Unchained - Why the CFTC Case Against Binance Will Have Very Important Consequences for Crypto - Ep. 475

Episode Date: March 31, 2023

In this episode, Austin Campbell, a professor at Columbia Business School, discusses the recent allegations made by the CFTC against Binance, and whether or not criminal charges will be brought against company officers such as CEO Changpeng Zhao, or CZ, or former Chief Compliance Officer Samuel Lim. He also sheds light on how this case could shape which agency will have regulatory authority over crypto assets. Show highlights: what the CFTC's allegations against Binance are whether Binance and its employees will face criminal charges what the two most likely scenarios for Binance are, according to Austin how regulators got so many details and so much information from CZ's phone whether CZ is personally liable and whether the US could extradite him  how the CFTC used the complaint to state that BTC, LTC, ETH, and some stablecoins are commodities Why Austin believes Coinbase would be the "single biggest winner" if Binance US is shut down how this case is going to help determine which agency has jurisdiction to regulate crypto assets Thank you to our sponsors! Crypto.com Railgun DAO  Guest Austin Campbell, professor at Columbia Business School and Managing Partner at Zero Knowledge Consulting Previous coverage on Unchained: Just a Coincidence? Coinbase and Polygon Lawyers See Bad Omens in SEC Crackdown Links CFTC vs. Binance Unchained: CFTC Sues Binance and CZ Over US Regulatory Violations Bloomberg’s Matt Levine: The CFTC Comes for Binance Previous coverage on Unchained: The Chopping Block: Is This the Beginning of the End for Binance? Learn more about your ad choices. Visit megaphone.fm/adchoices

Hi, everyone. Welcome to Unchained, your no-hype resource for all things Crypto. I'm your host, Laura Shin, author of The Cryptopians. I started covering crypto seven years ago, and as a senior editor at Forbes, was the first Mainstream media reporter to cover cryptocurrency full-time. This is the March 31st, 2023 episode of Unchained. Unchained is now at a new website. Head to UnchainedCrypto.com to check out our crypto news stories, educational articles for those just getting started. how-to-guides and videos. Again, that's unchainedcrypto.com to find answers to all your crypto questions. Ever wanted to use defy without being tracked? Railgun is a leading defy privacy solution on Ethereum, BSC, Arbitrum, and Polygon. Shield your funds and use them privately in your favorite defy apps, while Railgun's cutting-edge zero-knowledge system encrypts your data from public view. Yes, that includes dextrating.

Visit Railgun.org or use the Railway app at Railway. With the crypto.com app, you can buy, earn, and spend crypto in one place. Download and get $25 with the code, Laura. Link in the description. Today's guest is Austin Campbell, professor at Columbia Business School. Welcome, Austin. Thank you very much. Happy to be here.

This week, the Commodity Futures Trading Commission dropped a humdinger of a lawsuit on finance. It was 70 pages filled with detail after detail. about all the ways that Binance allegedly knowingly flouted U.S. regulations while at the same time catering to U.S. institutions. What are the exact violations and what did you find to be some of the more shocking or surprising allegations in the report? Yeah. So without getting exceptionally technical about how the CFTC operates, I would say fundamentally in the United States, if you're trading certain forms of derivatives on commodities, you're required to register with the CFTC. And

registration with the CFTC has a lot of strings attached to it, right? There are rules around what sorts of trading activity are allowed, what sorts of data you have to provide, how you treat your customers, how you handle funds. It is, to put it bluntly non-trivial. And as an example, I used to be at both JPMorgan and City, I would tell you CFTC compliance and derivatives compliance was significantly more time-consuming than anything that we were doing for the SEC at the time. So as you look at this, the CFTC is actually making some very serious allegations here that Biden is running essentially an unregulated derivatives platform. And in specific, did a couple of things that are going to be pretty concerning for most U.S. courts, if proven to be true,

because I want to be clear, we've only seen one side of the story here, and that's the CFTC's side of the story. So as a general rule, all of these at this point, you should probably take them as allegations, though the CFTC does not file frivolous lawsuits as a general rule. Number one is they are alleging that Binance knowingly had U.S. customers and failed to register. So what that means is not only did they run a platform that didn't register with the CFTC, it's that they knew they had U.S. customers, and in fact, they were alleged to have induced U.S. customers through their actions onto the platform. So if I was running a derivatives platform, and for argument's sake, I only served people in say Mongolia, you don't have to go register with the CFTC. There's no nexus of

