Molly White's Citation Needed - Issue 73 – Degen volunteer fire brigade

Episode Date: January 10, 2025

Terra founder Do Kwon is finally extradited, the CFPB proposes crypto consumer protections, and Polymarket reaches new lows. Originally published on January 10, 2025.

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 73. DGen Volunteer Fire Brigade. Terra founder Doquan is finally extradited. The CFPB proposes crypto-consumer protections, and Polymarket reaches new lows. This issue was originally published on January 10, 2025. The new year has kicked off with a major development in one of crypto's most notorious cases. Doquan, founder of the collapsed Terra Luna project, has finally been extradited to be tried in the United States after a 21-month saga in Montenegro.

Meanwhile, one regulator is still pushing for stronger consumer protections in crypto, even as they stare down a hostile administration and threats to their very existence. Welcome to 2025, friends. It's going to be a hell of a year. In the courts, Doquan. After almost two years in extradition limbo, Terra Founder Doquan has been extradited to the United States. To recap, in May 2022, Kwan's Terra Stablecoin and associated Luna crypto token crashed catastrophically, ruining many who had been tempted by supposedly risk-free 19 to 20% APY they were promised in exchange for depositing their dollar-pegged Terra stablecoins or UST into a protocol called anchor. Side note, if someone promises you a risk-free 20% annual yield

if you just let them hold on to your dollars for you or turn your dollars into stable coins and then let them hold onto your stable coins for you, the risk that you never see those dollars again is in fact very high. Despite tweeting, quote, I am not on the run or anything similar, Kwan was in the wind by the time South Korea, Kwan's home country and also home to many terror victims, issued a warrant for his arrest in September 2022. The United States SEC followed up with civil fraud charges in February 23.

In March 2020, Kwan was nabbed in a Montenegrin airport where he was using a forged passport to try to travel to Dubai. That same day, U.S. prosecutors unsealed a criminal indictment against him. Kwan spent the next 21 months in a Montenegrin jail, during which a string of more than 20 court rulings and appeals saw him approved for extradition first to the United States, then to South Korea, then the U.S. again, in a process that Protos wrote was, quote,

single-handedly ripping Montenegro apart amid allegations of corruption. During that time, he and his company were both found liable for fraud in the U.S. SEC case. A subsidiary of the U.S. trading firm Jump was also just fined by the SEC for their involvement in a secret deal with Kwan and his company to prop up the faltering stable coin a year before its collapse. Montenegro has recently been able to reach its first final verdict that was actually final enough to see Kwan actually board a plane, and he arrived in the United States to appear in court on January 2nd. This was celebrated by Prime Minister Minister Miloiko Spiesch, who tweeted that he believed the extradition would, quote, put an end to pre-election

manipulations and attempts to stage a scandal. Quan is probably not as happy about the outcome as Spich. Although he fought both extradition to the United States and South Korea, he seemed particularly opposed to the idea of winding up in the United States, with his lawyers at one point arguing that Montenegrin courts had falsified information, so as to suggest that the United states had requested Kwan's extradition before South Korea, and stating that the facts, quote, absolutely and 100% give priority to Korea. He'd tried again to halt this extradition, too, by claiming that Minister of Justice Boyan Bolshevich had illegally granted it, but to no avail. The eight fraud, market manipulation, and money laundering charges carry hefty maximum sentences,

and Kwan stands accused of causing $40 billion in losses to at least $100,000. of thousands, if not more than a million people. He's entered a not guilty plea, as is to be expected this early on, and is likely to do a whole lot more sitting around in a jail cell as prosecutors and defense attorneys sift through discovery. Quote, sounds like we're going to be backing up a U-Haul to the Southern District. District Judge Paul Engelmeyer joked about the apparent six terabytes of data, before scheduling the trial start date a whopping year away in January 2026, while offering Kwan and his defense team the opportunity to request an earlier trial. Everything else. The Winkle-Vos twins' Gemini cryptocurrency exchange will pay $5 million to settle a lawsuit

from the CFTC, which alleged that the company had misled the regulator about how they would prevent Bitcoin price manipulation in the Bitcoin futures contracts for which they were seeking approval. The case at one time threatened to turn criminal, as prosecutors in late 20, or early 2018 sees laptops belonging to former executives, but criminal charges were never filed. The CFTC case is separate from the lawsuits against Gemini pertaining to its earn product, which the SEC alleges was an unregistered securities offering, and which raised billions from investors before pausing withdrawals in November 2022, amid the broader crypto market upheavals and Genesis' insolvency.

