Cryptocurrencies, tokens, NFTs, virtual "assets" frauds

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S’pore-based crypto lender Hodlnaut faces police probe, public urged to submit documents​

Police said the Commercial Affairs Department has launched a probe into Hodlnaut and its directors for possible cheating and fraud offences, under Penal Code 1871. PHOTO: REUTERS
Clara Chong and Claire Huang

Nov 24, 2022

SINGAPORE – Embattled Singapore-based cryptocurrency lender Hodlnaut, which has $18.5 million worth of assets parked with the now bankrupt exchange FTX, is facing an investigation from the police.
On Wednesday, the police said the Commercial Affairs Department (CAD) has launched a probe into the firm and its directors, who were unnamed, for possible cheating and fraud offences under Section 417 and Section 424A of the Penal Code 1871.
Hodlnaut’s co-founders Zhu Juntao and Simon Eric Lee are both directors of the company.
Between August and November 2022, multiple police reports were received which alleged that Hodlnaut and/or its directors had made false representations relating to the company’s exposure to the collapsed Terra/Luna digital token ecosystem.
Hodlnaut is one of many crypto firms battered by a market rout triggered by the collapse of stablecoin TerraUSD and sister token Luna.
Earlier reports said Hodlnaut’s directors downplayed the extent of the group’s exposure to Terra/Luna both during the period leading up to and following the Terra/Luna collapse in May 2022.
Terra’s implosion led to the downturn across the wider crypto market.

Several companies, including prominent hedge fund Three Arrows Capital, filed for bankruptcy alongside crypto lenders Celsius Network and Voyager Digital.
It was earlier reported that Hodlnaut suffered a near US$190 million (S$263 million) loss from the wipeout.
Hodlnaut halted withdrawals in August and is now under judicial management, or a form of debt restructuring – a matter that is being disputed on many fronts and by different parties in the High Court.
In a Nov 11 notice, the current interim judicial managers (IJMs) – Ms Angela Ee Meng Yen and Mr Aaron Loh Cheng Lee of EY Corporate Advisors – confirmed that 25 per cent of Hodlnaut’s assets are held on centralised exchanges.
Of that, about 72 per cent or $18.5 million were parked with FTX.
The IJMs said they tried but failed to get the assets out from FTX before it suspended withdrawals two weeks ago.
In a Sept 10 notice, the IJMs said customers’ digital tokens deposited with Hodlnaut were lent to Hodlnaut HK, whose key assets were tokens staked on decentralised finance (DeFi) platforms. As at Aug 8, Hodlnaut HK owed about $82 million to Hodlnaut.
The IJMs were told that the Ethereum merge could trigger a liquidation of the tokens staked on the DeFi platforms by Hodlnaut HK, of which Mr Lee and Mr Zhu are also directors. In the same notice, reference was made to another matter.

The police and CAD had earlier ordered Samtrade Custodian, which holds the assets of Hodlnaut, to transfer the lender’s balance assets to the two authorities. Hodlnaut had on July 27 applied to quash this order.
The Sept 10 notice said the Attorney-General’s Chambers had made a proposal to resolve this order. Mr Lee is now fighting the appointment of the IJMs. He has suggested that law firm WongPartnership step in.
Meanwhile, a creditor named Chen Yuanxi has waded in on the IJM war by nominating Deloitte, a Nov 18 notice said.
The police advise people who have deposited digital tokens with Hodlnaut and believe that they may have been defrauded to lodge a report at a neighbourhood police centre or online.
The public will need to provide documents relating to their transactions with Hodlnaut.
They include records of payments made to and received from Hodlnaut, as well as relevant correspondence with the cryptocurrency lender.

