The Breakdown - Crypto Industry Faces Terrorist Financing Accusations

Episode Date: October 11, 2023

In what was probably an inevitable turn, crypto critics are coming out of the woodwork to blame the Hamas massacre in part on funding via cryptocurrencies. NLW explores the argument and its counters, as well as provides a brief overview of the first day of Caroline Ellison's testimony at SBF's trial. Today's Sponsor: Kraken Kraken Pro is the one-stop destination for pro traders - https://k.xyz/TheBreakdownPod Enjoying this content? SUBSCRIBE to the Podcast: https://pod.link/1438693620 Watch on YouTube: https://www.youtube.com/nathanielwhittemorecrypto Subscribe to the newsletter: https://breakdown.beehiiv.com/ Join the discussion: https://discord.gg/VrKRrfKCz8 Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW

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. What's going on, guys? It is Wednesday, October 11th, and today we are talking about, well, a lot of stuff. But before we get into all of it, if you are enjoying the breakdown, please go subscribe to it, give it a rating, give it a review, or if you want to dive deeper into the conversation, come join us on the Breakers Discord. You can find a link of the show notes or go to bit.ly slash breakdown pod. Hello friends, welcome back to another weird day. Indeed, I think that for the next little while, at least during Sam's trial and with all of this chaos happening around the world, it's likely that

the show will be a little bit more choppy than normal. In other words, I think that we'll frequently need smaller update segments versus shows that are just about one big topic. Today, I think our main focus will be around how fast the crypto-enabled Hamas narrative has spread, but we are going to start off with a little SBF trial update first. There is some serious. bombshell testimony going on right now. And so today I'm only going to do a few of the kickoff highlights. Later this week, we'll do a more full analysis. So, Tuesday's hearing saw the conclusion of Gary Wang's cross-examination, as well as the introduction of the prosecution star witness, former Alameda Research CEO, and former Sam Bankman-Fried shackmate, Carolyn Ellison. Now, Carolyn's testimony yesterday focused

on how Alameda had defrauded lenders. She explained the firm had patted their balance sheet with Loxalana, FTC's exchange token FTT, and numerous other Sam coins created by SBF, to quote, make Alameda look less risky than it was. Carolyn noted that FTT was added to the balance sheet specifically to obtain loans from Genesis, a move which she thought was misleading. Carolyn said that she specifically raised issues with Sam around the quote-unquote loans from customers in 2020, and when she said she was concerned that they would show up in an audit, Sam dismissed this saying, the auditors won't be looking at that.

Carolyn also discussed Sam's oversight of Alameda, which is of course a key question. His defense is trying to argue, as Sam did when he was still free, that he didn't really keep track of anything going on at Alameda, and so to the extent that they were doing bad things, that wasn't really on him. Alas, what Caroline reported is that when she was appointed co-CEO, nothing much really changed. She said she didn't feel qualified, and that quote, I checked everything with Sam. He was the person I reported to. He could fire me. Now, if you've been watching the Twitters, you've probably noticed that Caroline also divulged some personal conversations between the on-again-off-again couple. One of the most re-shared was that Sam believed

he had a 5% chance of becoming the president of the United States someday. She also explains Sam's view of risk, saying that he believed, quote, it was okay if it had a positive expected value. He said he was willing to take large coin flips. He talked about being willing to flip a coin and destroy the world as long as the win would make it twice as good. Now, we will get into, as I said, full analysis a little bit later on, but I think a fairly accurate summation of what we've heard so far came from Jacob Silverman, who wrote, today Caroline Ellison testified that since FDX's founding, SBF saw it as a source of capital for Alameda. It was always a way to harvest customer money for his own purposes. Seems like SBF was about pursuing money at almost any cost, an obsessive

pursuit of capital accumulation. He told his people to find money wherever they could, taking on billions and risky loans. He said he wanted infinite money to somehow save the world. Now, speaking of Sam's quest for money, an interesting sub-story that is shaping up is a anthropic and SBS's $500 million investment in the hot AI Foundation model company. The relevance is that recently it has been reported is that the company is out raising at a $20 to $30 billion valuation, which would make those $500 million worth of shares actually worth more like $3.5 to $4 billion. That goes a significant way in filling the remaining whole for FTX customers, and so of course