One of those lawsuits filed by the New York Attorney General, resulted in an agreement by Gemini to return at least $1.1 billion to customers. Another from the SEC is ongoing. Authorities haven't yet tracked down Richard Hart, actually Richard Schuller, who has likely fled his home of Finland and who is now the subject of both an Interpol Red Notice and listed among the EU's most wanted. However, Finnish police did just seize some of his assets, physical, monetary, and crypto. Among them are 22 watches, mostly Rolexes, valued at around $2.6 million,

which were a part of Hart's incredibly gaudy wardrobe that he used, quote, to create an impression of wealth around him, possibly to convince investors that they too could become wealthy, according to a lead investigator. In bankrupt, US has filed suit against the bankrupt Voyager crypto broker, hoping to reclaim a $10 million deposit from a scuppered deal made during the hectic period of mass collapse in late 2022. The already bankrupt Voyager had reached a deal to be acquired by FTX in late September of 2022, only for that to also fall through two months later when FTX fell apart. A month after FTX's failure, Binance US agreed to acquire Voyager's assets and take on their customers.

However, Voyager never completed the deal by the agreed date because they were litigating exculpatory agreements elsewhere in the bankruptcy proceedings. Binance called it off, but Voyager never returned the deposit and Binance wants its money back. Rather than being transferred to some other crypto trading platform, crypto assets were allowed to be withdrawn by customers in kind, and the rest are being returned by a good old check. Voyager creditors should have received about 70% of their allowed claims by now. In governments and regulators. Coinbase is being allowed to appeal to the Second Circuit, the March 2024 order by New York

Judge Catherine Polk Fyla, that the SEC has plausibly argued that some transactions met the definition of investment contracts and thus fell under their purview. Known as an interlocutory appeal, the request to appeal was made while the case still remains in its early stages, and such requests are somewhat rarely granted. However, Fyla wrote, Although the court does not appreciate and will not co-sign Coinbase's efforts to cast aspersions on the SEC's approach to crypto assets, the fact remains that these conflicting decisions on an important legal issue necessitate the Second Circuit's guidance. She also noted opinions in other cases in the district involving Terraform Labs and Ripple, where judges may have issued conflicting rulings.

She continued, quote, the court agrees with Coinbase that, quote, the conflict between ripple on the one hand and Terraform and the March 2024 Coinbase order on the other is symptomatic of the more fundamental difficulty of applying Howie to crypto transactions. Fila has stayed the rest of the case pending either a decision from the Second Circuit to deny the request for appeal or a decision on the appeal itself. If the Second Circuit takes the case, it could be very meaningful for the crypto world, which has been battling the SEC over the securities determination, for years now. However, the SEC has also put significant efforts towards alternate strategies

to escape the SEC even beyond the courts and is very much hoping that the lawmakers they raised hundreds of millions to help elect will pass legislation definitively removing the SEC from the crypto beat. The Consumer Financial Protection Bureau has proposed a new interpretive rule that would require both cryptocurrency platforms and video game companies to reimburse customers for stolen digital assets under the Electronic Fund Transfer Act, or the EFTA. This is a marked departure from the current sad state of affairs where crypto platforms that receive complaints from customers whose accounts were emptied, typically shrug and say, guess you shouldn't have fallen for a scam, and then refer them to local law enforcement,

who in turn shrug and say, we can't trace stolen crypto. It's also a big difference for some video game companies, whose responses to stolen in-game funds very dramatically based on the game company and seemingly the mood of whichever customer support representative you are lucky or unlucky enough to reach on any given day. The CFPB is not alone in their interpretation of the EFTA. A federal judge interpreted the law the same way in a decision in the Southern District of New York stemming from a class action lawsuit that was filed after flawed implementation of multi-factor authentication by the uphold cryptocurrency exchange contributed to multiple customers losing tens of thousands of dollars in assets.

Although Uphold never wound up paying much in damages, the opinion in the case included that, quote, personal asset accounts that are investment accounts, like the cryptocurrency accounts at issue here, are accounts covered by the EFTA, and noted that the EFTA does not define the term funds, leaving it open to the reasonable interpretation that other money-ish assets, like in-game currencies that are bought and sold for real money,

or crypto assets qualify. As Georgetown Law Professor Adam Levitton observed on the credit slips blog around the time of the uphold decision, quote, that's a huge consumer protection win. Reggie has important consumer protections regarding unauthorized transactions, error resolution, and provision of receipts and periodic statements. It also creates huge compliance headaches for crypto exchanges, which are not set up for dealing with any of those problems. All of the Zell-skirts, scam error resolution issues are now going to become crypto scam error resolution issues. And the ruling also indicates that consumer protection at cryptocurrency exchanges is now squarely within the existing regulatory authority of the Consumer Financial Protection Bureau.

