The Breakdown - Bitz Who Now? Department of Justice Takes Down Russian Exchange Bitzlato

Starting point is 00:00:00 Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. The breakdown is produced and distributed by CoinDesk. What's going on, guys? It is Wednesday, January 18th, and today we are doing an update on the crypto cleanup. One quick note before we dive in, there are two ways to listen to the breakdown. You can hear us on the CoinDesk podcast network feed, which comes out every afternoon and features other great CoinDesk shows. or you can listen on the breakdown-only feed, which comes out a little later in the evening. Wherever you listen, I would so appreciate it if you would take the time to leave a rating or a review.

Starting point is 00:00:44 All right, friends, it is Wanker Wednesday, which of course means I'm catching you up on the latest from the rotten redemption arcs, whiny deniers, and struggling insolvents that are still sucking so much oxygen in the crypto space. Hopefully we can keep this mostly to one day this week, although with these jimokes you never know. Let's start out with something so brazen it just bugger's belief. I'm referring, of course, to GTX. GTX is a new exchange that is out seeking to raise $25 million. Now, that name might be striking you as a little bit familiar. TX, TX, where have I heard that name?

Starting point is 00:01:19 And wait a second, G is, of course, the letter after F, so GTX? You also might recognize the faces of the company. It's none other than Suu and Kyle Davies, the failed hedge funders from Three Arrow's Capital, who last time we discussed them were hiding out in non-extradition countries getting served subpoenas via Twitter. Yes, the founders of bankrupt CryptoFund 3AC and Bankrupt Exchange, Coinflex, have teamed up in an attempt to raise $25 million to launch a new exchange. According to a widely circulated pitch tech, the new exchange will look to host markets for crypto stocks and debt claims, which the founders say has a clear market need, citing the $20 billion

Starting point is 00:01:58 worth of outstanding claims on insolvent crypto funds. The pitch deck also confirms that, yes, the name GTX was chosen, quote, because G comes after F. As you would well expect, Twitter just absolutely went off. Investor Adam Cochran writes, LMAO, great, trust your money to the guys who lied and took users leverage funds and went bust, and guys who gave them unbacked loans and went bust. Unwitting capital firms might back it, but if crypto users use that exchange, they honestly deserve to be rugged. Bitcoin Jack writes, why should you invest in us? Well, for starters, we have 10%. 10 years of experience in advanced Ponzoomics. VKTR writes GTX built by idiots for idiots.

Starting point is 00:02:38 Loma tweets if you really need Twitter to tell you that GTX is a terrible fucking name for obvious reasons, I wouldn't trust your judgment and decision-making with my funds. DC Investor writes excerpt from the memoirs of Suzoo published in 2027. We chose GTX as the name for our now-failed exchange because it was a portmanteau of Mount Gawks and FTCS. I actually wanted to call it Mount GTX, but Kyle vetoed it. Now, for those of you not knowing about Coinflex or its founder, Mark Lamb,

Starting point is 00:03:05 Nick Carter from Castle Island Ventures gave a little bit of background. He writes, In case you're unfamiliar with Mark Lamb, he's the guy that got so enamored with BCH and Roger Ver that he let Roger run up an $84 million margin position on his exchange in default, rendering an insolvent and rugging clients. Probably the dumbest way an exchange has failed. Now, all in all, Nick was pretty deadly serious about this whole thing. In another tweet, he said,

Starting point is 00:03:29 disgraced fraudsters teaming up with other disgraced fraudsters to trade claims from a collapsed fraudulent exchange sounds backable. Got rugged on FTX, want to get rugged twice over? Come and trust your FTCs claims to us. We have a track record of, well, we have a track record. So these guys want to skim fees from people trading claims against them? Is that what I'm getting from this? They're name-dropping some top VCs they're pitching, really hope for their sakes the rumors are false, probably best to just come out with a statement denying them ASAP. Later Nick got even more direct saying GTX, arsonism returning to the scene of the crime, hawking buckets of water to their victims. Still, for all the jokes, there was also a little bit of depressing real talk.