Sam's lawyers are interested in having that conversation in court. Indeed, after Tuesday's hearing concluded, Sam's lawyers renewed their motion requesting permission to introduce evidence about FTX's investment in Anthropic AI. They had earlier claimed that the jury should be allowed to hear that the $500 million venture investment was looking likely to pay off in a big way and could help make creditors whole. Now, the DOJ argued that this was ridiculous, that it was totally irrelevant to the crime, and that it shouldn't be allowed. This time around, the defense team narrowed their request and specifically asked to introduce Anthropic in relation to Caroline's testimony. The defense sought to ask Caroline about the, quote, portfolio nature of venture

capital investing, and the idea that venture firms see most of their returns from a small number of successful bets within a broader portfolio. They said that the appreciation of Anthropic was relevant to Caroline's testimony, quote, concerning expected value analysis. The defense tied this point back to the prosecution's opening statement, which claimed that Alameda and Sam's investments were risky and losing money. The defense views the anthropic evidence as relevant to rebutting those claims. Now, summing up what basically everyone was thinking, Cryptotrater Kyle Gibson wrote, I can't believe this is the strategy. Bro, the terms of service said nothing about using funds for VC investments. The terms of service also said nothing about funds

for proprietary trading. It's just so far from a defense, and I think the judge will see this for what it is. Now, I can only presume that what Kyle means is exactly what I think, which is that this is not about an intellectual appeal. Intellectually, jurors are going to know, no matter what the defense says, that if the crime you're being charged with is stealing money, there's no difference ultimately if the thing that you invested in with the stolen money was enough that after you got caught, people got their money back. However, a moment you Emotionally, there is of course a difference. Given that my base case is that Sam's entire defense is just muddy the waters enough to get one or two jury members to have questions, it fits right in line with that. Anyway, the stuff coming out of Caroline's testimony today,

at the time of this recording, is much, much crazier. So whether we end up doing that tomorrow or later in the week, get ready because it is a doozy. But for that, let's shift over to the discussion of crypto's role in the Hamas attacks. And now a word from our sponsor. Today's episode of The Breakdown is brought to you by Cracken. Cracken Pro gives advanced traders a customizable all-in-one interface for trading and buying about 200, depending on your region, crypto assets, stable coins, and fiat currencies. In addition to deep liquidity, world-class security, and a dedicated mobile interface, Cracken Pro also has some of the best in class support.

With average support resolution time less than five minutes this year, go to crackin.com slash the breakdown to get started. Disclaimer, not investment advice. involves risk of loss. Cryptocurrency services are provided to U.S. and U.S. territory customers by Payward Ventures Inc., PBI, DBA, Crakken. As a reminder, or for those of you who haven't heard my show yesterday, when it comes to coverage of what's going on in the Middle East right now, I'm going to strongly restrict it to things that are either A, the economic implications of the rising conflict, or B, areas that have some specific relationship to the crypto industry. That's not because I think

that they are the most important parts of the story, far from it. It's because they're the parts of the story that relate to the normal content here, and I think that there are plenty of other places that you guys can get opinion and news when it comes to everything else. Now, perhaps unsurprisingly, it did not take long at all for the mainstream media to start placing some amount of blame on the crypto industry for facilitating terrorist financing. The Wall Street Journal reported on Tuesday that, quote, Hamas militants behind Israel attack raised millions in crypto. Digging below the headline, the article used data from a range of blockchain analytics firms related to three designated terrorist groups, Hamas, Palestinian-Islamic jihad, and the Lebanese group Hezbollah.

The article claimed that Hamas had received $41 million since August 2021, according to research from Tel Aviv-based firm Bit OK. Eliptic had linked 93 million in payments to Palestinian Islamic jihad over the same period. The article also outlined how Israel's counterterror financing authorities have been frequently working with crypto exchanges to seize funds. After a June operation to seize crypto belonging to Hezbollah, Israel Defense Minister Yoav Ghalant, the Israeli defense minister explained that the use of digital currencies was making the job of stopping terrorist financing more complex. In July, an order was granted to seize crypto held in 67 client accounts on finance owned by P.I.J. A finance spokesperson said on Tuesday, over the past few days, our team has been working in real

time, around the clock, to support ongoing efforts. Now, of course, the role that crypto plays in the financing of terror is just one piece of that economic puzzle. For example, researchers who study terrorist financing say that alongside crypto, Hamas receives smuggled cash via the Egyptian border. They note that Iran remains the primary funder of Hamas to the tune of around $100 million per year. Joby Carpenter, a crypto specialist at ACAMS, a financial crime industry body said, crypto is another string in their bow. Now, Hamas had been publicly courting Bitcoin donation since at least 2019. According to Ari Redboard, a former treasury official and head of global policy at TRM Labs,

Hamas is one of the most sophisticated crypto users among terrorist groups. However, the group stopped publishing donation addresses in April of this year, citing concerns for the safety of donors, and a quote, doubling of hostile efforts against everyone who tries to support the resistance through this currency. Since then, Hamas have begun using payment processors that generate crypto addresses, which can be used to obscure the flow of funds. So, as you might imagine, the conversation about this on Twitter slash X has been very, very tense. Roe Ryder writes, Just in, more proof the terrorist attacks were funded through crypto. These groups can move

their funds easier than ever around AML controls and exchanges help them do it. Congress and DOJ must act now. John Reed Stark said, wake the F-up, US DOJ. The link between crypto, terrorism, Hamas, Iran is not just a threat to Israel, but a threat to the U.S. and everywhere else as well. Stephen Deal writes, have to keep stressing this point, crypto proliferation is directly at odds with the foreign policy interests of the United States. We should ban it. Finally, not Chase Coleman said the quiet part out loud, writing, if the DOJ wants to use scapegoats for this tragedy, go for the weakest links, the crypto cartel. Now, obviously, the industry isn't just going to stay silent on this. Ryan Selkis from Asari, right? To the extent small amounts of crypto were used by Hamas or Iran, the facts will show that most of these transactions were powered by offshore exchanges already under investigation by the DOJ. Punitive US crypto policy will only hurt good actors here and push even more activity offshore.