This could get interesting. The cryptocurrency industry will naturally vehemently oppose this as they have all other attempts at increasing consumer protections in crypto. Already, lawyer Bill Hughes of consensus, the maker of Metamask has blasted the, quote, warinites for the proposal, showing naked contempt for his own customers when he tweeted, quote, hacked because you tweeted you emailed your seed phrase, or believed that fashion model in Malaysia needed $5,000 to fly to see you.

Don't worry, your wallet might have to cover it. The CFPB is inviting comment for three months. The IRS has finalized a crypto tax rule that will require some, quote, DeFi brokers to cover. collect information about trading activity and issue 1099 tax forms to their users, although it's not set to go into effect until 2027. Industry lobbying group, the Blockchain Association, immediately issued a press release to express their horror that the IRS would dare request public comment and then not immediately abandon their rulemaking upon being informed by the crypto industry

that said industry is so very innovative it must not be, quote, crippled by tax reporting requirements. Unsurprisingly, the press release made no mention of the roughly 100 pages devoted by the IRS to addressing comments received during the comment period. And more power to whoever had to write those 100 pages, because they were sure a lot more patient than I might have been in explaining that no, having to report your taxes is not a violation of the First Amendment's protection against compelled speech. The Blockchain Association also had a lawsuit waiting to go, which they filed on December 27, along with the Texas Blockchain Council, which helpfully joins on these types of lawsuits so that the cases may be filed in the Fifth Circuit. The CFTC has reportedly subpoenaed

Coinbase for customer information pertaining to Polly Market, according to screenshots of emails that have been going around to customers potentially impacted by the subpoena. Polymarkets' betting markets are supposed to be off-limits to those in the U.S., although its attempts to actually install any limits were laughable, and many Americans openly spoke of placing bets on election outcomes and various other markets on the site. Perhaps Polly Market should open a betting market as to whether they face the CFTC enforcement action in the near future. Meanwhile, Polly Market has markets open on questions like, will the Palisades wildfire spread to Santa Monica by Sunday, which strikes me as an enormously worrisome thing to have people putting money on. Then again, if the market swings far enough to

the yes side, perhaps we'll end up with a volunteer fire brigade made up of crypto DGens hoping to protect the outcome of their bet. The crypto industry has continued to doggedly pursue proof of their enormously dubious claims that the FDIC and other financial regulators have been engaging in Operation Chokepoint 2.0. Coinbase has been busy filing Freedom of Information Act requests, hoping to secure documents that would prove that the FDIC was involved in such a nefarious campaign to, debank the crypto industry by ordering banks to deny accounts or other services to anyone involved with the sector. Having failed to obtain such proof, Coinbase is going with the second best option, loudly proclaiming that they have such proof and hoping no one will bother to dig through the rather

dry emails between banks and banking regulators. Fortunately, I have several years of practice in digging through dry documents crypto industry figures hope no one will actually read. quote, in short, the contents are a shameful example of a government agency trying to cut off financial access to law-abiding American companies, wrote Coinbase Chief Legal Officer Paul Graywall on Twitter. In Long, the documents actually reflect mostly requests for more information about blockchain-related services provided or used by banks themselves, where the FDIC was seeking to do things like, quote, gain an understanding of how the bank will ensure continued safe and sound operations. as this activity is implemented.

Where the FDIC did actually request banks pause activities, it was, again, where those banks were looking to themselves provide crypto services or offer crypto assets directly to customers, such as multiple emails addressing one or more banks wanting to sell or already selling crypto to their customers via web or mobile banking apps. And the FDIC explained that there was not an approved regulatory process for FDIC's supervised banks to do such a thing.

One letter asked for more information from a bank intending to provide an account to a company for the purposes of holding reserve assets that were backing a stable coin, and it contained a list of very normal questions, asking about audits, stress testing, anti-money laundering compliance, and reserves verification, as well as any plans for direct integrations that would allow stablecoin holders to redeem the tokens for dollars directly from the bank. It did not instruct that the bank should not open an account for the customer. In elections and political influence.