U.S. business there. Here in this case, like, it's not just that, oh, we had a few that got through like a KYC AML onboarding procedure by defrauding us. Here it's we actively helped them get around all of these controls to onboard. So that's a pretty significant allegation. The second one that's pretty material, is that in the process of doing this whole scheme, Bidenance was alleged to have had a bunch of internal accounts trading against people on this platform without adequate controls around it. So then you get into issues like front running, abusive trading, insider trading type behaviors that for pretty much all of the U.S. regulatory apparatus around trading,

it's defined in slightly different ways at each place, but nowhere is it okay. Right. The idea that you could be doing something like deliberately putting in orders to take advantage of your clients or seeing information and acting upon it is not going to be acceptable. And so to have many, many internal accounts without controls around them is a very sort of negative set of facts, if true. And then the third part about that is that they were alleged to have essentially defrauded some of their commercial partners about the controls that they had in place. So there's some specific, you know, stories in there, one of which involved. my old employer Paxos about how when Binance was asked for information, you know, the CFTC is alleging that essentially they just created fake reports and fake information to deliver outwards to give the appearance of having taken actions as though they were in compliance, but actually were not. Yeah. Another one that struck me was an open discussion they appeared to be having about how Hamas, a known terrorist organization, was using Binance to launder money. And I'm just going to quote directly from the complaint, which refers to Samuel Lynn, who was the chief compliance

officer. Quote, in February 2019, after receiving information regarding Hamas transactions on finance, Lim explained to a colleague that terrorists usually sent, quote, small sums as, quote, large sums constitute money laundering. Lim's colleague replied, quote, can barely buy an AK-47 with 600 bucks. And with regard to certain finance customers, including customers from Russia, Lim acknowledged into February 2020 chat. Like, come on, they are here for crime. And then Binance's Monday Laundering Report Officer, I think is the title, agreed, quote, we see the bad, but we close two eyes.

So when you take that along with this other part of the report in which Lim clearly seems to understand the law and the consequences for violating it, he had written in a chat, US users equals CFTC equals civil case we can pay fine and settle. No KYC, meaning know your customer rules, which like take personal identifying information, equals Bank Secrecy Act equals Criminal Case, have to go to jail. So given the kind of disconnects between his knowledge of, you know, what not following those rules could mean for the exchange and for himself and then, you know, this conversation about Hamas. I'm curious what you thought were the odds for a criminal charge brought by the Department of Justice? Yeah. So I would say, one, Sam is correct that the CFTC is not a criminal prosecution authority. Like the CFTC doesn't put people at jail. They can put people in, you know, what I would jokingly call financial jail, that is to say they could kick you out of the industry.

But what they can't do is put you in literal like physical jail. That's a DOJ type problem. I would say, based on what's happening here, one of two things will occur with Binance. One is that if they want to defend this case, they're going to open themselves up to discovery. If they open themselves up to discovery and there's worse things that come out and or those things are already in the possession of the U.S. government, I think the odds of DOJ action in this case are significant, right? It's never 100%, but those comments are not the kinds of things that typically people are just going to let fly and sort of if, you know, close their eyes at when they're discovered. So I would say, if true, it's not a good fact pattern. I mean, even, you know, without having seen the entirety of the messages, you don't

even want to joke about those kinds of things, much less say them truthfully. So I would have a heightened level of concern, shall we say, about criminal prosecution coming. And then again, the question becomes, are we talking about fines, cessation of operations, material changes to business, keeping in mind also that many of these allegations are from, to the best of my understanding, 2019 and 2020. So the other question that we don't know is how much has already been remediated. That is to say, if people further up the chain saw this and said, oh, this is bad and are already deeply into the process of fixing it before the DOJ shows up, that's going to be received very differently than if it's still kind of an ongoing tire fire, and then the DOJ shows up. Yeah, I think

that's a possibility. But the other thing to keep in mind about the CFTC here, you know, and I referenced jokingly financial jail earlier, they could put Binance in a position where it's simply impossible for Binance to operate in the United States going forward. So even if there's not, you know, a criminal prosecution, oh, we just pay a fine sort of thought around the CFTC is way too gentle of an interpretation of the CFTC's powers, right? Because if you read the suit, They're asking for it to be declared that Biden, many of their companies and many of their senior officers are not legally allowed to register in the United States, period. Right?