 

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Alameda CEO Caroline Ellison was a little-known crypto trader – then FTX collapsed​

Ms Caroline Ellison, the 28-year-old CEO of Alameda Research, claimed repeatedly that Mr Sam Bankman-Fried’s FTX empire was on stable financial footing. PHOTO: NYTIMES

Nov 24, 2022

NEW YORK – When his cryptocurrency exchange started teetering in early November, Mr Sam Bankman-Fried went on Twitter to calm everyone down. FTX was fine, he insisted. Nothing to worry about. Joining him in the outreach was a close colleague: Ms Caroline Ellison, the 28-year-old chief executive of Alameda Research, a crypto trading firm that Mr Bankman-Fried also founded.
A little-known figure outside crypto circles, Ms Ellison claimed repeatedly that Mr Bankman-Fried’s empire was on stable financial footing. On Twitter, she sparred with Binance CEO Zhao Changpeng, who was voicing doubts about FTX and Alameda.
But her words were not enough to keep FTX alive. A run on deposits, prompted partly by Mr Zhao’s comments, left the company owing US$8 billion (S$11 billion). Within less than a week, FTX and Alameda had filed for bankruptcy. Now the companies are facing investigations by the United States Justice Department and the Securities and Exchange Commission, focused on whether FTX’s shortfall arose because it had illegally lent its customers’ deposits to Alameda.
Ms Ellison is at the centre of the furore. In a meeting with Alameda employees the week that the companies imploded, she acknowledged that her company had dipped into FTX user funds. On Twitter, amateur detectives have spent the past two weeks dissecting her life, and she is likely to play a crucial role in any criminal case that emerges from FTX’s collapse.
In some ways, Mr Bankman-Fried, 30, and Ms Ellison could not be more different. While he was an aggressive and outgoing public cheerleader for the crypto industry, she maintained a relatively low profile. But they emerged from the same intellectual milieu. Like Mr Bankman-Fried, Ms Ellison was deeply involved in the effective altruism movement – a community that has become increasingly influential in technology circles. At times, the pair were romantically involved.
Effective altruism is a global philanthropic movement in which donors seek to maximise the effect of their giving for the long term. But the tight-knit community – driven by online forums, blogs and mailing lists – is also a hothouse for all sorts of other ideas outside the mainstream, from polyamorous living to the possibility that artificial intelligence will one day destroy humankind.
The daughter of economists at the Massachusetts Institute of Technology, Ms Ellison grew up in the Boston area, where she was the captain of the Newton North High School mathematics team and regarded as a serious student and a hard worker.

In 2012, Ms Ellison moved across the country to attend college at Stanford University, where she majored in maths. Former classmates described her as studious and quiet.
Ms Ellison has given a handful of interviews over the years, speaking in soft, halting tones. By her own account, she got interested in effective altruism in her freshman year at Stanford, after reading about the movement online. When she graduated, she joined quantitative trading firm Jane Street, where she was part of a cohort of new arrivals coached by Mr Bankman-Fried, who was a couple of years older.
“I was kind of scared of him,” she said in an interview with The New York Times in March. “You could tell he was quite smart and sort of intimidating.”

