The Breakdown - What to Make of Galaxy Digital's $200m Fine

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. What's going on, guys? It is Monday, March 31st, and today we are talking about a big settlement for Galaxy. 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, friends, well, in one of the largest settlements in crypto history, Galaxy Digital has agreed to pay a $200 million fine to the New York Attorney General over their promotion of Luna. We all of us remember here the Luna crash as one of the defining moments of the last cycle. And the run-up in the second half of 2021 was just as pivotal.

Starting point is 00:00:57 Luna was a bit more of an obscure token up until that point, with the Terra Protocol making relatively little impact with a tokenized stock product as their major offering. In March of 2021, Terra introduced the Anchor Protocol, which offered 20% yield on their algorithmic stablecoin UST. This unsustainable yield would ultimately lead to the demise of Luna as the stablecoin violently depegged the following May. But for six months, Luna was a dominant trade in the all-coin space. It ran up from $5 in June 21 to reach $100 by the end of the year. Crypto influencers were pushing the token hard, and Luna founder Doe Kwan became a notorious presence on CT, shouting down any detractors. Galaxy Digital founder Mike Novogratz was right in the thick of it all. In January of 2022, Novogratz posted a picture of his Luna tattoo, declaring

Starting point is 00:01:40 himself a lunatic. At the time, the token price was crashing and would be cut in half to $50 by the end of that month. Luna ended up rallying to fresh all-time highs in March before entering its final death spiral, vaporizing $40 billion in total market value in a few days. Most assumed Novagratz had lost his shirt in the deal, holding onto the token with true conviction as the protocol detonated. Settlement documents, however, disclose he was actually selling tokens throughout those heady days at the end of the last cycle. They state, while Novogratz posted pictures of his tattoo and expressed his Luna bullishness to the public, Galaxy sold millions of tokens into the market at many multiples of its initial cost without disclosing that it was selling.

Starting point is 00:02:16 Ultimately, Galaxy helped a little-known token increase its market price from 31 cents in October 2020 to $119 in April 2022, while profiting in the hundreds of millions of dollars. The settlement goes into great detail about Galaxy's buying and selling activity. It states their initial purchase was arranged in August of 2020. The Attorney General presented internal emails to Novograts from his investment team, which stated, I think Terra will benefit greatly for more exposure in the U.S., and if you're open to making the firm an advocate for them, I think we can negotiate good terms on an investment. On an email chain, Galaxy's vice president commented, they're dying to get real macro guys involved with Terra, but they need someone who will actually talk about their product.

Starting point is 00:02:52 A big part of the reason Luna and UST had credibility were the endorsements from well-known macro guys like Novogratz and Raal Paul. Digging deeper into the documents, Galaxy seemed a little mixed on whether to move forward and identified some of the issues with the U.S.T. mechanism. Their head of venture wrote in a Slack message, this stuff is confusing, trying to understand what is real versus just financial engineering that creates value out of thin air. Also, sort of seems like Doe Kwan acknowledges the ICO was bullshit. Galaxy was never able to confirm real-world usage of U.S.T. through the Chai Payments Network in South Korea, which was later revealed to be fabricated by Terra. Galaxy also decided not to participate in an official advisor role. Still, in September of 2020,

Starting point is 00:03:28 the firm agreed to take an 18 million token allocation, at a 30% discount to the prevailing market price of around 30 cents. In total, they invested around $4 million. The deal was structured with a 12-month vesting schedule, meaning Galaxy would unlock 112th of the tokens monthly. They were free to sell the tokens once they were unlocked each month. The firm was fully unlocked by the end of 2021, with Luna sitting at $100. The settlement agreement then documents Galaxy engaging a PR firm to track and help boost Novograt's profile on traditional and social media. Novagratz doubled his Twitter following in 2021, reaching 330,000 by the end of the year. He discussed Luna frequently during this period, beginning before the first tranche was even unlocked. In December of 2020, Novogratz emailed his

