The Breakdown - The Continued Fallout of the Tornado Cash Arrests

Episode Date: August 26, 2023

On this edition of the Weekly Recap, NLW looks at: More community reactions around the Tornado Cash arrests The latest updates from Binance Bitfinex up and running in Turkey Circle adds 6 new chains to USDC 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 Saturday, August 26th, and that means it's time for the weekly recap. 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 in the show notes or go to bit.ly slash breakdown pod. friends, welcome back to the weekend. We have a lot of follow-ups today. For a summer week, there was kind of a lot going on. And so let's dive in with a follow-up to the most dramatic news of the week, which was certainly the indictment of Roman Storm and Roman Seminoff in relation

to their operation of the Tornado Cash Protocol. You will remember that the pair are charged with conspiracy to commit money laundering, conspiracy to commit sanctions violations, and conspiracy to operate an unlicensed money-transmitting business. Storm has been arrested and has already been granted bail, Seminoff remains at large, but was added to the sanctions list personally. Now, the arrest caused an outcry across the crypto industry, with many appalled at the apparent attack on privacy, open source development, and crypto infrastructure more broadly. Others, however, pointed out, and this was especially after the initial takes had cooled, that contrary to the popular industry take, the pair seemed to have not just been charged for merely writing code,

but rather for willfully aiding money laundering by North Korean hackers, the lasse, Pazirist group. Crypto Critic Row Rider tweeted, The tornado guys were arrested for writing code narrative continues to spread. If they had just written code for a mixer and threw it on GitHub, they would not be arrested. They're arrested for very intentionally using that code to facilitate money laundering and crime. Now, of course, that claim and that assertion will be subject to much test in courtrooms in the future to come. The indictment has definitely raised serious questions about the government's approach to dealing with cybercrime. Some, for example, are suggesting that this represents a chapter in an ongoing fight against

digital privacy. Rohan Gray, assistant law professor at Willamette, who is no fan usually of cryptocurrencies, said, I generally strongly agree with the claim that profiteering off these platforms makes the moral high ground much harder to maintain. But one, governments are considering criminalizing end-to-end encryption and other privacy tools, and two, PGP Zimmerman prosecution happened, so not sure fully convinced. Another topic of conversation is that some are pointing out that despite over four years of sanctions against North Korea, and even longer against other nations, little appears at least from the outside to change. Defy Pulse co-founder Scott Lewis said, Can we just be real? American foreign policy towards North Korea is to starve the North Korean

citizenry out of existence, so they turn on their government. But by the way, let's pray they don't accidentally launch a nuclear missile during the revolution and transform LA and San Francisco into large sheets of glass. It hasn't worked. It is stupid. Populations rally behind despots when an external party tries to starve them. The entire thesis behind sanctions is wrong direction. And now they want us to sacrifice our privacy and send the defenders of our people. our privacy to federal prison, so we can continue this absolutely idiotic decade-spanning foreign policy of unsuccessfully starving North Korea into submission? Now, at the very least, this case should see some of these issues robustly defended in court. Roman Storm has retained premier crypto-criminal

defense lawyer Brian Klein. Klein defended Virgil Griffith when he was accused of violating sanctions by traveling to North Korea to deliver a conference presentation about using crypto to evade sanctions. He has also represented Eric Voorhees, Cracken, and Block 1 in their dealings with the SEC. Attorney Collins Belton writes, Only positive news of the past two days is that Roman has arguably the best criminal defense lawyer in this industry behind him. Challenges ahead, but glad to know he's got Brian Klein

in his corner. Now, in an ironic demonstration of how impotent the approach of going after developers rather than hackers is, shortly after the arrest of Roman Storm, the FBI warned that Lazarus Group was attempting to cash out. On Tuesday, the FBI put out a warning to crypto firms that the Lazarus Group had moved $40 million worth of Bitcoin and were likely seeking to sell.

The agency released a list of newly funded wallets which had aggregated funds, behavior that typically occurs as a prelude to those funds being deposited on an exchange. The Bitcoin was traced from the recent $60 million Al-Halpo hack and the 37 million coin spade exploit. Cryptosecurity expert Taylor Monaghan was furious about the whole thing. In one instance, she tweeted, I don't know what the government thinks is going to come from this, but it's certainly not Lazarus is able to launder less money.