The pair stayed in touch, and Ms Ellison got in contact with Mr Bankman-Fried in February 2018, not long after he had started Alameda. They had coffee, and Mr Bankman-Fried seemed cagey, informing her that he had just embarked on a new project he could not tell her about. But eventually, he decided to share his plans for Alameda.
“I was like, ‘Oh, man, this sounds pretty exciting’,” she recalled in March. “For the next week, I kept thinking about it and being like, ‘I wonder what is going on at Alameda right now?’ It sounded like crypto trading is pretty crazy.”
Alameda made fast profits by exploiting inefficiencies in the Bitcoin market. Not long after its founding, Mr Bankman-Fried moved the company to Hong Kong, where Ms Ellison eventually joined him with a small group of traders. In 2019, he started FTX; as the new exchange started to consume more of his time, he appointed Ms Ellison and another trader, Mr Sam Trabucco, as joint CEOs of Alameda. Mr Trabucco stepped down earlier this year, leaving Ms Ellison in sole charge.
The relationship between Alameda and FTX was the original sin that led to the implosion of Mr Bankman-Fried’s empire. Alameda traded heavily on the FTX platform, meaning it sometimes benefited when FTX’s other customers lost money.
Even as she profited from crypto’s explosion in popularity, Ms Ellison was hardly a true believer in the technology. “I do think a lot of crypto projects don’t have much real value,” she said matter-of-factly on FTX’s official podcast in early 2021. On another episode, she said she had pursued crypto trading mainly to make lots of money, which she planned to give away as part of her commitment to effective altruism.
MORE ON THIS TOPIC
US prosecutors opened probe of FTX months before its collapse
FTX bankruptcy: What’s next for crypto customers
Last year, FTX relocated to the Bahamas, and Ms Ellison set about encouraging other people in the effective altruism community to follow.
In the Bahamas, Ms Ellison lived in the five-bedroom penthouse of Albany, a luxury resort on the island of New Providence. She shared the space with nine other occupants, including Mr Bankman-Fried.
Even before the crisis of the past two weeks, there were signs that Alameda was in big trouble. According to a recent bankruptcy filing, the company’s quarterly financial statements were never audited. One business partner, who requested anonymity to describe private business discussions, ended work with Alameda after a call with its executives raised red flags late last year. The business partner asked about a line representing US$2 billion of investments on Alameda’s balance sheet – a sizeable chunk of the firm’s overall assets – and the Alameda representatives could not explain what it was.
Then, on Nov 2, crypto news site CoinDesk published an article based on a leaked Alameda balance sheet that appeared to show that a large portion of the company’s assets consisted of FTT, the cryptocurrency that FTX invented.
The disclosure raised concerns about the financial stability of Mr Bankman-Fried’s empire. On Nov 6, Mr Zhao announced plans to sell an enormous supply of FTT. At the time, the token was worth about US$22; if its price dropped too much, FTX would be in trouble.
Ms Ellison confronted Mr Zhao on Twitter: “Alameda will happily buy it all from you today at US$22,” she said. Behind the scenes, she gave orders to her small team of traders to keep the token’s price at US$22 by placing bids at roughly that level, according to a person familiar with the matter.
But Mr Zhao’s tweets set off the crypto equivalent of a bank run, and customers rushed to withdraw their holdings from FTX.
Two days after Mr Zhao’s tweets, Mr Bankman-Fried announced what had seemed unthinkable: The exchange was facing “liquidity crunches”, unable to meet withdrawals.

In a meeting with employees the next day, Ms Ellison admitted that Alameda had taken customer funds from FTX to make up for shortfalls in its accounts, according to a person familiar with the matter. Ms Ellison sounded tearful, the person said, and told the group that she was sorry. FTX now owes creditors US$8 billion, and the amount it lent to Alameda is as high as US$10 billion, according to people familiar with the firm’s finances.
The Alameda employees were shocked. As the news sank in, they commiserated, discussing plans to leave Hong Kong and seek legal help. Ms Ellison was not included. NYTIMES

 

[Singapore Dancing Spirit]

Hedge Funds at FTX

Hedge funds have billions of dollars stuck on failed cryptocurrency exchange FTX and could face years of waiting to recover anything at all from a marketplace they once believed to be one of the industry’s most reliable bets.

In a situation reminiscent of Lehman Brothers in 2008, which left billions of dollars of hedge funds’ assets trapped for years, investors who traded on the Bahamas-based exchange have found themselves among the thousands of creditors in a highly complex bankruptcy.

 

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FTX collapse won’t spell the end of crypto or scandals​

More countries may follow China in banning crypto transactions. But no bold regulatory action is likely to come from the US.​

Kenneth Rogoff

FTX may be the biggest scandal in crypto so far, but sadly, it is unlikely to be the last, says the writer. PHOTO: NYTIMES