That basically means you're done here. You can never operate here again. And at that point, starting to flout those kinds of things puts you in much greater danger as well. All right. There's so many directions we could go from this. But one thing I have seen so much commentary about that I just want to ask you to clarify things for a lot of the crypto community is people are very curious how it is that regulators got all these chat logs as well as information directly from the phone of CZ or Chang Peng Xiao,

who's the CEO. So can you explain how it is that regulators were able to get those details and also information directly from his phone? Well, I was going to say that there's a couple of potential ways that can happen as somebody who had to be involved with some investigations previously cleaning up some other messes. One is that you've got a mole, right? That is to say somebody inside the company who provided those to regulators, if you have a whistleblower, if you have somebody who thought there was wrongdoing, who had access to all of those things, that's part one.

Part two is it could have been the case that Binance received a bunch of requests and turned those over as part of some sort of legal action. You know, you can get subpoenaed by people. You can deliver all of these things. Sometimes they'll privately request the information. And if you're trying to play ball, especially if they're in the case of having materially improved controls off the back and senior people took it seriously, it's not always the worst idea to just deliver all the information and show that you've done it. You know, the third part is, and you know, speaking realistically about how the United States operates, somebody could have compromised their security and just stolen all this information, right? if you read some of the controversy around like certain criminal prosecution and parallel construction type problems in the judicial world, which what that means is that the government acquired the information through some way that is not judicially like, call it legitimate, so you couldn't bring it to court.

But then knowing what they know, they go and reconstruct it with warrants and everything in a way that appears much more judicially like relevant. There's no knowing which one of those paths we've gone down as of yet with the information that's in public, but people encrypto. should be aware that all of those are possible. I would as a generic statement tell people if it's on the internet it's forever, even if you think it's in an encrypted app or something like that, like no. All right. So in a moment, we're going to talk about some of the other elements of this case, but first a quick word from the sponsors who make this show possible. Ever wanted to use defy without being tracked? Railgun is the leading defy privacy solution on Ethereum. It's available on BSC, Arbitrum, and Polygon 2. Shield your funds.

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They even put it in the creamy garlic sauce on your McMuffin. The McDonald's Franks Red Hot menu. They put that shit on everything. Breakfast available until 11 a.m. At participating Canadian restaurants for a limited time. Franks Redhot is a registered trademark of the French's food company LLC. Back to my conversation with Austin. So, you know, as we just discussed, there is the potential for criminal action here.

And the complaint went into detail about how much control CZ has over Binance, even mentioning that he approved, for instance, a $60 expense or, you know, showing just how deeply involved he was in conversations about different clients or the kinds of reports he was receiving. So at the moment, CZ is believed to live in Dubai. He's a Canadian citizen. But what kind of peril do you think he's in? Do you think he could travel to any country that has an extradition treaty with the U.S.? Could he travel to the U.S.?

As SVF once joking asked about? Like, I did see some commentary also saying that there could potentially already be a sealed indictment that hasn't been revealed to the public yet. So what are your thoughts on all that? So one, I would say the United States has a very long reach to capture people internationally. There's a short list of countries that are not. going to extradite you to the United States that you can feasibly live in for long periods of time. Right. So, for instance, another, shall we say, crypto fugitive Doe Kwan was recently apprehended as well.

It's going to be hard if there are warrants outstanding for you, for you to evade the United States forever without simply going somewhere like, say, Cuba and never leaving. So number one would be if there's a sealed indictment and they actually want to extradite him, I like their odds of getting him. Or he has to become a certain form of, like, call it pseudo-captive in a nation that doesn't have an extradition treaty. And more importantly, and this is something people often don't think about, won't have one in the future. Because if you're there for five years and then they improve relationships with the United States, well, guess what's going to happen with you? So what I would say, if they really want to get their hands on him, they probably can, or he's going to be hiding out with some of America's, like, genuine enemies. Two, I didn't see anything in that indictment that would indicate to me he had deep personal knowledge of the shortcomings and approved of them.

Again, we haven't seen everything. This is just the initial indictment. So that's not a statement that anything is guaranteed. But one of the things people should know about how corporate prosecutions work is you've really got to zero in on who were the actors and who knew what at what time. right? This was a problem for the people who were prosecuting Enron. For instance, it was a problem in 2008. Of being able to prove that the CEO was fully aware of the actions of all of their supportments and endorsed them is something that's actually relatively difficult. Because it's not enough to have somebody running around saying these things internally. You have to prove that CZ knew about them and that he endorsed them, right? Because if later on he disagreed and took actions to remediate, neither sidelined or fired a person, that's going to be perceived very differently than given.

