 3 is going discreet. In brief, since I published the last issue, Ruiz-Young-Lin, the owner of Incognito Market, was arrested for his role in operating what was until March 22.

24, one of the largest darknet narcotics marketplaces. Alongside the marketplace, he ran a cryptocurrency, quote, bank, where vendors and customers held the crypto they used to transact. In March, Incognito Marketplace allegedly stole the funds their users held on the platform and threatened to release customer data if not paid a ransom. Lin has been charged with engaging in a continuing criminal enterprise and various other drug crimes, as well as money laundering. He faces life in prison. David Kegel, an 85-year-old former attorney who was disbarred in 2023 for misappropriating client funds, pleaded guilty to conspiring to operate a cryptocurrency Ponzi scheme that defrauded victims of more than $9.5 million.

He had served as an attorney for two people who promoted an investment scheme that they said used AI trading bots to generate high returns, and Kegel had backed up the promoter's false claims that he held around $11 million in Bitcoin in escrow as a sort of insurance fund. He faces up to five years in prison. Junhe Wang was arrested for operating a massive botnet alleged to have enabled a substantial number of computer crimes. Wong was reportedly paid around $99 million in cryptocurrency and fiat. He faces up to 65 years in prison. Rishon Russell. a former investment banker, was sentenced to around three and a half years in prison for a

2020-2020-2020-22 cryptocurrency investment scheme. Instead of investing his client's funds into cryptocurrency, as promised, Russell used the funds for his own purposes, gambling, and repaying other investors. Sergei Potopenko and Ivan Torojin, the operators of a $575 million dollar crypto Ponzi scheme called Hashflare were extradited from Estonia to face charges. Although their clients invested hundreds of millions of dollars with them from 2015 to 2019 to rent cryptocurrency mining capacity, their actual mining operations were minuscule, mining only 1% of the Bitcoin they claimed. We Dong, or Bill Guan, the chief financial officer of the Far Right and Falun Gong-affiliated

Epic Times Media Council. was indicted on money laundering and bank fraud charges after allegedly operating a more than $67 million fraud. Guan allegedly used cryptocurrency to purchase prepaid debit cards that were loaded with fraudulently obtained unemployment insurance benefits and laundered the funds through bank accounts they had fraudulently opened up using stolen personal information. Three creators of the October 2021 evolved Apes NFT project, have been charged for their $2.7 million rug pull.

Meanwhile, the New York Attorney General has sued a couple over an alleged $1 billion set of cryptocurrency pyramid schemes, which were affinity frauds that specifically targeted Haitians. Cynthia and Eddie Petion are learning the hard way that despite moving to Panama and writing, quote, they can't serve you if they can't find you, L.O.L., fleeing the country is not a get-out-of-jail-free card. Over in the United Kingdom, John Wen was sentenced to over six years imprisonment after helping to launder billions of dollars in cryptocurrencies for Jim and Qian, also known as Yadhi Zhang. The case against Zhang is ongoing. In Governments and Regulators. I've seen a lot of comments lately that the U.S. government and regulators have been softening towards crypto. Daniel Kuhn at

Klohn wrote of a, quote, sea change, saying that, quote, it appears that the U.S. government's long war on crypto is nearing an end. I'm not sure if I'd go so far as sea change, but it does seem that the pain and political fallout from the FTX collapse and related disasters is becoming a more and more distant memory. One of the first notable events in this so-called sea change was the Senate's vote to overturn the SEC's Staff Accounting Bill 121. This received the expected Republican votes, as well as support from the usual crypto-friendly Democrats like Kirsten Gillibrand. However, some other Democratic supporters were more surprising, such as Michigan Senator Gary Peters, who co-sponsored the Digital Asset Anti-Money Laundering Act of 2023 with Elizabeth

Warren last July, and Montana's Senator John Tester, who had previously said crypto was, quote, all bullshit. Given that President Biden had already promised to veto the bill before the Senate vote, it just may be that some senators viewed this as a freebie opportunity to appeal to a promised, though quite likely mostly imaginary, base of single issue pro-crypto voters without any real ramifications. However, that interpretation would also mean that these senators believe the crypto industry's story that there is a substantial base of pro-crypto people, whose support might be predicated on the senator's stances on things like the SAP 121 issue, which in itself would,

be startling. Now let's get back to the topic of the Ethereum ETP. One question on everyone's mind following the approval is, does this mean the SEC has decided Ether is not a security? There were some rumblings in the other direction recently, particularly with a revelation in a lawsuit filed by consensus on April 25th of a statement interpreted by consensus to mean that the SEC did broadly view ETH to be a security. The answer is unfortunately not much clearer than it was before. Some lawyers seem to think the approval means ETH is safe from SEC designation as a security, but others have acknowledged that the SEC could still decide later on that Ethereum is broadly security. Somewhat more likely, in my non-lawyerly view, is that the SEC will continue to focus more