Starting point is 00:04:08 vice president asking, give me something good to tweet about Luna. It's on the move. Like to think we had something to do with that. At least want Kwan to think that. He settled on tweeting about Chai having 80,000 users of UST, a claim that the firm hadn't been able to verify in their due diligence. In January of 2021, Galaxy gave a press release to Bloomberg promoting Chai adoption, claiming 2 million users. Bloomberg ran an article entitled Novogratz invests in crypto startup serving millions in Korea. Luna's price more than doubled in the wake of this reporting, hitting $2.5 by the end of January 2021. Meanwhile, Galaxy had already sold more than 1.5 million tokens, recouping their initial investment. Throughout the rest of the year, Novogratz made numerous high-profile

Starting point is 00:04:47 appearances and continued tweeting about Luna. In an interview on the Odd Lots podcast in February, Novogratz again spoke about Luna and the real-world adoption of UST on the Chine Network. He said, If you're in Korea and you're in a cab, you will pay for things on the Chai payment system. Or if you're in a grocery store, you will use Chai like you might use Apple Pay. Chai is a crypto payment system and it's already 6% of payments in Korea. And so we're starting to jump out of the sandbox into the real world. It's not clear that he had any basis for making these claims, at least other than promotional material from Doe Kwan. The full settlement agreement is 49 pages of these types of events,

Starting point is 00:05:19 with Novogratz publicly promoting Luna while Galaxy was selling in the background. When they received their first tranche in December 2020, Novagratz wrote to his VP, Let's hold for a while. I have a policy of not selling for at least three days after I tweet positive or buying if I tweet negative. Good to know we have the liquidity. This policy went out the window by the end of the ride. On January 5, 2022, with Luna down 16% in two weeks from its then all-time high of $100, Novogratz tweeted, markets always consolidate after huge moves. 100 was a symbolic number. Keep the faith. Meanwhile, Galaxy sold 13 million in Luna that day and over 100 million across that week. They were essentially out of their entire position by the end of February, with just a few thousand

Starting point is 00:05:57 tokens remaining on the books. Now, the allegations laid out in the settlement have been wildly controversial on crypto Twitter. Andrew Bailey, a fellow at the Bitcoin Policy Institute, wrote, Anyone buying crypto they heard about from some influencer should read this settlement. It's often the case that the very people promoting a token got it at a discount from insiders and are dumping it, or being paid to tout it without disclosure. It's sad and damaging. There are some great people at Galaxy Digital I don't wish to embarrass them.

Starting point is 00:06:21 but we do well as an industry to call a spade a spade and reject this model. Pumping crypto is bad, tokens with insiders are bad, touting without disclosure, also bad. Anthony Scaramucci had a very different take, tweeting, Novogratz is a dear friend and one of the smartest investors I know. Everything he ever said about Luna was because he thought it was true based on the deception perpetrated by the real bad actors here, Doquan and Terraform. This makes no sense and is completely at odds with the SEC and DOJ, which have been pursuing actions against Doquan and Terraform. It's lawfare pure and simple due to an obscure and dangerously powerful New York law known as the Martin Act. The law has no need to prove intent, creating a low standard of proof that can open the door for abuse like this.

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Starting point is 00:08:26 what they have available to you. So thanks, once again, to Ledger for sponsoring the show. Enforcement under the Martin Act isn't all that uncommon, but the 1921 law is very broad. It runs in parallel to federal securities laws and allows New York State to take a much tougher stance on sketchy promotional activities in the investment space. The big point is that there doesn't need to be any intention to defraud, simply making public comments while acting Inconsistently is enough. Bitco CEO Mike Belchie responded to Scaramucci adding, it's harder to deny that NIAG laid out a compelling case of pump-and-dum, selling tokens as soon as you vest them, shilling and hyping and saying I'm long when in reality you're selling as fast as you

Starting point is 00:09:02 can. I've always thought Mike brought good maturity to crypto and respected him for it, but I was shocked to read the facts outlined by NYUAG. So legal overreach or not, it's not ethical, and this type of behavior makes our entire industry look bad. Unchecked, this is what leads to over-regulation. Just read the controls put onto Galaxy as part of this settlement. Our industry will not be taken seriously so that we can build a better market when our most experienced leaders are doing this. Principles-based regulation could fit well here. Don't lie to promote assets you hold. Don't tell others to buy while hiding the fact that you're selling. And this comes to the other points of the galaxy settlement. The firm has been handed a massive fine and agreed to a very limiting set of

Starting point is 00:09:36 conditions. They are no longer allowed to promote crypto tokens without disclosure of payment and have dozens of new limitations on how they deal in crypto. Generally, the settlement brings Galaxy's compliance in line with highly regulated financial firms that deal in equities. They're definitely not getting away with their conduct by any stretch of the imagination, but it also wasn't an isolated incident for the industry. Ari Paul, the founder of Block Tower, highlighted that this kind of behavior is endemic, tweeting, big fine for Galaxy, crazy outcome in these murderous legal times. In TradFy before this admin, this might have been a reasonable outcome, maybe, but in crypto, hard to find a firm without far bigger and clearer violations.

