The Breakdown - Do Kwon Goes To Jail

Episode Date: June 20, 2023

On this episode of crypto shennanigans, Do Kwon sentenced to four months for fake passport; ZachXBT raises $1M to fight lawsuit; Sam still going on trial in October (despite viral tweets saying otherwise).  Enjoying this content? SUBSCRIBE to the Podcast: https://pod.link/1438693620 Watch on YouTube: https://www.youtube.com/nathanielwhittemorecrypto Subscribeto 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 Tuesday, June 20th, and today we are doing a bad guy roundup. Before we get into that, however, 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. All right, friends, happy Tuesday.

If you've been on Twitter today, you've probably noticed that there is a lot of chatter about institutional engagement. Frank Chaparro from the block wrote, BlackRock, Fidelity, Citadel, they're all making big moves into crypto despite the Gensler crackdown. Interesting. Dot, dot, dot, dot. Now, the specific context for this is a new exchange backed by Schwab and Citadel that's just come online. More broadly, I think that we are returning to this post-narrative institutionalization

that was a big theme for the show in 2022, pre-FTX, and I'm not sure how post-narrative it is anymore. However, I've been working on a larger piece about that institutional trend, so we'll circle back to that in a full episode soon. Today, as I said, we have some updates on 2022 cleanup and general bad behavior, and we start with an update on disgraced Terra founder Doe Kwan. Doe has been found guilty of document forgery and sentenced to four months in jail by a court in Montenegro. The Terraform Labs founder was arrested in the Balkan Nation in March, alongside fellow Terraform Labs executive Han Chang-June when the pair were caught traveling using fake passports. Authorities found on the two a pair of Costa Rican passports as well as two Belgian passports and two

identity cards. Kwan said during the trial that they obtained the documents in Singapore through a service that sells citizenship to various countries and believe that the documents were genuine. Now, time already served since the pair's arrest is included in the prison term, and an appeal is also possible. Quan's defense lawyer stated, once we've received the verdict in writing, we will consult with our clients about possible appeal. Now, a lot of people were absolutely up in arms thinking that this was just a slap on the wrist, but it's important to note that this trial in Montenegro was only looking at the document forgery charges. In other words, Kwan is still yet

to face the music over the collapse of the Terraluna ecosystem last May. At this time, both the U.S. and South Korea are still seeking Kwan's extradition to face charges related to Luna's failure. Last week, a High Court in Montenegro confirmed that Kwan would be held in custody for six months while extradition requests were considered. In South Korea, meanwhile, Terraform Labs co-founder Daniel Shin is currently standing trial for the collapse of Luna, alongside nine others involved in the company. They face charges, including violations of capital markets law. In the U.S., the Justice Department has filed extensive fraud charges against Doe Kwan, that if he's extradited and then convicted, could result in a lengthy stint in jail.

Ekin, the managing editor at DL News, wrote about Kwan's argument that he bought the Costa Rican passport through an agency in Singapore and believed that it was a legitimate passport. Ekin says, think nobody believes this, but what if it's true? Do Kwan getting rugged by a golden passport scam in Singapore? I hope it's true. David Z. Morris from Coindex writes, just to be clear, this is only the passport charges. M.F. will have spent two to four months in a Balkan prison before even going to trial for his financial crimes.

Parrot Capital said simply, he's guilty of a heck of a lot more than that, but we'll start there. Now again, a bunch of people on Twitter were confused thinking it was a slap on the wrist for the overall financial crimes, not just the passport charges. And a bunch of others noted the fact that he's getting four months, which is, of course, CZ's favorite number. Next, we move on to the case of Zach XBT. I'm sure that you guys have run across a Zach XBT exposition thread, but for those of

you who haven't, he is an on-chain sleuth who often reveals bad behavior on the part of prominent projects or influencers. Last May, Zach had laid out the details of alleged scams operated by Machi Big Brother using on-chain evidence. Last Friday, however, Zach revealed that he was being sued for defamation by Machi Big Brother, writing, it's unfortunate that I have to make this thread, but I am being sued by Machi Big Brother for an article I published in June 2022. Today, Machi filed the defamation lawsuit. The lawsuit is baseless and an attempt to chill free speech. I intend to fight back and defend free speech. This is a classic David and Goliath story. My understanding is that Machi is very wealthy. I am not. He is using his money to try and silence me.