Nov 27, 2022

SAN FRANCISCO – The epic collapse of wunderkind Sam Bankman-Fried’s US$32 billion (S$44 billion) crypto empire FTX looks set to go down as one of the great financial debacles of all time. With a storyline full of celebrities, politicians, sex and drugs, the future looks bright for producers of feature films and documentaries. But, to paraphrase Mark Twain, rumours of the death of crypto itself have been much exaggerated.
True, the loss of confidence in “exchanges” such as FTX – essentially crypto financial intermediaries – almost surely means a sustained steep drop in prices for the underlying assets. The vast majority of Bitcoin transactions are done “off-chain” in exchanges, not in the Bitcoin blockchain itself. These financial intermediaries are vastly more convenient, require much less sophistication to use, and do not waste nearly so much energy.
The emergence of exchanges was a major factor fuelling cryptocurrencies’ price growth, and if regulators come down hard on them, the price of the underlying tokens will fall. Accordingly, Bitcoin and Ethereum prices have plummeted.
But a price adjustment alone is not the end of the world. The pertinent question is whether crypto lobbyists will be able to contain the damage. Until now, their money has been speaking volumes; Mr Bankman-Fried reportedly gave US$40 million to support the Democrats in the United States, and his FTX colleague Ryan Salame reportedly gave US$23 million to Republicans. Such largesse surely helped persuade regulators around the world to follow a wait-and-see approach to crypto regulation, rather than be perceived to be stifling innovation. Well, they waited, and with the FTX crash, we must hope that they saw.
But what will they conclude? The most likely path is to improve regulation of the centralised exchanges – the firms that help individuals store and trade cryptocurrencies “off chain”. The fact that a multi-billion-dollar financial intermediary was not subject to normal record-keeping requirements is stupefying, no matter what one thinks about the future of crypto.
Of course, firms would face compliance costs, but effective regulation could restore confidence, benefiting firms aiming to operate honestly, which are surely the majority, at least if one weights these exchanges by size.
Greater confidence in the remaining exchanges could even lead to higher crypto prices, though much would depend on the extent to which regulatory demands, particularly on individual identities, ultimately undermined demand. After all, the major transactions currently conducted with crypto may be remittances from rich countries to developing economies and emerging markets, and capital flight in the other direction. In both cases, the parties’ desire to avoid exchange controls and taxes implies a premium on anonymity.

On the other hand, Mr Vitalik Buterin, the co-founder of the Ethereum blockchain and one of the crypto industry’s most influential thinkers, has argued that the real lesson for FTX’s collapse is that crypto needs to return to its decentralised roots.
Centralised exchanges such as FTX make holding and trading cryptocurrencies much more convenient, but at the expense of opening the door to managerial corruption, just as in any conventional financial firm. Decentralisation can mean greater vulnerability to attack, but so far the largest cryptocurrencies, such as Bitcoin and Ethereum, have proven resilient.
The problem with having only decentralised exchanges is their inefficiency compared with, say, Visa and Mastercard, or normal bank transactions in advanced economies. Centralised exchanges like FTX democratised the crypto domain, allowing ordinary people without technical skill to invest and conduct transactions.
It is certainly possible that ways to duplicate the speed and cost advantages of centralised exchanges will eventually be found. But this seems unlikely in the foreseeable future, making it hard to see why anyone not engaged in tax and regulatory evasion (not to mention crime) would use crypto, a point I have long emphasised.
Perhaps regulators should push towards decentralised equilibrium by requiring that exchanges know the identity of anyone with whom they transact, including on the blockchain. Although this may sound innocent, it would make it rather difficult to trade on the anonymous blockchain on behalf of an exchange’s customers.
True, there are alternatives involving “chain analysis”, whereby transactions in and out of a Bitcoin wallet (account) can be algorithmically examined, allowing the underlying identity to be revealed in some cases. But if this approach was always enough, and all semblance of anonymity could always be obliterated, it is hard to see how crypto could compete with more efficient financial intermediation options.
Finally, rather than simply banning crypto intermediaries, many countries may ultimately try to ban all crypto transactions, as China and a handful of developing economies have already done.
Making it illegal to transact in Bitcoin, Ethereum, and most other crypto would not stop everyone, but it would certainly constrain the system. Just because China was among the first does not make the strategy wrong, especially if one suspects that the main transactions relate to tax evasion and crime, akin to large denomination paper currency notes like the US$100 bill.
Eventually, many other countries are likely to follow China’s lead. But it is unlikely that the most important player, the United States, with its weak and fragmented crypto regulation, will undertake a bold strategy any time soon. FTX may be the biggest scandal in crypto so far; sadly, it is unlikely to be the last. ©PROJECT SYNDICATE

• Kenneth Rogoff, a former chief economist of the International Monetary Fund, is Professor of Economics and Public Policy at Harvard University.