Starting point is 00:04:08 Cantering Clark writes, watch, there will be a great divide soon as some of your favorite people start collaborating with and supporting GTX. Gride is too strong. And this is really the question for all of us the next cycle. Hold aside whatever regulators are going to do. The more important question in some ways is will the industry hold itself to a higher standard? On that front, at least one market maker has drawn its line in the sand. Ifgeny Gaeoff, the CEO of Wintermute, says, since we are talking about canceling stuff,

Starting point is 00:04:35 if you are investing into Coinflak slash 3AC exchange, you might find it a bit more difficult to work with Wintermute and future on the relationship-building side. Similarly, we are not going to be participating in venture rounds where these guys are about to enter the cap table, so founders beware. Nick Carter reinforced that as well, quote tweeting and saying, same with Castle Island. You can make contrarian comeback story bets on anyone you like,

Starting point is 00:04:57 even bottom-of-the-barrel disgraced fraudsters, but there are costs associated with that. Now on that front, one more thing. Wassy lawyer, whose analysis I often find interesting, wrote a long thread about the idea underlying GTX of tokenizing distressed claims, and unsurprisingly got a lot of pushback for that. He later tweeted, People should divorce ideas from personalities more. The GTX proposal has interesting concepts that should be evaluated on its own merits, rather than thrown out immediately because of who is proposing it.

Starting point is 00:05:25 viability of the idea is one thing. Credibility of the team is another. My response to that is, if we're forking the conversation entirely to discuss whether someone else should explore something similar, that's one thing. But as it stands, the idea is inseparable from the team. This isn't some high school pitch competition where the winner of the most interesting idea gets an oversized check for $5,000. This is a very specific proposal from a very specific set of people who are deadly serious

Starting point is 00:05:50 about wanting to be sanctioned by the market to re-intervene in crypto users' lives. I've said it before, and I'll say it again. No redemption arcs. Anyway, after all of that dust stuff, CoinFlex walked back the name. In a blog post, they also clarified the situation, stating that the raise was part of their own rebranding strategy and that, quote, any new funds raise will be used for operational growth, which we strongly believe will increase value for CoinFlex creditors. The blog added that, quote, this avenue will not only be an opportunity to serve a large number of existing crypto creditors, but in doing so will also bring new volumes to the exchange through crypto trading. Anyway, according to the deck,

Starting point is 00:06:25 founders hope to launch the exchange as soon as possible, possibly by February. Good luck with that. And speaking of people who, should they remain out of jail, are definitely going to try to redemption arc their way into another crypto business, SBF is back with another substack post. It was a response to information that had come out from the FTX bankruptcy team earlier in the day. So first, let's check to see what they had to say. Basically, the new FTX team outlined more details about the financial situation of the firm. This included giving more details about the composition of the $5.5 billion in redact. covered assets that they disclosed last week. They also acknowledged for the first time that there is a

Starting point is 00:06:59 quote substantial shortfall in the assets required to make creditors whole at FTX US as well as the international exchange. So first, this $5.5 billion. According to the new FtX team, that consists of $1.7 billion in crypto assets, including FTT, and $300 million in securities, which mostly consist of gray-scale Bitcoin and Ethereum trust shares. Now, the information they provide is actually kind of confusing. Their press release gave that $3.5 billion number in crypto assets, but then they go on to say that they've identified $1.6 billion in digital assets associated with FtX.com and $181 million associated with FtX U.S. I'm no mathematician, but I'm fairly sure that $1.6 billion plus $181 million does not equal $3.5 billion, but here we are. Anyway, of that $1.6 billion associated

Starting point is 00:07:46 with FtX.com, quote, $323 million was subject to unauthorized third-party transfers post-petition, $426 million was transferred to cold storage under the control of the securities commission of the Bahamas, $742 million is in the cold storage under the control of the FTX debtors, and $121 million is pending transfer to cold storage under the control of the FtX debtors. It's worth noting that they summed up this section by saying, The assets identified as of the petition date are substantially less than the aggregate third-party customer balances suggested by the electronic ledger for FtX.com. Now, when it comes to the U.S., quote, 90 million of the crypto is subject to unauthorized third-party

Starting point is 00:08:22 transfers post-petition, $88 million is in cold storage under the control of the FTX debtors, and $3 million is pending transfer to cold storage under the control of the FTX debtors. The money shot here is the last line, which says the assets identified as of the petition date are substantially less than the aggregate third-party customer balances suggested by the electronic ledger for FTCS U.S. Now, when it comes to the difference between that $3.5 billion top line number and the $1.6 billion FTCS number, plus the $181 million FTCS number, I think it may be that they are counting some other things separately, including 140 million held in segregated cold wallets at FtX Japan, 529 million