them a giant bonus for these actions. So I would say on that topic, like just being genuine from what I've read, more information needed. I would say hot takes in either direction are probably premature, but these things do come out over time. One of the things people should keep in mind is judicial proceedings are slow, right? Like if you think, you know, compared to crypto banking is slow, try going to a court where you can take five years to go through an entire case. One thing that interested me was that Bloomberg opinion columnist Matt Levine basically asserted that he felt that the allegations here were not necessarily ones that the CFTC would always go after. I'm really paraphrasing, but he was essentially saying that the complaint is largely about these big international proprietary trading market making trading firms that were operating on finance that were, you know, were the ultimate. and beneficial owners were U.S. persons. And his conclusion was the CFTC cares about this activity, not because, quote, not because it wants to protect big U.S. high frequency trading firms from the

risks of trading on finance, but because finance is the biggest crypto exchange and this is a lever to crack down on it. Do you agree with that assessment? So I think there's a couple of parts to that. If you look at the current U.S. like regulatory framework, I would say I think that's about half right there. One thing to recognize in this suit, and I actually think this may be the single most important point that's fallen out of it, is that the CFTC is now in a federal court, bluntly alleging that Bitcoin, Ethereum and two of the major stable coins, BUSD and USDT, are commodities. This is a direct contradiction of some of the things that the SEC, or at least the chair, have been saying. right so they've now put their cards on the table in court the way that is contestable saying these things are commodities and one of the elements of this case can be seen as a marker of where the lines of regulations begin and end, right?

They are very clearly saying this sort of activity, at least on these tokens, is under our jurisdiction and we intend to proceed accordingly. And that has a lot of implications for U.S. consumer protection in general. So I would tell you the scope of the actions here should not be read solely within the four corners of this case, but rather thinking about some of the second order of that go beyond it. Two, I do think that it's important to understand that even if obviously protecting like big U.S. high frequency traders is not the goal here. What happens with these sorts of arrangements is there's a lot of smaller traders caught in the middle who just get crushed

as the giants walk around, and that has always been a concern for the CFTC. They, as a general statement, are pretty pro-commercial in terms of like experimentation, letting companies try things like allowing innovation, but they're very, very pro fairness, which is to say they wouldn't want it done in a way that disadvantages the smaller traders. And there are hints that that is their view throughout this soon. I was curious. So at this moment, we have seen a lot of crypto community members are tweeting things like this could mean the end of Binance. Some people also just say, oh, well, maybe it'll suffer the fate of Bitmex and drop from number one to like number 20. So what are your thoughts about what is likely to happen to Binance at this point? So if you look at this case, so if I were on the other

side thinking about strategy from the Bidenance perspective, I would say you've really got two good options here. Option number one is try to find some sort of settlement with the CFTC about this. So I would say the fact that this was filed either indicates those discussions failed if they were had already or the CFTC is not particularly interested in settling. It probably feels like one of those two. Your other option is, I do not think this will kill Bidenance, but there is a non-zero chance that it kills Biden's ability to operate the United States, right? And not in the sort of, oh, we don't operate, but we're quietly letting people in the back doorway, but no, you actually literally cannot operate the United States. And what that would mean for them is right now,

they're number one with a bullet, right? Like, very dominant global exchange. And the moment you start regionalizing these things and forcing them out of the entirety of the U.S. space, that will shrink their influence. Probably the single biggest winner from that would be Coinbase, right? As the exchange operating onshore, it was at least tried to color within the lines so much as we even know what the lines are in America. And so, you know, that goes back to the fairness concerns of the CFTC. They don't want finance operating in one way through like offshore, but inducing all these onshore clients while Coinbase has a much stricter set of rules to face the same people. So again, it could be a real leveling of the playing field, I think would be the most likely

outcome here. I think this being fatal for Biden ads probably would depend on, say, the DOJ piling on and, you know, alleging much more severe criminal issues. And then just because this took up such a big part of the complaint, I was curious if you thought the regulators would go after those trading firms that are written about it at length, for having traded on finance and having done so, despite, you know, having ultimate beneficial owners that were Americans. The question you would have to ask there is, what did those trading firms do wrong, right? In many cases, the registration requirements and like policing the platform and fairness in the CFTC framework fall on finance. If you could show those people were trading

in deliberately abusive fashion and taking advantage of people, then yeah, maybe you've got something. but I think this came for Binance first because they're the lowest hanging fruit, right? Like if you look at where the legal liability attaches, had I been at the CFTC discussing strategy with them, I would have gone after finance as well compared to trying to go that route, that'll be significantly more difficult because those people are trading largely for their own account for profit-making purposes. They're not holding themselves out as like, oh, we are fair arbiters of an exchange who faces retail. All right.