More crisply, she wrote, systems that punish builders while incentivizing the status quo don't do shit, as evidenced by the fact that DPRK moved another 40 million literally as the U.S. arrested its own builders, and circle jerked around how much they've checked notes, impacted DPRK's ability to move money. Moving on to our next update, for an industry beleaguered by exchange folly, all eyes have been on and continued to be on Binance. And it appears that payment firms continue to turn away from them. On Thursday, Reuters reported that MasterCard is planning to sever ties with finance and halt

crypto card services in Argentina, Brazil, Colombia, and Bahrain. The shutdown will affect Binance-linked MasterCards, which allow users to spend their crypto. MasterCard will close the service on September 22nd, and the firm said that other crypto-linked cards will not be affected. One bright spot this week for Binance was the announcement that Moon Pay would offer Binance US a solution to its lack of payment rails. The firm will allow customers to purchase Tether using debit cards, credit cards, Apple Pay, or Google pay, and then converted into crypto using the exchange. Users will also be able to off-ramp into U.S. bank accounts. Binance U.S. was, of course, forced to suspend dollar deposits after losing banking partnerships in June, going crypto only since then. The big question will be whether there are

any customers left. Binance U.S. is currently recording just 10 million in daily volume, according to Coin Gecko. By way of comparison, Coinbase has around $1.15 billion in daily volume, and Cracken records about $500 million. Now, both of those firms operate internationally, so have some additional volume from offshore, but the difference is still clearly several orders of magnitude. Another Binance story that people are trying to make heads or tales of is that leaked communications from Binance show that staff have been contacting crypto projects with low liquidity over the past week. The exchange has asked for details of market-making arrangements. Binance further asked if projects would be willing to place between 1% and 5% of their circulating

supply in savings accounts on the exchange, which are subject to being lent out to traders. The rationale is that additional supply ready to be borrowed could allow traders to boost liquidity. If projects did not want to disclose their market-making relationship or contribute tokens, Binance asked for an explanation why. A Binance spokesperson said that this outreach was part of a, quote, ongoing risk management initiative and claimed that this communication only reached a small number of firms with low liquidity which could expose users to risks, including they said potential market manipulation. The spokesperson said, quote, the main purpose of our risk management outreach is to encourage project teams to take the recommended steps required to enhance their liquidity

protection. Engaging market maker support is one way to enhance such protection. Now, for all of the speculation that there are nefarious explanations for this or that it presents finance running out of coins, Matt Batsunales, the founder of Glass Market, seemed to think it was perfectly normal. He said, we see this as a net positive for exchanges to be monitoring market makers to ensure they're providing liquidity. Speaking of exchanges and liquidity, the FTX bankruptcy team has tapped Galaxy Digital to assist with asset management as the firm begins to look at liquidations of their crypto holdings. FtX wants to begin selling, staking, and hedging its crypto holdings, which make up over $3 billion of the estate's assets.

The plan at this stage is to return funds to customers in Fiat rather than in Bitcoin or ETH, so hopes that some careful trading can help maximize value for creditors. In a court filing made on Wednesday, FTX outlined their plan. The filing explained that, quote, hedging Bitcoin and Ether will allow the debtors FTX to limit potential downside risk prior to the sale of such Bitcoin or Ether. Staking certain digital assets will inure to the benefit of the estates and ultimately creditors by generating low-risk returns on otherwise idle digital assets. End quote.

The firm signaled out the SEC approved investment advisor, which forms part of the Galaxy Digital Group as an appropriate partner in this endeavor, stating that, quote, Galaxy asset management has extensive experience in areas relevant to digital asset management and trading, including with respect to the types of transactions and investment objectives contemplated. The filing also disclosed that FTCS is concerned that selling all of their crypto holdings in one go would impact markets dramatically. They proposed placing selling decisions with expert market participants to figure out how to mitigate that risk through weekly sale limits or other trading strategies. Galaxy Digital had also previously disclosed that it had

tens of millions tied up in FTX when it collapsed, raising questions of conflict of interest which were addressed in the filing. The request is currently before the bankruptcy court, which will need to approve the decision before the plan can move forward. A hearing is scheduled for September 13th, and under the proposed plan, FtX will give creditors 10 days notice before the dumping begins. Summing up the feeling of just about everyone was Hal Press at North Rock LP, just what we needed. Weekly sales of half a billion aggregate amount of majors. Still the best tweet award goes to CMS Holdings, who wrote, Novo gets a sleeve of the FTX bankruptcy legal team's logos. But with that, let's shift over to