 

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Crypto lender BlockFi files for bankruptcy as latest casualty of FTX collapse​

BlockFi listed FTX as its second-largest creditor, with US$275 million owed on a loan extended earlier this year. PHOTO: REUTERS

Nov 29, 2022

WASHINGTON - Cryptocurrency lender BlockFi has filed for Chapter 11 bankruptcy protection, it said on Monday, the latest industry casualty after the firm was hurt by exposure to the spectacular collapse of the FTX exchange earlier this month.
The filing in a New Jersey court comes as crypto prices have plummeted. The price of Bitcoin, the most popular digital currency by far, is down more than 70 per cent from a 2021 peak.
“BlockFi’s Chapter 11 restructuring underscores significant asset contagion risks associated with the crypto ecosystem,” said Mr Monsur Hussain, a senior director at Fitch Ratings.
New Jersey-based BlockFi, founded by fintech executive-turned-crypto entrepreneur Zac Prince, said in a bankruptcy filing that its substantial exposure to FTX created a liquidity crisis. FTX, founded by Mr Sam Bankman-Fried, filed for protection in the United States in November after traders pulled US$6 billion (S$8.3 billion) from the platform in three days and rival exchange Binance abandoned a rescue deal.
“Although the debtors’ exposure to FTX is a major cause of this bankruptcy filing, the debtors do not face the myriad issues apparently facing FTX,” said the bankruptcy filing by Mr Mark Renzi, managing director at Berkeley Research Group, the proposed financial adviser for BlockFi. “Quite the opposite.”
BlockFi said the liquidity crisis was due to its exposure to FTX via loans to Alameda, a crypto trading firm affiliated with FTX, as well as cryptocurrencies held on FTX’s platform that became trapped there. BlockFi listed its assets and liabilities as being between US$1 billion and US$10 billion.
BlockFi on Monday also sued a holding company for Mr Bankman-Fried, seeking to recover shares in Robinhood Markets pledged as collateral three weeks ago, before BlockFi and FTX filed for bankruptcy protection.

Mr Renzi said BlockFi had sold a portion of its crypto assets earlier in November to fund its bankruptcy. Those sales raised US$238.6 million in cash, and BlockFi now has US$256.5 million in cash on hand.
In a court filing on Monday, BlockFi listed FTX as its second-largest creditor, with US$275 million owed on a loan extended earlier this year. It said it owes money to more than 100,000 creditors. The company also said in a separate filing that it plans to lay off two-thirds of its 292 employees.
Under a deal signed with FTX in July, BlockFi was to receive a US$400 million revolving credit facility while FTX got an option to buy it for up to US$240 million.

BlockFi’s bankruptcy filing also comes after two of its largest competitors, Celsius Network and Voyager Digital, filed for bankruptcy in July, citing extreme market conditions that led to losses at both companies.
Crypto lenders, the de facto banks of the crypto world, boomed during the pandemic, attracting retail customers with double-digit rates in return for their cryptocurrency deposits.
Crypto lenders are not required to hold capital or liquidity buffers like traditional lenders, and some found themselves exposed when a shortage of collateral forced them – and their customers – to shoulder large losses.
BlockFi’s first bankruptcy hearing is scheduled to take place on Tuesday. FTX did not respond to a request for comment.