So as you alluded earlier, one of the additional issues that has arisen because of this lawsuit is the fact that now both CFTC and the SECC have asserted conflicting statements about the status of crypto assets aside from Bitcoin. So what happens to sort of decide whether cryptos like Ether or, you know, as the CFTC asserted like coin, are commodities versus whether they're securities? Yeah, and so this is getting to where the rubber meets the road for the SEC and the CFTC, the answer is a judge will decide that, right? You're looking at a situation where the CFTC is making some pretty blunt assertions in court. Those could be challenged, but if they are not, I think everybody will be proceeding a pace. And then at least in the circuit they've filed in, you now have a statement that these things are understood to be commodities. right? So if the CFTC wanted to assert regulatory authority, great, it's already there. If the SEC wants to assert it, they have to contest that. And why weren't they in this case contesting that?

It just starts to build a body of case law that tells you know these are commodities. Also, if this were to get appealed or they were to fight as they go up to like the appellate division or the Supreme Court, now you can get rulings that are binding on much larger groups of people. So ultimately, the answer in the United States to whether something is 100% of security or not as judicial, right? These are rebuttable presumptions by the SEC, and you can go to court and fight about it. And essentially, the CFTC, and, you know, I want to compliment them for doing that. I think this is the clarity that we need. But they have put all of their cards on the table in the forum where a final decision can be made as to what these things are and made their view very,

very clear. We'll see if it stands up. But, you know, I would say this sort of clarity is what you would need. It would be nice. For instance, if the SEC would just take, say, the top 500 tokens and tell us which ones with certainty they think are securities or not and why, but they haven't. So this is kind of how you start forcing that process. So for that issue of whether or not Ether and like coin and other crypto assets are securities versus commodities, how does that get decided as a part of this case? Like shouldn't it be kind of separated out into its own case or how does that all work? Yeah. So a court proceeding has multiple layers to it. And One of the important layers is actually jurisdiction, which is to say the judge asking,

am I the right person to hear this case? And are you the right people to be participating in this case, which is standing for those people? And so, you know, one of the things to think about, like one of the simple examples in this space would be if you're in California and I'm in California, we have a commercial dispute with each other about something that happened in California. And then I go sue you in New York. They're going to tell me to leave, right? They're going to tell you that the venue where you should be doing this is perhaps unsurprisingly, California.

And so a judge is looking at that and first saying, am I the right court for you to have shown up in? And then are you the right parties? Because the other part of that is if you and I are having a commercial dispute in California, but some unrelated third party with no stake in it tries to sue us about this. It's like, no, please go away like you're not a party to this dispute. So one of the things that's going to get answered here is, is the CFTC the correct regulator to be in this action? and they are a commodities regulator. So one of the decisions the judge is going to have to make is are these things commodities? Because if you look at these and say, well, Bitcoin, Ethereum, these stable coins,

light coin, all of them are securities, the question will be CFTC. What are you doing here? Like, get out of here. The SEC has got to bring this action. And so the fact that the CFTC is bringing it is going to force a judge to confront that issue of like, do you have regulatory authority over these actions, which necessarily involves a determination. Because another option, for instance, to leave the SEC out of it is if you look at USDT and BUSD and say, no, these are unregulated banking products. Like essentially, this is an unregulated

bank. You may need somebody like the OCC showing up instead to confront those issues. And, you know, it is essentially a way to have a final determination, at least within the walls of that court case, of what are these things? That is a precondition to the CFTC proceeding. Because again, if it's not a commodity or a commodity derivative, they probably shouldn't be there. Wow. So, okay. So what's going to happen is that even before the finance case really is hashed out, the first step is to determine whether or not the CFTC has jurisdiction and therefore whether

or not those crypto assets are securities or commodities. Yeah, that's part of jurisdiction. There's many other parts to it, right? Like, is there an excess of activity, et cetera? But one thing that has to be answered is, does this fall? within the four corners of the CFTC authority, and that's part. Okay. And then so when might that happen?

What do you expect? I do not make predictions about timelines and court cases. Somewhere between now and forever is basically the correct prediction for most of these things. Because here's part of what we don't know. Is somebody else going to intervene and try to argue that they're not? Is Binance going to try to argue that they're not? Because if nobody contradicts the CFTC, they kind of win by default. because the judge only has one argument in front of them to consider.

