The Breakdown - The SEC and DOJ Are Reportedly Investigating DCG

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 Monday, January 9th, and today we are talking about news that DCG is being investigated by the DOJ. 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. All right, friendos, happy Monday. And if you've been on Twitter pretty much at all this year, there's an image I'm sure you've seen. It's a line drawing of a guy screaming with excitement

Starting point is 00:00:52 with a little green arrow saying 1% up. The gag, of course, is that after all of the crap that we've been waiting through, even tiny positive market movements feel, well, miraculous. I have a feeling this is going to be one of the key memes of 2023, and it certainly captures a lot of the energy over the last couple days. On Sunday, Bitcoin broke its painful range-bound streak below 17K. The price of BTC moved up by 1.3% on the day, and finally up through the $17,000 mark where it remains right now. As it did so, it dragged the total crypto market cap up by about 3% alongside it, and capped off a relatively solid green week. Now, analysts pointed out that the charts still look bearish, but everyone is happy to have something positive to write for once.

Starting point is 00:01:36 Coinbase institutional's David Duong pointed out in a note that the next technical resistance level sits at 17,800, so we could see a little run here. Fundstratt's Sean Farrell suggested that there were plenty of buyers looking to commit funds below 17,200, but that, quote, this paints an incredible picture of a strong bullwall at current market prices and suggest a strong bottom is forming. So what drove the weekend pump? Although industry news has been dire recently, there doesn't appear to be

Starting point is 00:02:03 a fast and dramatic conclusion to anything which would drive further market breakdowns. Global inflation numbers have been coming in cooler than expected recently, and with the US CPI data due for release on Thursday, we could see yet another reason for the Federal Reserve to take a break on its aggressive monetary tightening campaign. Finally, and likely most importantly, we saw major breakdown in the U.S. dollar on Friday that continued throughout the weekend. The dollar index or Dixie, a measure of the dollar against other major currencies, dropped sharply by 1.5% on Friday and continued to tick lower as Sunday night markets opened in

Starting point is 00:02:32 preparation for the week ahead. This now puts the Dixie at a seven-month low. Still, many people were commenting on the size of the reaction compared to the size and the market move. Ledger status writes, based on comments, you'd think we were up 20% on the day. Tree of Alpha writes, from Binances Insolvent, everyone get out, to depositing more to long shit coins in one 7% total market cap pump. Cryptot traders are by far the people with the shortest attention span ever, thankfully so. Trader Bob Lucas writes, in my opinion, if Bitcoin can hold this range through January 10th, then trade above 17K, very strong chance bare market lows are in. I get cold shivers anytime I see anyone call a bottom knowing this market and what's still out there.

Starting point is 00:03:12 But I'm just sharing what people are saying. Now, a better one, I think, comes from Mike Dutus from Sixth Man Ventures, who writes lots of negative stuff in the news, but the real ones just keep using the blockchains. NFT, defy app activity all quietly up in early 2023 across multiple chains. You love to see it. But let's step back and pick up this dollar story, though. and let's talk about what might be driving some new weakness there. Now, there are a few possibilities with the likelihood that it's a combination of all of these

Starting point is 00:03:38 factors and more. China's reopening has driven offshore yuan markets to five-month highs, with news breaking that international travel would restart soon. Back in the U.S., U.S. data releases last week painted a picture of a slowing economy, albeit in the background of a still-growing labor market. The Institute for Supply Management report released on Friday showed that the service sector contracted in December the first monthly contraction since the summer of 2020. RBC head of currency strategy Adam Cole said where the number came in, marginally below the 50

Starting point is 00:04:05 break-even level, is just about as negative as you can get for the dollar. If it were another five percentage points lower, then that would be obviously deep recession territory, which historically has generally been associated with a stronger dollar against everything other than the yen and the Swiss franc. Another potential factor is the stalemate in Congress finally having been broken, with the House-electing Republican Kevin McCarthy did the Speaker roll after 15 grueling rounds of voting. With Congress back in session, focus will now turn to at legislative matters. And in that context, negotiations around increasing the debt ceiling will be taking a front seat in both the political agenda and the discourse.