BlockFi’s largest creditor is Ankura Trust, which represents creditors in stressed situations and is owed US$729 million. Valar Ventures, a Peter Thiel-linked venture capital fund, owns 19 per cent of BlockFi equity shares.
BlockFi also listed the US Securities and Exchange Commission (SEC) as one of its largest creditors, with a US$30 million claim. In February, a BlockFi subsidiary agreed to pay US$100 million to the SEC and 32 states to settle charges in connection with a retail crypto lending product the company offered to nearly 600,000 investors.
Bain Capital Ventures and Tiger Global co-led BlockFi’s March 2021 funding round, BlockFi said in a press statement issued at the time. Both firms did not immediately respond to a request for comment.
In a blog post, BlockFi said its Chapter 11 cases will enable the company to stabilise its business and maximise value for all stakeholders.
“Acting in the best interest of our clients is our top priority and continues to guide our path forward,” BlockFi said.
In its bankruptcy filing, BlockFi said it had hired Kirkland & Ellis and Haynes & Boone as bankruptcy counsel.
BlockFi had earlier paused withdrawals from its platform.
In a filing, Mr Renzi said BlockFi intends to seek authority to honour client withdrawal requests from its customer wallet accounts, in which crypto assets are held in custody. However, the company did not disclose plans for how it might treat withdrawal requests from its other products, including interest-bearing accounts.
“BlockFi clients may ultimately recover a substantial portion of their investments,” Mr Renzi said in the filing.
BlockFi was founded in 2017 by Mr Prince, currently the company’s chief executive officer, and Ms Flori Marquez. Though headquartered in Jersey City, BlockFi also has offices in New York, Singapore, Poland and Argentina, according to its website.
In July, Mr Prince had tweeted that “it’s time to stop putting BlockFi in the same bucket/sentence as Voyager and Celsius.”
“Two months ago, we looked the ‘same’. They shut down and have impending losses for their clients,” he said.
According to a profile of BlockFi published earlier this year by Inc, Mr Prince was raised in San Antonio, Texas, and financed his college education at the University of Oklahoma and Texas State University with winnings from online poker tournaments. Before starting BlockFi with Ms Marquez, he held jobs at Orchard Platform, a broker dealer, and at Zibby, a lease-to-own lender now called Katapult.
Ms Marquez previously worked at Bond Street, a small business lending outfit that was folded into Goldman Sachs in 2017, according to Inc. REUTERS

 

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More crypto platforms could seek restructuring in Singapore​

Singapore’s legal framework is well-positioned to be the restructuring jurisdiction of choice. PHOTO: REUTERS

Joyce Lim
Senior Correspondent

Nov 29, 2022

SINGAPORE - The death of cryptocurrency exchange FTX has sent an enormous blow to investors’ confidence, and the panic leading to withdrawals has put many crypto lending platforms at liquidity risk.
Market observers are already seeing an uptick in these players seeking to restructure their debt, and Singapore’s legal framework is well-positioned to be the restructuring jurisdiction of choice, they said.
Mr Danny Ong, a partner at Rajah & Tann law firm and an expert in fraud, asset recovery and investigations, said: “The negative sentiment that has driven withdrawals and terminations by customers and counterparties serve only to compound the problem. As a result, we are already seeing an uptick in these players seeking to restructure their debt and boosting their capital, whether consensually or through a court-supervised process.
“To this end, with the inherently cross-border nature of their operations, and any such restructuring inevitably raising novel and complex legal and practical issues, the Singapore International Commercial Courts (SICC) would be a very well suited forum to oversee any such restructuring.”
Apart from having “a deep bench” of judges from across the globe with expertise in restructuring who would be well-versed in a broad spectrum of foreign law issues, the judges are also well versed in the latest technological developments, said Mr Ong.
“The SICC’s framework and approach for restructuring provides the necessary flexibility and adaptability to maximise the prospects of a successful outcome in the interests of all stakeholders,” he added.
With Singapore’s openness to new technology and a well-regulated financial sector, a number of crypto-related firms have set up offices here in recent years.

Managing director of restructuring at Kroll, Ms Rose Kehoe, who moved to Singapore this year after 18 years in Hong Kong, noted that there are many crypto companies, such as Three Arrows Capital (Three AC) and Zipmex, which have some connection or presence in Singapore.
“There are a number of jurisdictions that we’ve identified as being essentially crypto hubs for our work for restructuring and Singapore is one,” said Ms Kehoe, who is currently working on at least three crypto-related cases.
Kroll is a risk and financial advisory solutions provider. Its clients include CoinGate and Vauld.