Starting point is 00:10:10 Heck, we got clearer crimes just around the Trump coin launch and market manipulation. Talk to Novo about this back in real time. He was a true believer. Doquan fooled him. He wasn't trying to scam or mislead anyone. Paul was slammed for this take, and later added, to the many people who responded that they literally sold into promotion, fair, I concede. That hot take was not my best.

Starting point is 00:10:29 And in many ways, this underscores the issue. There aren't many in the industry that consider Novograt's a truly bad actor. He was largely just competing as a crypto fund under the same self-imposed rules as rival firms. Paul's comments that everyone else was doing much worse really begs the question of whether there are any rules at all in CryptoVC. Most crypto traders understand the game that VCs are playing and take them into consideration, but this notion of the market having enough awareness to make better decisions,

Starting point is 00:10:52 despite shilling, falls apart when something like Luna and UST break through into the mainstream. And that, of course, was the entire issue with Luna the whole time. One of the things that I talked about extensively back then is that Luna was the first time that DeFi got socialized into the mainstream. Defi had historically been a sandbox that had extremely high barriers to entry. And so even though there were plenty of exploits and hacks and just implosions of various types, the only people being hurt were the people who knew how to play the game and were fully prepared for the consequences of their actions.

Starting point is 00:11:22 Because the risk of the Terra ecosystem was ultimately instantiated in a token that was subject to an implosion of the type exactly that happened, regular people who didn't know how to do anything more than just press buy on a token button were able to actually get hit by a defy failure. Now, when it comes to this question of Novagrats and the behavior here and whether it's normal and whether the settlement is out of line, there are a bunch of very separate questions here. The first is whether this behavior is out of sync with others in the space. And I think the answer is quite obviously no that lots of people did versions of this and still do. Crypto is a sector where investors talk about their investments, which isn't necessarily

Starting point is 00:11:57 necessarily different than equities, where investors use the platform of cable news shows to talk about their shorts and their longs regularly. And yet at the same time, this has always been weird. It's weird in equities and it's weird in crypto. It's weird that it is the norm to shill whatever it is you're invested in. And it's certainly and obviously unethical, as any 10-year-old could tell you, to be pushing people to buy or hold while you're selling. Novo grads didn't need to become a voice for Luna. That was a specific intentional strategy he chose. Now, do I think that he was, is specifically targeted for the egregiousness of getting that tattoo and blasting it all over social media? Probably. And am I a big fan in general of the NYUAG when it comes to these issues? Not really.

Starting point is 00:12:38 But still, to the extent that we are in lesson learning mode, I don't know, man, it just seems pretty obvious. It is never not going to be dicey to scream and shout and shill about an investment you've made in the crypto space. But if we are going to continue to do that, let's at least not do that while also selling in the background. Now look, I am glad that Galaxy is around. You hear me quote their research all the time here. I think by and large, the space is better with them in it, and I have no doubt that they'll be able to absorb this and move on and still be a strong actor here. But I don't know. Maybe we all need to distribute signs that say think before you tweet or something. Hopefully this gets better in the future, but I'm not holding my breath. And so perhaps I would

Starting point is 00:13:15 shifted back to us, the recipients of these messages, to go back to an old version of that Bitcoin Maxim, don't trust Verify, which in the case. of people promoting tokens could be simplified. Don't trust ever under any circumstances at all, no matter what the evidence that you should actually trust is. Just don't believe a word that anyone says, ever. On that extremely positive and happy and uplifting note, I leave you today. That's going to do it for the breakdown. Appreciate you listening. As always, till next time, be safe and take care of each other. Peace.

The Breakdown - What to Make of Galaxy Digital's $200m Fine

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