Starting point is 00:04:38 Commentators quickly circled back to a repeat of last year's fascination with minting a trillion dollar platinum coin to solve the government's fiscal problems with one neat trick. Regardless of how real or manufactured the outrage around the debt ceiling is, nothing says dollar weakness quite like the prospect of a lengthy debate about how many additional trillions of dollars the U.S. government should be allowed to borrow, with a strong possibility of political brinksmanship surrounding the negotiation. Now, there will probably be a lot more to discuss on that front, but for now, let's move back to the crypto side of the market for some updates there. In many ways, right now, there are three

Starting point is 00:05:10 crypto institutions people are watching most closely. The first is, of course, FtX. FtX is failure and fraud. We're always going to set the tone for at least the early part of this year, both in terms of the situation itself and how it resolves, but also in terms of potential contagion. The second key company is, of course, finance. Ever since the flop of FTCS, there has been recurring and intermittent finance fud. In some ways, this is inevitable, as it's basically the last big player standing. Unless we forget, even before FTX, there were some questions about Binance, particularly from a regulatory standpoint. There are understandably lots of eyeballs watching Binance right now and wondering if there are things that people

Starting point is 00:05:44 should be worried about. One of this morning's examples comes from a piece by Forbes staff that argues that Binance outflows are worse than CZ suggested. The TLDR is that, quote, On December 13th, Nansen, a separate crypto data firm broke the news that Binance had lost 3 billion of assets over the previous week, representing 4% of the firm's total at the time. A Forbes investigation revealed that, in fact, Binance lost 15% of its assets since a Twitter posting by CZ on the same day he downplayed the Nansen report withdrawals. End quote. The report also discusses the drop in value of the BNB token, questions around Binance operating without a CFO, which they have been since June 2021, about audit firm Mazar's calling

Starting point is 00:06:21 off their engagement on December 19th and much more. Overall, they say that the total asset change over the last 30 days is 14.6% of Binance assets leaving the platform, putting its total assets at around $55 billion. The article quite clearly tries to paint a picture of people losing trust in Binance. I don't know about that exactly. I do think that people are naturally wary of any centralized service and exchanges especially right now. And so on the one hand, this feels fairly expected. But it's also true that some big market makers and investment partners like Jump and Wintermute seem to be retreating, probably whatever the case it's worth watching. Still more direct news comes in the fact that federal prosecutors have reportedly served subpoenas

Starting point is 00:06:59 to a number of hedge funds that have dealt with finance in the past as a probe into the largest crypto exchange escalates. According to anonymous sources who spoke with the Washington Post, the U.S. Attorney's Office for the Western District of Washington in Seattle is seeking records of communication with finance from several hedge funds. Reports surface in December that U.S. attorneys were split on whether they had sufficient evidence to pursue money laundering charges against finance and its executives. And remember, the Bank Secrecy Act requires crypto exchanges that conducts substantial business in the United States to register with the Treasury Department and comply with anti-money laundering regulations. To be clear, the issuing of subpoenas does not

Starting point is 00:07:32 indicate that any charges against Binance or the hedge funds will go ahead. John Reed-Stark, the former chief of the SEC's Office of Internet Enforcement, says not surprising U.S. DOJ investigating Binance's auditors quit. Its financial disclosures are limited and laughable. Per Reuters, it has processed over $10 billion in payments for criminals and companies seeking to evade U.S. sanctions. Red flags ad nauseum. capital kind of sums it up as well, saying after the FTX collapse, the eye of Sauron is now on Binance. The U.S. Attorney's Office is sending subpoenas to investment firms asking for records of communications with Binance looking for dirt to indict CZ with. Still, in the immediate

Starting point is 00:08:08 term, when it comes to the big institutions that people are watching, the most closely observed right now is, of course, the digital currency group. DCG is the parent company of many in the crypto space, including CoinDisc, but also including Genesis. In the wake of FTX's collapse, Genesis halted withdrawals, and since then, it's been a couple months of hemming and hawing about what happens next. Last week, Gemini, co-CEO Cameron Winklevoss, dropped an open letter that significantly ratcheted up rhetorical pressure on DCG's CEO, Barry Silbert. Gemini has about $900 million worth of its customers' deposits stuck in Genesis as part of Gemini Earn. The letter from Winklevoss accused Silbert of Bad Faith stall tactics, which is Winklevoss's

Starting point is 00:08:48 phrase, and even elicited a Twitter response from Barry himself. Still, the week didn't reveal really too much about what was going on. However, on Friday night, some juicy details came out. You know, the classic Friday night screw up your weekend with some hot gossip. Late on Friday, Bloomberg reported that DCG is being investigated by the SEC and the DOJ. Citing anonymous sources, Bloomberg reported that federal prosecutors are investigating the crypto conglomerate regarding financial dealings between DCG and Genesis. The status of internal dealings between the firms has been one of the key points of contention between Genesis and its creditors. In that same letter I was mentioning last week, a key criticism was

Starting point is 00:09:24 the failure at DCG to properly recognize debt between companies, with Winklevoss saying that the company's finances were, quote, beyond commingled. Last summer, Genesis was hit hard by three-year-os capital defaulting on loans. To firm up their balance sheet, DCG assumed the bad debt on its own balance sheet by issuing a promissory note for $1.1 billion to Genesis. This loan is not due to mature until 2032. later during last year, an additional promissory note for $575 million was issued by DCG to Genesis, which is due to be paid back this May. In November, shortly after Genesis halted redemptions and loan origination from its lending platform, Silbert asserted in a letter to DCG shareholders that the intercompany loans were made in the ordinary course of business and, quote,