on what people do with Ethereum and how they offer it, rather than making a wholesale declarative that the asset is or is not a security. They've been quite clear that they view offering Ethereum staking programs to cross the line into unregistered securities offerings, for example, and that stance doesn't seem to have changed with this approval. Unlike with the Bitcoin ETPs, the Ethereum ETP issuers weren't locked and loaded to immediately unleash these projects on the market, and they still have to go through further approvals, so it's still too early to see how they will be received. Analysts have estimated the first funds won't launch until the end of June at the very soonest. Another important recent event was the House's passage of the Financial Innovation

and Technology for the 21st Century Act, or Fit 21, which received 279 votes. The bill would place more of the crypto-regulatory responsibility under the CFTC, a smaller agency with substantially fewer resources than the SEC, although there still would be a split regulatory regime. It would also allow cryptocurrency companies to simply self-certify that their products are, quote, sufficiently decentralized and therefore not securities, something many cryptocurrency companies already widely falsely claim in hopes of sidestepping the SEC. Maxine Waters has described the bill as one of the worst she's ever seen. The crypto industry, of course, loves it.

Gary Gensler has expressed concerns that the bill would, quote, risk investor protection and, quote, not just in the crypto space. Despite its victory in the House, the bill still has a ways to go to get through the Senate. Still, with around two-thirds of the House supporting it, it's earned considerably more support than most crypto-related bills in the past. In elections and political influence. Coinbase claims that more than one million people have signed up as, quote, crypto advocates for their stand with crypto advocacy group and political action committee.

You should take this number with a massive grain of salt, particularly given Coinbase also likes to claim that 52 million Americans own crypto, despite a Federal Reserve survey showing that only around 7% of respondents bought or held crypto in 2023, which would work out to around 18 million people, or a third of Coinbase's claim. They also claim that they've raised more than $87 million in donations. If we assume they aren't double-counting donations to super PACs, this would put the total crypto war chest at around $250 million in counting, with around $53 million of that already spent. Here's a sneak peek at a part of the project I've been working on, which shows where all that money's been going. I would recommend checking out the web version of this

newsletter to see the full table, but it's a list of races influenced by cryptocurrency industry money. including more than $20 million going to oppose Katie Porter in her Senate primary race, which she ultimately lost, more than $6 million going to support Jim Justice in his West Virginia Senate race, which is still upcoming, and more than $6 million to support Jim Banks in his Indiana Senate race, which also is upcoming. However, the list of donations shown on the website, supposedly from this grassroots, quote, community,

total up to a paltry 1,176,000. $1,900, suggesting that stand with crypto is double-counting donations to packs like Fairshake. Remove the $1 million donated by the Moon Pay Company, $15,000 from Gemini, and roughly $12,000 from Coinbase's CEO Brian Armstrong, and that leaves about $150,000 raised from the million people that supposedly signed up. Meanwhile, Donald Trump has continued his attempts to appeal to the Cryptocurst and to libertarians by promising at the Libertarian National Convention to free Silk Road creator

Ross Ulbricht if elected. Ulbricht is 11 years in to two life sentences after being convicted of various drug and computer crimes relating to his operation of the Silk Road Darknet Marketplace, and the judge also heard evidence during sentencing that he had hired hitmen, although no one was ultimately killed. His case has become a cause-seleb among libertarians and cryptocurrency advocates alike, who view his sentence as disproportionate to his crimes and who argue that he should not have been held accountable for the sale of narcotics when he was not personally involved in those transactions. Trump's promise of clemency is somewhat surprising for a presidential candidate

who's previously pledged that he would be so tough on drug crime that he would mandate the death penalty for those caught selling drugs. But then again, it's hardly the first time he's been inconsistent in his campaign promises. The Libertarians didn't seem to really buy it, though. Despite a few cheers from the audience when he promised to commute Albrecht's sentence, Convention goers later said things like, quote, I would rather eat my own foot out of a bear trap than vote for Trump, and dismiss the promise as hollow pandering. I'll swear in crypto. Robin Hood has announced it will be acquiring the European and bit-stamp cryptocurrency exchange, subject to regulatory approval, in a $200 million deal.

The meme coin mania just keeps getting weirder. People have realized that if they're just able to raise enough momentary publicity, they stand the chance of getting their hands on potentially life-changing sums of money. That's playing out about as badly as you might expect. A new trend has involved people live streaming while promoting their meme coins, encouraging viewers to buy the tokens as they broadcast live and promising to do various things on stream if the token reaches various market cap goals.