Indeed, this was a big theme for many, that the lack of regulations and the lack of legitimate above-board venues was contributing to the problem of the wild west nature of the industry. Paul Grewell, the chief legal officer at Coinbase said, this is why we need sensible crypto legislation passed here in the United States without further delay. We need this industry flourishing and nations committed to the rule of law, not driven to places where human rights and public safety mean much less. Austin Campbell pointed out that part of the reason that crypto gets so much more attention when it comes to this sort of financing is that it's easier to track

and easier to clearly say, yes, it was used for these nefarious purposes. As he wrote, blockchains are more transparent, thus we can easily see transactions and amounts. Let me ask the next question. How much did Hamas take in through the traditional system? Perhaps crypto is being punished for being a better system for detecting bad activity? Certainly the fact that Hamas stopped publishing donation addresses suggests that they agree, that crypto isn't necessarily better for them. Austin also wrote, I want to be clear that the actions of U.S. regulators are the cause of not the solution to this issue.

By cracking down on legitimate players in the U.S. like the banks who serve crypto and then regulated stable coins with better KYC and AML controls who are trying to do the right thing, the U.S. regulators effectively force the entire space offshore and into the hands of unregulated actors who are much more willing to ignore U.S. rules. Tether has been the single greatest beneficiary of the U.S. regulatory actions with regard to crypto in the last year. Essentially arguing for more of this without understanding the problem is saying that the solution to your house burning down is more gasoline. Now, of course, as we mentioned yesterday, Binance has been right at the center of a lot of these discussions. As I mentioned, the Israeli police wrote in a statement

that they've been coordinating with companies including Binance to identify and freeze accounts, and Binance co-founder Yee actually responded to all of this in a we chat message, stating, quote, Hamas is a designated terrorist organization by the United Nations. Therefore, any organization, including banks and trading platforms, will need to cooperate on the receipt of freeze assets. This is not something Binance can decide on its own, no political stance. But there is no way for any trading platform to refuse this law enforcement request. Now, Binance continues to be beleaguered when it comes to access to the traditional system. Shifting topic slightly, this week is the UK's Financial Conduct Authority's new crypto marketing

came into force, a number of crypto firms partnered with local companies to provide certification of their advertising material. The new regulations require marketing to be self-certified as compliant, but this can only be done by locally registered firms. Lacking this domestic registration, international exchanges including Coinbase, OKX, and Binance, engaged a small handful of firms to provide this certification. Binance, for their part, had partnered with a small peer-to-peer lending firm called Rebuilding Society to sign off on their marketing, but on Tuesday the FCA scuttled this arrangement, declaring that rebuilding society, quote, must not approve the content of any financial promotion on behalf of crypto asset firms. In another Binance story, a Bloomberg investigation

has found that the $1 billion dollar Binance Industry Recovery Initiative actually distributed just $30 million. The fund was launched in late November in the wake of the FTX collapse and was promoted by Binance CEO CZ as a way to, quote, help projects who are otherwise strong but in a liquidity crisis. Alongside Binance's splashy $1 billion figure, the fund attracted multi-million commitments from Annamoka brands, Jump Crypto, and several other market makers. According to Bloomberg, only $30 million was ever deployed. The only publicly disclosed investment made by the fund was the purchase of a $15 million majority stake in South Korean Exchange gopacks.

A finance spokesperson claimed that 14 projects received funding but declined to add any further detail. They added that, quote, applications into the IRA dropped significantly, which is a good sign that the industry is regaining its health. We will keep funds available as needed, but they will sit in our corporate wallets rather than in the IRA wallet. Now, Binance quietly withdrew the $985 million remainder of their contribution in March, moving the funds out of the publicly disclosed wallets.

Kristen Smith, chief executive of the Blockchain Association, said, We've seen a lot of actors in the crypto space swooping in in an effort to be the White Knight. It's really important that we make sure there are follow-throughs to those promises. Anyways, guys, there is so much more that we have to get into. BitFinex is buying back shares. The entire Israeli crypto industry is scrambling, given that they are going to have some serious personnel issues coming up. there is just a lot to talk about. And so given that, I appreciate you guys hanging out and listening.

Another big thanks to Cracken for sponsoring the show. And until next time, be safe and take care of each other. Peace.