That argument is that they're commodities. So the other question you have to ask is, does somebody want to fight about it? Oh, oh, well, I mean, doesn't it seem like the SEC might, because, you know, Chair Gensler has been going around saying that only Bitcoin is a commodity and everything else is the security. So do you think that might happen? And if so, is that unusual? Because that feels like that might be kind of unprecedented or something?

Usually federal regulators do not show up in federal court adverse to each other and start punching each other in front of a judge. I would say that would be highly unusual. But then again, a lot of highly unusual things happen in crypto. So, you know, I'm going to fall back on Yogi Berra here and just say predictions are hard to make, especially about the future. Okay. Okay.

I have to say that sounds extremely interesting to me. All right. Well, this has been a fascinating discussion. Thank you so much for coming on unchanged. Thank you very much. Really enjoyed it. Don't forget, next up is the weekly news recap. Stick around for this week in crypto after this short break. Join over 50 million people using crypto.com, one of the easiest places to buy, earn, and spend over 250 cryptocurrencies. Spend your crypto anywhere using the crypto.com visa card. Get up to 5% cash back instantly.

Plus, 100% rebates for your Netflix and Spotify subscriptions and zero annual fees. Download the crypto.com app now and get $25 with the code Laura. Link in the description. At Medcan, we know that life's greatest moments are built on a foundation of good health, from the big milestones to the quiet winds. That's why our annual health assessment offers a physician-led, full-body checkup that provides a clear picture of your health today, and may uncover early signs of conditions like heart disease and cancer.

The healthier you means more moments to cherish. Take control of your well-being and book an assessment today. Medcan, live well for life. Visit medcan.com slash moments to get started. Thanks for tuning in to this week's news recap. SBF faces more accusations. Sam Bankman-Freed, the founder of the collapsed cryptocurrency exchange, FTX, is now dealing with new charges. Prosecutors allege that Bankman Freed bribed Chinese government officials with a $40 million cryptocurrency payment in November 2021 to unfreeze certain Alameda accounts.

These accounts, collectively holding $1 billion worth of crypto, were frozen during an investigation into an Alameda counterparty. After several unsuccessful attempts to unfreeze the accounts, SBF reportedly directed Alameda employees to execute a portion of the bribe payment, authorizing additional tens of millions of dollars after the accounts were frozen. In a court appearance on Thursday, through his lawyer Mark Cohen, the founder of FTCS pleaded not guilty to these charges of attempting to bribe Chinese officials and evading campaign financing laws. Amid mounting legal fees, Forbes revealed that SPF's defense costs are being covered by a

multi-million dollar gift he made to his father, Stanford Law Professor Joseph Bankman, which itself had been funded by a loan from FTX's sister company, Alameda Research. The funds were transferred in 2021 as a tax-free gift using SPF's lifetime estate and gift tax exemption. As he prepares for trial in October, SPF faces new bail restrictions focused on his use of electronic devices and encrypted messaging services. His internet access will be limited to pre-approved websites on a new laptop assigned to him, and all user activity will be logged and monitored by his legal counsel. U.S. and South Korea vie to extradite Doe Kwan. Terraform Labs co-founder Doe Kwan and chief financial officer Han Chong-June have been arrested in Montenegro, facing extradition requests from

the U.S. and South Korea, according to Justice Minister Marco Kovac. The duo will first face criminal proceedings for ID document forgery in Montenegro. The international warrant was issued after the collapse of the Terra-USD stable coin last year, which wiped $40 billion from the crypto market. The U.S. claims jurisdiction because the Securities and Exchange Commission accuses Kwan and his company of defrauding American investors. Kwan and June entered Montenegro illegally and were arrested while attempting to fly to Dubai using falsified travel documents. Prior to their arrest, South Korean officials were searching for Kwan and Serbia. Authorities seized three laptops and five mobile phones from them during the arrest. Interior Minister Philip Adzik told Bloomberg that the duo

seemed surprised about their arrest and told authorities that they had previously enjoyed VIP treatment while on the run. Kwan faces multiple charges from South Korean and U.S. authorities for his role in the collapse of Luna and UST, and is planning to appeal a Montenegrin court's order for a month-long detention. Binance allegedly hid presence in China. On top of the CFTC lawsuit, Binance was accused of hiding its presence in China for several years, according to internal company documents seen by the Financial Times. The documents suggest that Binance operated an office in China until at least the end of 2019 and used a Chinese bank to pay employee salaries. Finance CEO, Cheng Peng Zhao, and other senior executives are said to have instructed employees to hide the

company's presence in China. Genesis had privileged access to FTCS's tokens. According to a Financial Times report, Genesis, a major crypto lender that filed for bankruptcy earlier this year, had privileged early access to issuances of tokens backed by FTX at a discounted rate before they were made available to the public. Genesis is FtX in Alameda's biggest creditor with $226 million owed, according to U.S. bankruptcy. court records. Thomas Brazil, a bankruptcy expert, said, if this is true, Genesis shouldn't be on the UCC or unsecured creditors committee. Also this week, the sale of $45 million worth of FTX's assets in Sequoia Capital Fund was approved by a federal bankruptcy judge in Delaware. The buyer was