This has spawned, among other things, a token named Live Mom, where a boy appearing to be in his early to mid-teens streamed while sitting next to an adult woman, who he said was his mother. The woman flaunted her breasts on the stream and urged viewers to buy more tokens so as to reach market cap goals

that would trigger events like, poor milk on my mom's chest. Another token was Fade Live, in which two teenagers boxed live on stream, wearing boxing gloves, protective headgear, and masks to hide their faces. Despite their attempted safety measures, they were forced to end the live stream early

when one of them lost a tooth and asked to be brought to the hospital. This was a relatively minor injury compared to those suffered by the creator of the Truth or Dare token, who doused himself, in isopropyl alcohol as friends shot fireworks at him and quite predictably went up in flames. He later posted videos from the intensive care unit in a Miami hospital, showing that he has

substantial facial burns, and he describes the second and third degree burns he suffered over a substantial portion of his body. Elsewhere, we're seeing echoes of the times a few years ago when various celebrities went all in on crypto. Remember when Reese Witherspoon was tweeting, crypto is here to stay, and Justin Bieber was posting his NFTs on Instagram, well, now we have various B-list celebrities, belatedly getting in on the grift, as crypto prices rise again. Olympic athlete turned Trump World talking head, Caitlin Jenner, released a Jenner token, with such bold shilling that it took people a day or two to be convinced that it was really her behind the token, and not someone who had hacked her Twitter account.

Rapper Iggy Azalea is making frustrated tweets, about how she can't find a market maker for her new token. Hulk Hogan spent a day promoting his Hulk token, only for it to turn out to be a pump and dump. He's since claimed that his account was hacked, although it's not clear if that's true. Even Floyd Mayweather couldn't seem to resist, despite multiple run-ins with securities laws in the past. In 2018, he was forced to pay around $615,000 for unlawfully promoting the CentraTech ICO the year before, and he agreed not to promote securities for three years. Once his timeout was over, he got right back in the game, promoting the Ethereum Max token, Bored Bunny, NFTs, the Mayweverse, and other projects.

He was later sued by investors in the Ethereum Max token, which was described as a security in a separate lawsuit by the SEC that named a bunch of celebrities but not Mayweather, although the case against him was ultimately tossed out. Now he's been posting about a Floyd token, although he quickly deleted his tweets after being called out by blockchain sleuths Zack XPT for repeatedly scamming his fans. The Web3 is going just great recap. There were 10 entries between May 18 and June 7, averaging 0.5 entries per day. $1.316 billion was added to the Gryft counter.

Linnea blockchain halts in response to hack. The Linnea Layer 2 blockchain, which is backed by consensus, made the controversial decision to halt block production in response to a $6.8 million hack of Velocor, a decentralized exchange built on top of Linnea. Like many Layer 2 blockchains, Linnea is incredibly centralized, and it's this centralization that gave the project team an easy off switch they could hit when something went awry. Although this prevented the thief from cashing out some of the assets they'd stolen from Velicor in a flash loan attack, it was extremely controversial, as this degree of centralization

is viewed as dangerous in the cryptocurrency world. As often happens after these types of unilateral actions, Lanaya has promised that they will soon be trying to decentralize so that they will be prevented from ever doing something like this in the future. We'll see. The DMM crypto exchange was hacked for more than $300 million. The Japanese cryptocurrency exchange, DMM, announced that they had suffered a, quote, unauthorized leak of around 4,500 bitcoins, priced at around $308 million.

They offered very little in the way of further details about how the hack happened or who might have been responsible, saying that they were still investigating. The company has promised that it will be able to plug the $300 million hole by raising funds through a capital increase and various loans. This is one of the largest cryptocurrency heists, rivaling the $320 million wormhole bridge hack in February 2022, although some of those funds were later recovered. Everything else.

A blockchain developer lost over $48,000 after posting their private key to GitHub. A meme coin team has been accused of hacking influencers' Twitter accounts to manipulate markets. The normie meme coin plummeted. more than 99% after an exploit, and Gala Games suffered a $21 million hack. Worth a read. Leo Schwartz over at Fortune Crypto just published a scoop on Yida Gao and his Shima Capital blockchain-focused venture capital fund. Gao allegedly took millions of dollars from investors and funneled them into offshore

companies under his own name. As for Shima, it seems to have lost money, despite the overall cryptocurrency bull run recently. This article is in fortune, and it's titled, He taught at MIT, worked at Morgan Stanley, and convinced Bill Ackman and Galaxy to back his $200 million crypto fund by his early 30s. His future is now in jeopardy. In the news, personally, I consider it a career achievement to have made it onto the shortlist of people for a journalist to call when they need comments on a tech company telling

people to eat glue. You can read, why Google's AI might recommend you mix glue into your pizza, in the Washington Post. 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.News.