I'm asking for your help so this doesn't happen and the truth survives. I'm creating a donation address to assist with legal costs associated with the defense of this matter, which could easily exceed $1 million USD. All leftover funds will be returned on a pro rata basis to contributors. Now, Machi wrote, a year ago, Zach XBT published a medium article about me that damaged my reputation. Today, I have filed a defamation lawsuit against him in the United States District Court for the Western District of Texas. I have consistently maintained that the allegations in his article are false. I look forward to proving through the lawsuit that Zach XPT unlawfully defamed me. Now, alongside the imposition of defending a lawsuit, Zach also had his personal details released in public court documents,

which of course could compromise his safety. Zach has been one of the most dogged investigators in the crypto industry over the last few years uncovering numerous scams, frauds, and hacks, as well as assisting the victims in recovering stolen funds. In other words, he's made a lot of enemies, and doxing him could be seriously dangerous. Machi's lawsuit claims that Zach, quote, falsely accused Machi of being a, quote, criminal that had embezzled millions of dollars of cryptocurrency. The lawsuit refers to an article from June 2022 entitled, 22,000, Eth embezzled and over 10 projects failed. the story of Machi Big Brother, Jeff Huang. In the article, Zach laid out how Machi had, quote,

embezzled 22,000 Eth from Formosa Financial in 2018, and followed up by launching, quote, over 10 failed pump and dump tokens and NFT projects. Machi claims that he was merely an advisor to Formosa finance, so could not have had access to the project's funds in order to embezzle them. Now, the outpouring of support for Zach from the crypto community was immediate. The wallet for the legal defense fund quickly swelled to $1 million in a little over 24 hours. Binance CEO, CZ, and Tron founder Justin Sun both threw their support behind SAC, each making five-figure donations. And because this is crypto, there was, of course, some D-Gen nonsense. Some people Sybil attacked the donation address, making multiple donations from separate

wallets and speculative anticipation that an airdrop might come out of the event. And to be clear, there hasn't been even the hint of an airdrop. And someone even launched a meme coin with a 2% trading tax to be donated to the cause, which raised over $80,000. Coinbase director Connor Rogan wrote, people are Sybil attacking the ZachXBT legal donation address because, of course, they are. Someone also set up a shit coin on Uniswap v2 that has a 2% buy and sell tax that goes to Zach. The Zachxbt token tax is already the largest donor by far, with nearly 80,000 in donations already. This might be one of the most D-Gen things I've seen in crypto. I'm kind of impressed. Stephen Paley, a partner at law firm Brown Rudnick, confirmed that he had been retained to

defend the lawsuit on Zach's behalf, tweeting, quote, along with Jess Myers and the team at Brown Rudnick, I'm honored to represent Zach XPT in his ongoing mission to speak truth to power. Important to note that as well as operating one of the most knowledgeable crypto law firms in the country, Brown Rudnick also has some serious chops in defamation litigation. Recently, for example, they represented Johnny Depp in his successful defamation case last year. The day after filing the lawsuit, Machi appeared to have some amount of regret about his decision. Backpedaling in a tweet, he wrote, I was only expecting an apology.

Any monetary compensation I receive, I'll donate to charity. This, if anything, made people even angrier at Machi. Cryptodontalt writes, So you're going to, one, ruin your reputation. Two, put Zach's life in danger. Three, cost both you and the CT community a bunch of money. Four, open yourself up to get effed by the courts. Five, make the space look more clownish than it already does,

just to get an undeserved apology? Trader I like Blocks writes, The Streisand effect should be renamed the Machi effect. If you win in court, people are going to hate you. If you lose in court, people are going to clown you and then hate you some more. You literally have nothing to win. Cryptot trader Shea writes, before this, I had never heard of you. I still haven't looked at your past or the allegations. I could give a shit. But I do know that you suing Zach has crippled your rep in my eyes. Can't imagine I'm alone in that. Now beyond just the question

of Machi and Zach, there is a larger question of what all of this says about the state of the crypto industry. Obviously last week's Long Read Sundays was about whether meme coins are an attack on Ethereum and crypto more broadly. And my little soliloquy at the end was all about us need to decide in these types of moments in between big bull runups, what type of industry we want this to be. Taylor Monaghan wrote a long threat about this saying, for a decade now, good faith players have been held more accountable than literal liars and schemers and cheats and thieves. It is far more risky to call out a scammer than it is to scam. Don't be surprised by what happens next. Incentives are clear as day. Y'all delusional if you think this industry is just going to magically

become better, safer, less corrupt. That would be betting there's more people who will risk their lives than there are people who will morally justify their own malicious actions. That would be betting that there's more people who will work for free forever than people who will scheme for a couple weeks for untold riches. Stuff doesn't magically get better. Stuff gets better when you incentivize better behavior. Speaking of better behavior and bad behavior, over the weekend you may have noticed a headline circulating that implied that charges against SBF had been dropped. This clickbait raised concerns that Sam Bankman-Fried was going to avoid facing consequences of his actions. Laura Lumer, formerly of Project Beritas, circulated this extremely inflammatory tweet. Feds quietly dropped charges