Starting point is 00:10:04 always structured on an arm's length basis and priced at prevailing market interest rates. Bloomberg sources say that the authorities are specifically looking into what investors were told about these transactions. Now, according to sources, these investors, investigations are at an early stage, with regulators and law enforcement requesting interviews and documents. There have been, importantly, no accusations of wrongdoing at this point, and no investigations have been publicly acknowledged. What's more, one of Bloomberg's sources say that the investigations had begun prior to the collapse of FTX. A DCG spokesperson said in a statement, DCG has a strong culture of integrity and has always conducted its business lawfully. We have no

Starting point is 00:10:38 knowledge of or reason to believe there is any Eastern District of New York investigation into DCG. It's hard to get a lot of good information at this point. The community is just one big rumor mill more or less. But speaking of the community, there is also a bit of a community grassroots effort around the Greyscale Bitcoin Trust. Many have pointed out that most of the problems at DCG and indeed throughout the collapse of crypto markets last year have as an ultimate source the collapse of the Grayscale Bitcoin Trust share value. Until March 2021, GBTC traded at a healthy premium, allowing hedge funds and other large market participants to capture a lucrative arbitrage trade of locking up their Bitcoin in the Grayscale Trust. Since then, GBTC has collapsed into a massive

Starting point is 00:11:15 discount to net asset value, with shares coming close to trading with a 50% discount to the Bitcoin they represent last month. Once the dust had settled on the trade, GPDC was managing approximately 650,000 Bitcoin, more than 3% of total supply. Over the last year, Grayscale has put in a huge push to convert the trust into an ETF, which would allow market participants to arbitrage the value of shares back into alignment with the underlying Bitcoin via redemptions. At the end of December, rival ETF manager Valkyrie put forward a proposal to take over administration of the trust, promising to correct the GBT discount. However, now Grayscale faces additional pressure from shareholders to redeem shares to close the discount. David Bailey, the CEO of Bitcoin Inc.,

Starting point is 00:11:54 which operates Bitcoin Magazine and the Bitcoin Conference, began organizing a shareholder's petition called Redeem BTC. Their website reads, We're a group of GBTC shareholders interested in ensuring the trust has managed to maximize the value for all shareholders. Our goals. One, a credible path, to redemptions that minimizes impact on the Bitcoin market. Two, a reduction in management fees. Three, a change in management and a competitive bidding process for new trust sponsors. Bailey claims that the website used for organizing has now received contact from 1,500 shareholders representing around 20% of the shares of GBTC. The website does not appear to have any way of

Starting point is 00:12:29 verifying share ownership so these numbers could be inflated. However, it's still telling a public sentiment surrounding the management of GBTC. Bailey tweeted, taking a step back and speaking objectively, How does it make logical sense to trust three plus percent of the world's total Bitcoin supply to one man who was willing to lend many billions of dollars to the biggest fraudster in history? Those loans enabled the fraud. Bailey is, of course, referring to loans to Alameda from Genesis. Anyways, what's clear is that DCG is in a rough spot. Maya Zahavi writes, takeaways.

Starting point is 00:12:59 Going public just diminished DCG's options. DCG going down is a game changer. Unlike last bare market, this time we're seeing the so-called crypto giants taking a massive have hit and maybe disappearing, thus quenching the remaining confidence in crypto markets. I will be clear here just in case it's not clear. I am not rooting for any more institutional failures. The more that people can get together and settle things emicably and in a way that's best for everyone involved, from shareholders to creditors to whatever, that is the solution I'm rooting for. Unfortunately, right now we're just in the morass where it's not clear what the

Starting point is 00:13:32 path forward is. One last eyebrow razor before we get out of here today. This morning, Charles Gasparino from Fox Business Network tweeted breaking. Prosecutors are telling lawyers connected to Sam Bankman-Fried fraud investigation that the case is so sprawling that it could exhaust resources of the Southern District, since it includes potential bribery, campaign contribution violations, and market manipulation on top of theft and fraud. So boy, howdy, if you thought things were going to cool down now, think again. However, for now, I want to say thanks again for listening.

Starting point is 00:14:05 I appreciate each and every one of you, the time that you put into the show. the time you come take to join in the conversation on the Breakers Discord, and just your thoughtfulness in general. Until tomorrow, be safe and take care of each other. Peace.

The Breakdown - The SEC and DOJ Are Reportedly Investigating DCG

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