Abu Dhabi's investment arm, all noir investments RSC limited. The sale meets the requirements of U.S. bankruptcy law, which sets restrictions to prevent unduly hasty divestment of assets. Meanwhile, the sale of FDX's stock clearing business, MBed, was put on hold until further notice. On a related note, Crypto Exchange OKX announced that it had identified $157 million in digital assets belonging to FDX and Alameda and is turning them over to the bankruptcy estate. FDIC gives a deadline to signatures digital asset clients. The Federal Deposit Insurance Corporation, or FDIC instructed signature banks digital asset clients to close their accounts by April 5th. In the sale of signature to Flagstar Bank, approximately $4 billion worth of crypto-related deposits

were excluded from the deal. The FDIC informed these depositors that any funds remaining in their accounts after the deadline would be mailed to them as a check. During the acquisition, Flagstar took over $88.6 billion in deposits and 110.4 billion in assets from signatures' 40 branches. Additionally, on Wednesday, FDIC Chair Martin Grewenberg faced questions from the House Financial Services Committee members regarding the agency's handling of Signature Bank's digital assets business. Greenberg stated that the FDIC is currently marketing Cignt, Signature Bank's crypto-focused payments network, for sale. Further, Nellie Leang, U.S. Treasury's Undersecretary for Domestic Finance, assured the House Financial Services Committee that the recent failures of Silicon Valley Bank and signature should not be blamed on the crypto industry. quote, I don't believe that crypto played a direct role in either of the failures, she said. U.S. law firm accuses regulators of going after crypto.

Washington, D.C. law firm Cooper and Kirk published a white paper suggesting that U.S. regulators, including the FDIC, Federal Reserve Board, and the Office of the Controller of the Currency, or OCC, are secretly targeting the crypto industry in a financial war similar to the first operation choke point. The paper highlights the recent closure of signature banks' $4 billion dollar deal. digital asset business and the increasing number of crypto firms losing access to the ACH payment network. Cooper and Kirk previously sued the FDIC, Federal Reserve, and OCC, over the original Operation Choke Point, which pressured banks to cut ties with high-risk businesses. The firm now urges Congress to hold regulators accountable and halt Operation Chokepoint 2.0, which they say is targeting

the crypto industry. Nick Carter of Castle Island Ventures, who has been raising the alarms of Operation chokepoint 2.0 for weeks now, tweeted, quote, this really is an exceptional document, calling it essential reading. Court summons 3AC founders to BVI. Founders of Three Arrows Capital, or 3A, Kyle Davies, and Suju, are required to appear in a British Virgin Islands court on May 22nd, in relation to the ongoing liquidation process of their collapsed crypto hedge fund. If they do not respond to the summons, they will be held in contempt of court. The founders must submit all pertinent documents concerning the firm's bankruptcy by April 14th. Dow tokenholders faced liability in BZX Dow case. A U.S. Court in California ruled that BZX Dow

tokenholders may be held liable for the Protocols $55 million hack in 2021. The court classified BZX Dow as a general partnership, suggesting that token holders owe a duty of care to investors. This decision marks a significant development in the legal landscape concerning the liability of governance token holders in decentralized autonomous organizations or DAWS. However, as Gregory Schneider, Deputy General Counsel at Hedera pointed out, it is an early ruling and does not decide liability. The BZX platform, a defy margin trading protocol, suffered a hack in 2021 when a team member fell victim to a fishing exploit. The attackers stole $55 million with the individual plaintiffs losing between $800 and $450,000. The court ruling supports the plaintiff's argument that

token holders failed to ensure adequate security to prevent the hack. Voyager Digital transfers $150 million in U.S.D.C. to Circle. Bankrupt crypto lender Voyager Digital transferred $150 million in U.S.D.S. Staplecoin to center, the joint venture between Coinbase and Circle, as part of its ongoing effort to offload crypto assets. Despite objections from regulators such as the SEC, the New York Department of Financial Services, and the New York Attorney General, who argue that Voyager's actions may violate securities laws. The company is attempting to convert its crypto assets into U.S. dollars.