more positive, forward-looking stories. Bitfinex have announced the successful API integration with Vakif Bank, one of the largest banks in Turkey. This will allow Turkish customers to deposit Lira into exchange accounts for free directly from their bank accounts. Now, hold aside whatever feelings you might have about Bitfinex or tether or anything associated with them. Coming from the perspective of Turkish citizens, this is a positive development. This week, the Central Bank of Turkey surprised analysts by raising its main policy interest rate from 17.5% to 25% in a bid to tackle rampant inflation. Economist polled by Reuters had expected a smaller hike to 20%. The Central Bank recently revised its annual forecast from 22.3% to 58% inflation for this year, with official

statistics for July showing inflation at 47.8% on an annualized basis, meaning these rates are still massively negative. The Lirisat peak official inflation over 80% last year, after President Erdogan fired three consecutive Central Bank. governors between 2019 and 2021, as inflation shifted up above 15%. Perhaps unsurprisingly, then, after years of monetary dysfunction, Turkey has become a major market for crypto adoption. Indeed, internal finance documents leaked earlier this month, showed that Turkey was the third largest market for the exchange behind China and South Korea. BitFinex has been pushing hard into regions undergoing currency distress lately, last month, for example, launching a peer-to-peer platform

for users in Argentina, Colombia, and Venezuela. Another company in the news this week, having changed the arrangement around USDC is, of course, Circle. Circle have announced support for USDC across six additional blockchains. USTC will now be available on Polygon, Base, PolkaDot, near Optimism, and Cosmos via the Noble Network. This expansion of availability was hinted at earlier in the week during the announcement that Coinbase would be taking an equity stake in Circle. As part of the announcement, the company said they would be winding down the center consortium, which was a self-regulatory body which governed USDC, and that Circle will now act as the sole governance organization for USDC. These new additions bring the number of blockchain

using USDC up to 15. Now, some viewed the week's moves as an attempt to shore up USDC, which has been rapidly losing market share to USDT over the past five months. USDC's circulating supply has dropped by 40% since the banking crisis in March, which temporarily threatened a small portion of circles reserves. That said, the stable coin is still firmly the second most popular stable coin in the industry with a current supply of $25.8 billion. Aviva Litan, a senior blockchain analyst with Gardner, questioned whether adding networks would stem the bleeding for USDC, stating that, the bottom line is money is flowing out of the chains, and support for more chains won't make it flow in. However, one integration that was also announced this week could potentially see some moves in that area.

On Wednesday, Salana Labs announced that they would be integrating their Salana pay network into e-commerce giant Shopify. This will allow online shoppers to check out using USDC. Josh Freed, head of commerce business development at the Salana Foundation, said, When thinking about this integration, we chose a stable coin because merchants and consumers think in dollars. It creates a much simpler entry point when pricing is in a currency consumers and merchants naturally understand. Jeremy Aller, the CEO of Circle, tweeted, Maybe there's something to Stablecoin payments after all. Companies whose core business is extracting 3 to 4% on merchant fees will face a reckoning in the decade to come.

Maybe merchant processing fees will settle in at something closer to 20 to 30 basis points, built around tech fees. Looking globally, hashkey will begin offering crypto trading to retail customers in Hong Kong from Monday. The firm was the first crypto exchange to obtain a license to sort of, service individual traders under the newly introduced regulatory regime. Initially, only Bitcoin and Ethereum markets will be offered and retail customers will be limited to investing up to 30% of their net worth. That restriction, obviously, is a new part of regulations that could prove extremely difficult to enforce. Hashke's CEO, Livio Wang, said of the limited offering, we thought it would be better to be more prudent. In a bearish market environment, there could be

higher risks trading the so-called altcoins, so we hope to offer tokens that come with relatively lower risks at first. The exchange will support deposits in Hong Kong dollars and US dollars. Wang also said that customers from mainland China will be strictly prohibited using IP bans. Lastly, closing on a shifting of tone, Dan Moorhead is done with Crypto Winter. The Pantera Capital founder published a letter on Tuesday, which noted just how long crypto markets have spent in the red. The period from August last year until this June was the longest period of negative year-over-year returns for Bitcoin, clocking in at a brutal 15 months. Prior to that, the longest period of negative returns was in 2015 at just under a year. The negativity can't last, according to Moorehead, who wrote,

Our view is that we've seen enough. There's just so long markets can be down. We will leave the combination of recent positive events, the XRP ruling and endorsements by BlackRock at all, in addition to the Bitcoin having expected to occur in April 2024, provide a strong setup for the next-ball market in digital assets. And I will save friends on this last. And I will say, late summer weekend. If that's just opium, hand me the pipe. Until next time, be safe and take care of each other. Peace.