against uniparty donor SBF in multi-billion dollar FTX scam, just in time for 2024 so they can rig another election. So what's actually going on with Sam's trial, which is currently scheduled for early October? In May, SBF filed a slew of motions to dismiss various charges on numerous grounds. One of the arguments raised was that new charges added after Sam was extradited from the Bahamas weren't agreed to by the Bahamas government when they put Sam on a plane. The Justice Department said at the time they would be seeking a waiver from the Bahamian government to move ahead with the additional charges, acknowledging that Sam's motion had at least some legal merit. Last Tuesday, the Bahamas Supreme Court ruled that Sam would be allowed to move forward with a

judicial review of his extradition from the Caribbean. The Bahamas government had argued that consenting to the additional charges was simply a matter between the two sovereign nations, but the court has disagreed, allowing the matter to proceed. Of the 13 charges, Sam is facing, five were added after his extradition and will be held up by this process. This includes a lot of the charges around election tampering and basically American political stuff. Perhaps the most notable additional charge, however, related to bribing Chinese officials to release frozen funds. Sam's criminal trial will now be split into two hearings. The first will go ahead in October and hear the eight original charges. A second hearing will be held once the

judicial review in the Bahamas concludes and is currently anticipated sometime in 2024. Now, just Hines, the founder at Seed Starter, writes, The five charges are being challenged by SPF for procedural reasons. This fact alone could have added months and months to the case. So the prosecutors withdrew these charges with the caveat that they would be tried separately. This was literally done to bring SBF to justice sooner rather than later. Now, the U.S. judge overseeing the case was sort of bemused, it seemed, by the legal contortions, telling Sam's lawyer, quote,

I'd like to congratulate you on an extraordinarily imaginative defense. The judge did not make a decision on other motions to dismiss during last Thursday's hearing. So at this stage, SBF will still be facing charges of fraud in October, and there have been no moves by the prosecution to drop charges permanently, again, just to sever them from October's trial. Now, the one other story that's been circulating around FTX is the bankruptcy fees, and people are grossed out. The latest rundown of legal and advisory costs have been submitted in the FTX bankruptcy, and the numbers are frankly eye-popping. The estate paid $121.8 million in legal, consulting, and financial service fees and expenses

between February and April. That's more than $1 million per day for the three-month period. And remember, fees for January and February were just as steep, both clocking in at over $30 million per month. Law firm Sullivan and Cromwell was the richest biller, filing $37.6 million in charges over the last three months. Restructuring consultants at Alvarez and Marcel have also charged $37 million over three months, including $1.1 million in expenses. Lodging alone cost almost $150,000 during the time period, with more than $50,000 spent on meals for the consultants. Now, of course, the reason people are upset is that these fees directly impact the recovery that creditors will see as professional fees are taken off the top before any distribution of recovered funds.

Eric Voorhees tweeted, 10 million per week leaving FTX, none going to victims. DLA Piper partner Michael Fleur wrote, what's the alternative? Someone has to spend thousands of hours sorting through all this. Zero X Orko writes, well, how many more months' meals and lodging do they need? It's pretty clear that there's a huge incentive to work at a snail's pace and just keep feeding on the carcass until there's nothing left. What's pushing them to work faster? Honor? LMAO. Ram Alawalia writes, why Chapter 11 is broken. John Ray, FtX, is paid to turn over every rock with no regard to cost-benefit analysis. Some rocks are not turning over when you bill at $1,000 an hour. The trustees are fiduciaries and are incentivized to chase nothings. Now, this massive cost of

conducting the bankruptcy has also led some in the creditors community to push for a relaunch of the exchange, viewing a restarted business as their only hope for a meaningful recovery. One of the leading voices in that is Loomdart who said, I spent a while talking to different professionals. It made me realize just how much bankruptcy effing sucks. I get this naive, just give us our money back attitude. Unfortunately, bankruptcy is the most vulture business in existence. They can do whatever they want with us.

FTCs bankruptcy will take years. A properly executed FTX 2.0 is something we can all contribute to that can actively help reduce the duration of this process, and big caveat on hopefully here, enable us to get more assets directly into the hands of creditors. We will see. I think there are a lot of reasons to be skeptical of that, but I also think that people are correct to identify that it seems like the FTX bankruptcy estate is at least positioning for that

possibility. To the extent that it gets any more real, I will certainly keep you posted here. But that is going to do it for today. Appreciate you listening as always, and until next time, be safe and take care of each other. Peace.