In spite of the recent lawsuit filed by the CFTC against Binance, legal experts suggest that the case is unlikely to have a significant impact on Binance's acquisition of Voyager's assets. Paxville to reimburse Celsius earn users. Peer-to-peer marketplace Paxville is set to refund Celsius earn users on its platform following the latter's bankruptcy. Paxville CEO, Ray Yusuf, committed to using the company's funds to compensate affected users who were unable to access their assets after Celsius halted withdrawals.

Yusuf said on Twitter, Paxville, like many others, was paralyzed to act as we could not retrieve funds held by Celsius. While some users with custody accounts have resumed withdrawals, those with deposits through partnerships such as the one Paxville had face a more uncertain future. Euler Hacker returns 51,000 ETH. Over the weekend, the individual behind the Euler hack returned 51,000 ETH, worth around $91 million to the protocol, causing the EUL token to surge by 60% in 30 minutes. The hacker still holds $73 million in ETH and $43 million in die from the $190 million

exploit. The return of the stolen funds followed a series of interactions between the hacker and the Euler team via encrypted blockchain messages, despite an attempted fishing attack by the Ronan Bridge exploit hacker, the Euler hacker proceeded to return the majority of the stolen funds. Polygon ZKEVM launches on Mainnet. Polygon's zero-knowledge-proof roll-up network, or ZKEVM, launched on the Mainnet with over 50 DAPs and infrastructure providers integrating it from day one. Ethereum co-founder Vitalik Bouturin executed the first transaction, celebrating the network's potential for unconstrained scalability. Quote, millions of constraints for man? Unconstrained. Unconcustraintest,

strain scalability for mankind, said Buderan in an embedded message. The ZKEVM technology aims to scale Ethereum by moving computation and state storage off-chain. Polygon has also made it open source. On a related note, Consensus launched a public test net for its ZKEVM solution dubbed Linnea, following the processing of over 1.5 million transactions during its private beta. The Linnea test net features native metamask and Truffle integrations. If you're still not familiar, familiar with zero knowledge technology, I highly recommend you listen to this Tuesday episode of Unchained, in which I talked with Stanford Cryptography Professor Dan Bonay and A16 general partner, Ali Yahya, to do a deep dive into the topic. Speaking about developments around Ethereum,

its core developers confirmed that the Chappellea network upgrade will be implemented on the Ethereum Maynett on April 12th. Be sure to check on my recent interview with Christine Kim of Galaxy Digital to find out what's included in the Chappellea upgrade and how it might affect Ethereum. Meanwhile, the Maker Dow community approved a new constitution proposal that lays out guiding principles for the decentralized lending protocol and outlines plans for endgame, a major restructuring initiative for the platform pushed by its founder, Roon Christensen. Time for fun bits. This week, Ginny Hoken of Unchained gives her take on Doe Kwan's arrest. An update on Doe Kwan, who continues his year of world travel. Quine has been on the run from

an Antropal Red notice for months, which does explain. in his outfit. It's exercise chic. He recently got arrested in Montenegro and South Korea has requested he be extradited from there. However, South Korea faces competition as the United States has recently requested that Kwan be extradited to America first. And while all of this was going on, he started a new company in Serbia, which means maybe they're owed a piece of him too. So many countries involved, I literally feel like I'm at a model UN tournament. They're going to have to figure it out because Do Kwan obviously can't be in two places at once. It's not possible for him to just instantaneously jump all over the map. He's not the value of the terrace table coin.

The Montenegrin justice minister, who has honestly never had so much attention in his life, this is truly like a sweet 16, a bar mitzvah, and a wedding all in one, has said that for now, Kwan is being held in COVID quarantine in Montenegro. Personally, I doubt he has a contagious COVID infection, though. If his business record is any indication, he's not known for his capacity to successfully grow things. Thanks so much for joining us today. To learn more about Austin and the CFTC lawsuit against Binance, check out the show notes for this episode.

Unchained is produced by me, Laura Shin, without from Anthony Youne, Mark Murdock, Matt Pilgerd, Zach Seward, Juan Aranovich, Sam Shre Rum, Ginny Hogan, Ben Munster, Jeff Benson, Leandro Camino, Pamma Jimdar, Shashonk, and CLK transcription. Thanks for listening.