Starting point is 00:08:58 in FTT tokens, which represents 15.8% of recovered crypto, and then 685 million in Solana tokens representing about 20% of the recovered portfolio. Now, if you know a thing or two about crypto markets, you might be head scratching at the idea of calling some of these, quote, liquid assets. Adam Cochran tweets, so liquidators were counting token prices on the day of filing, and consider the 529 million of FTT to be liquidated. in this calculation, as well as $685 million of Solana, which would mega-nook the sole market, and this is only the liquid tokens they counted. You may get some of the value out of the Bitcoin and ETH, and you'll get the stables. Everything else is going to tank the price if you

Starting point is 00:09:35 sell it. People were definitely a bit gobsmacked on the Salana side. Block Gregg, the research director at the block, writes, yikes, per today's filing FTC's Salana position reflects around 11% of the market capitalization as of petition date pricing. The report also detailed the backdoor mechanism that allowed Alameda Research to borrow functionally unlimited funds, outlined $250 million in Bahamian real estate purchased by FTX Group companies, and lays out the $4.6 billion in venture investments made, however, notes that recovery value is anticipated to be, quote, materially lower than this amount. Anywho, following the debtor's report, Sam immediately went on the defensive, releasing another missive on his substack outlining his alternative theory on the assets that

Starting point is 00:10:14 could be recoverable by FTX. The key point in it was that Sam was attempting to refute the claim that there was a shortfall in assets at FTX U.S. referring to Sullivan and Cromwell, the lawyers acting for FTX as S&C, he writes, these claims by S&C are wrong and contradicted by data later on in the same document. FtXUS was and is solvent, likely with hundreds of millions of dollars in excess of customer balances. In the presentation that S&C formally filed on the Delaware Chapter 11 court docket, S&C failed to include 428 million in FTXUS's bank accounts as an asset. What follows is a lengthy walkthrough of Sam's view of the financials, with plenty of hastily put together Excel sheets. The upshot of all of it was that Sam thinks that FtXUS had about

Starting point is 00:10:55 $199 million owed to customers at the time of bankruptcy, but that it also had $428 million in cash on hand, in addition to the 181 million in digital assets attributed to the U.S. exchange. He acknowledged that at least 128.4 million of that cash was held by the segregated ledger X company rather than the FTX U.S. exchange entity. In short, the difference of opinion here is that Sam thinks the U.S. entity should have been treated as a segregated entity, which remains solvent and could release withdrawals to customers in full, while the FTX bankruptcy team are treating FTX US, FTCS, FtX.com, Alameda Research, and the numerous other FTX entities as one big bankruptcy case altogether. In so doing, aggregating assets and creditor claims from across the entire FTCS group.

Starting point is 00:11:35 Well, whatever Sam was selling, crypto-T-Twitter wasn't buying it. Udi Worthheimer wrote, if FTX-U.S. Then why did Caroline say that on implosion day, you told her to liquidate Alameda assets and transfer them to FTXUS? Sam? Sam? If Gany again from Wintermute says, TLDR, I'm still going to ignore the question that actually matters, commingling of the funds. And God, the Excel formatting. Dysopia Breaker writes, Sam's strategy of posting screenshots of sticky notes with everything okay we has lots of money,

Starting point is 00:12:05 sure to hold up in court. Speaking of court, ICO beast, the lawyer writes, this dude's lawyers have got to be just about bald at this point. Financial Regulation commentator Sean Tuffy writes, the thing is, even if FtXUS was solvent, which it's not, it wouldn't get SBF out of facing U.S. prosecution for all the crimes. I mean, no matter where you are, if you touch a U.S. dollar, you're more or less in the U.S. jurisdiction if you do fraud. Anyway, this is all probably more misdirection by SPF. So ask yourself why he wants to keep the focus on FTXUS and where we should be looking instead. Coindesk's Consensus 20203, the most important conversation in crypto and Web3, happening April 26 through 28th in Austin, Texas.

Starting point is 00:12:48 Consensus is the industry's only event bringing together all sides of crypto, Web3, and the Metaverse yourself in all that blockchain technology has to offer creators, builders, founders, founders, brand leaders, entrepreneurs, and more. Use code breakdown to get 15% off your paths. Visit consensus.com.com. or check the link in the show notes. Speaking of other things Sam touched, new reporting from CoinDesk has uncovered

Starting point is 00:13:18 that more than one in three members of Congress received campaign donations from FTX executives. The report identified 196 members of the new Congress, many of them first-time lawmakers, who took cash from senior executives at FTX. This includes Republican Speaker of the House, Kevin McCarthy, Democrat Senate Majority Leader, Chuck Schumer, and many, many more.