Representative Brian Steele, a Republican from Wisconsin, has been tapped to lead the House Financial Service Committee's subcommittee on digital assets, financial technology, and artificial intelligence. Steel enjoyed $764,000 in backing from the Fair Shake crypto-focused superpack, plus smaller direct contributions from the Winklevoss twins, and a Coinbase pack. Steel earned an A rating from Stand with Crypto by making statements like, quote,

Web 3 is happening and it's transformative on Twitter in July 2024, long after the Web 3 buzzword had largely been abandoned by the industry. Despite his occasional out-of-touch tweet, he's a devout worshipper of the crypto industry, who is pledged to, quote, build frameworks that support innovation while in office,

and promoted how, quote, traditional financial institutions like community banks and asset managers can benefit their customers from this technology. A Senate version of the Digital Assets Subcommittee is also in the works, and is tentatively named Laser-Eyed Cynthia Lummus as its leader. Lummus has been pushing for an absolutely bat-shit Bitcoin Act, which would see the Treasury Department purchasing one million bitcoins over five years, priced at around $100 billion at recent prices. I don't think she seriously thinks it'll pass, but it is useful for signaling loyalty to her bitcoiner fans, I suppose. Vice-Chair of the Federal Reserve for supervision, Michael Barr, has announced he will step down from the position while retaining his role as a member of the Federal Reserve Board of Governors.

While many roles routinely turn over as administrations change, such as chairs of the SEC and the CFTC, Barr is stepping down not because of norms, but rather because he believes, quote, the risk of a dispute over the position could be a distraction from our mission. Bad news, Barr, there are going to be a lot of distractions from the Fed's mission going forward. It's likely a response to clear signals that Trump plans to replace him with someone considerably friendlier to banks, that is, less interested in this supervision activity for which the role is named. Barr has also been a notable skeptic of stable coins, stating that dollar-pegged stable coins quote, borrow the trust of the central bank and thus need to be carefully regulated.

Coinbase CEO Brian Armstrong has cashed out $129 million in personal profit earned from Coinbase stock price increases just since the election, selling off $439 million worth of shares in total. This is more than doubled a $50 million his company contributed to the cryptocurrency super PACs this cycle. Not a bad return on investment. Canada. As Justin Trudeau has stepped down as Canada's prime minister, the odds are looking good that the conservative parties Pierre Polyev will take his spot. Among his other political positions, he's a big Bitcoin guy and has made similar arguments as many diehard bitcoins about money printing and so forth. In 2022, he expressed a desire to make Canada, quote, blockchain capital of the world, though he's now got competition with Trump, who promised similar

things with respect to the United States during his campaign. Polyev has already earned the endorsement of Elon Musk, who has recently taken an unpleasantly active interest in politics outside just the U.S. Elsewhere in crypto. The more than $300 million hack of the Japanese DMM cryptocurrency exchange in May 2024 has been officially pinned on North Korean state-sponsored hackers, as so many big-ticket crypto heists have been. The DMM hack was the largest hack in 2024, followed by the $230 million hack of Wazir X, which was also likely performed by North Korean hackers.

The Web 3 is going just great recap. There were four entries between December 23rd and January 9th, averaging 0.2 entries per day. 5.1 million dollars was added to the grift counter. Feed Every Gorilla was hacked again for over $1 million. A man reported losing $100,000 to a website spoofing a crypto exchange, a hangalow man was arrested in an alleged cryptocurrency pyramid scheme, and Orange Finance was hacked. Worth a read.

If there's anything about this most recent crypto boom that I could describe as refreshing, it would be the number of crypto-critical articles in mainstream publications, like one in the Atlantic titled The Great Crypto Crash. I still clearly remember how I felt in 2021, when crypto was booming and the media was cheerfully complimenting the Emperor's lovely outfit. Though certainly more clear-eyed, things are a lot less cheery this time around, with Annie Lowry predicting, quote, a bust, a big bust, maybe, with firms collapsing, the government being called in to steady the markets, and plenty of Americans suffering from

foreclosures and bankruptcies. I really enjoyed a recent Crypto Critics Corner episode titled What Donald Trump's Election Means for Bitcoin, featuring Joseph Politano. The episode covers the upcoming administration and went into a lot of detail about some of the likely cabinet appointments and some of the members of Congress who are all in for crypto. In the news, my recent piece about the rights war on Wikipedia was unexpectedly timely, as only a few days later, the foreword obtained a copy of a presentation circulated by the Heritage Foundation

about their plans to, quote, identify and target Wikipedia editors they determined to be contrary to their goals. They wrote about this in a piece titled Scoop, Heritage Foundation plans to, quote, identify and target Wikipedia editors. As I wrote in my piece, as other information sources fall, Wikipedia's stubborn independence becomes more vital than ever. The attacks from the right aren't just about an online encyclopedia. They're part of a broader assault on any information source that refuses to be controlled. 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.com. 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.