Starting point is 00:13:38 CoinDesk reached out to every lawmaker to ask what they've done with the tainted donations, and 64% of the 53 politicians who responded, said that they had already donated the money to charity, while others said that they are in active discussions with the DOJ around setting the money aside until it can be contributed to a compensation fund for FDX creditors. In a December statement, FTCS warned that, quote, making a payment or a donation to a third party, including a charity, and the amount of any payment received from an FTCS contributor,

Starting point is 00:14:03 does not prevent the FTX debtors from seeking recovery. According to the statement from FTX, they will soon be inviting any politicians who receive donations to return them to the bankruptcy estate, noting that if the money was stolen, then it was never theirs to give to charity in the first place. Finally, topping off this nasty midweek cake today, early in the morning, East Coast Time, the Department of Justice announced that at noon EST, they would be announcing a, quote, international cryptocurrency enforcement action via live press conference. There were kind of a lot of speakers scheduled. Deputy Attorney General Lisa Omonico, Assistant Attorney General Kenneth

Starting point is 00:14:36 Polite, Criminal Division, U.S. Attorney Breon Pierce, Eastern District of New York, associate deputy director Brian Turner, FBI, and Deputy Secretary Wali Adayamo of the Department of Treasury. Now, speculation flew around in terms of who might be on the offing here with just about every name you can imagine being thrown around. And whoever it was to be, our near record streak of positive days came to a crashing halt as markets brace for the news. Kaleo tweeted, well, that was a fun mini bull run guys, see in 2024 for the next one.

Starting point is 00:15:05 Still, some people thought we were getting a bit too nervous. Alex Weiss wrote, announcement is going to be a nothing burger, plus too many overtraders. Rip it long and watch the chart to a big dipper impression. So what was it? Bad or not so bad? At 1159 a.m., DB, A.K.K. came out with the news first, as usual.

Starting point is 00:15:24 DOJ takes enforcement action against Russian exchange Bitslotto. Everyone had the same reaction at the same time, which was Bitschuno? In the sweeping relief of not having to deal with some major crisis, it was absolutely just a race to make jokes. I tweeted, today we're announcing we're going after one of the most notorious exchanges in crypto. Wait, what's it called? Bislato? Yes, of course. We're going after Bitslotto. Mike McDonald write first they came for Bitslotto and I did not speak out, because literally no one has heard of it. And really, joking aside, literally no one has heard of this company. Frank Chapparo from the block wrote, I've covered crypto for six years and have never heard of

Starting point is 00:16:00 Bitslotto. I'm sure the mainstream press will cover it like it's a death knell for the industry. Can I sue the DOJ for wasting an hour of my life? I laughed alongside the jokes and shared Frank's frustration, but then I thought about it for a minute and tweeted counterpoint, good on DOJ for taking down bullshit bad actors that screw up the crypto space for the rest of us. We're laughing at the disparity between what the announcement made it seem like it was going to be and who it was, but ain't no one in crypto crying for Bits Lotto. And what's more, I actually watched the press conference and came away genuinely impressed. These speakers were not, not one of them trying to sneakily blame things on crypto. They made clear over and over

Starting point is 00:16:36 again that the issue is crime and criminals. In fact, they were basically saying that their goal is to get the crime out of crypto. Even when crappy reporters asked about what signal it should send to the crypto markets, Deputy Attorney General Lisa Monaco said basically that this should put on notice people who would seek to exploit her words, crypto markets. Monaco even said that they wanted to help fix the crisis of confidence in crypto markets. It's hard to overstate as someone who has monitored the crypto is for criminals narrative for more than half a decade. How different this is is than what it could be and what it might have been not too long ago. So while it was funny how hyped up we all were for the announcement, it actually kind of seems like the authorities doing their

Starting point is 00:17:16 job. So there you have it. Anyways, guys, fun little Wednesday for you. Hopefully we can get to some more interesting and substantive non-criminal related news tomorrow. But until then, be safe and take care of each other. Peace.

The Breakdown - Bitz Who Now? Department of Justice Takes Down Russian Exchange Bitzlato

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