Ms Kehoe was also among a team of experts working to trace and recover the misappropriated funds of failed crypto trader Torque.
Torque, which was founded by Singaporean Bernard Ong and shut in 2021, was incorporated in the British Virgin Islands (BVI), with management in Singapore and operations in Vietnam. Around US$300 million (S$412 million) was allegedly misappropriated from the cryptocurrency trading platform, including 72 bitcoins. The company’s records show that about 3,500 of its 17,700 users across 120 countries were Singaporeans or investors based here, with total cryptocurrency assets valued at about US$124 million.

Last year, lawyer Danny Ong led a team to obtain a High Court order which empowered liquidators here to gather evidence from eight cryptocurrency entities, as well as Torque’s founder and an employee. Cryptocurrency exchange Binance and its local unit were among 10 business entities and individuals ordered to hand over records to the liquidators.
Prior to the collapse of Terra Luna in May, hacks, theft and fraud were the main catalysts tipping companies into liquidation, noted Ms Kehoe.
But following the fall of the Terraform ecosystem, the high profile cases and inquiries received by Kroll had more to do with liquidity and counterparty risk, she added.
Faced with a liquidity crunch, crypto lending platforms like Zipmex, Vauld and Hodlnaut have filed for bankruptcy protection here in order to block withdrawals.
“So we’ve seen that first wave where we’ve got Three AC, Celsius and Hodlnaut and a bunch of others who have just sort of gone into restructuring and liquidation bankruptcy in the US,” said Ms Kehoe. “Anyone who has had like a run on the bank has frozen or suspended their accounts. There are billions of dollars of frozen cash essentially, at the moment, that has been worked through by in restructuring and insolvencies.”
But there are a lot of unknown future obligations and there could be a second effect when loans mature, warned Ms Kehoe.
Market watchers said events this year have revealed the risk of a domino effect when large crypto platforms fall, and led to the demise of several lending platforms and hedge funds.
Singapore’s appeal as a crypto hub could now be turning into a hub for the restructuring of distressed crypto firms, they said.
In 2019, Insol (International Association of Restructuring, Insolvency and Bankruptcy Professionals) – a London-based umbrella body for restructuring and insolvency associations – set up its first overseas office at Maxwell Chambers Suites.
More recently, the Crypto Fraud and Asset Recovery network (CFAAR), which began in the United Kingdom in August 2021, launched its Singapore-based chapter.

Mr Ong, who co-founded the Singapore chapter in September this year with some 14 others, said: “CFAAR was launched in Singapore against the backdrop of an ever-increasing number of cross border crypto fraud and hacking cases year on year requiring professional specialist assistance.”
The members will work closely to share knowledge and experience, to further the ability to assist victims of crypto fraud and hacking effectively and efficiently, and to work with the crypto industry in enhancing risk mitigation, he said.
Mr Ong added: “Crypto-related cases which we have handled have been on a consistent upward year-on-year trajectory, since about 2017, with a significant uptick in the last 12 months. Depending on the point in time, the specialist team at our firm would be handling about 10 cases involving over a billion dollars.”

 

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FTX founder Bankman-Fried denies trying to commit fraud at fallen crypto empire​

FTX founder Sam Bankman-Fried appearing virtually at The New York Times’ DealBook Summit on Nov 30, 2022. PHOTO: NYTIMES

Dec 1, 2022


PORTLAND, Oregon – Mr Sam Bankman-Fried, the disgraced founder of the bankrupt FTX crypto empire, has denied trying to perpetrate a fraud, while admitting to making many errors at the helm of the company.
“I made a lot of mistakes,” the 30-year-old said on Wednesday by video link at The New York Times’ DealBook Summit. “There are things I would give anything to be able to do over again. I didn’t ever try to commit fraud on anyone.”
He was speaking in an interview with Mr Andrew Ross Sorkin, a columnist for the news organisation, who said Mr Bankman-Fried was joining from the Bahamas, his first public appearance since his US$32 billion (S$43.5 billion) crypto exchange collapsed earlier this month.
Mr Bankman-Fried’s participation has sparked controversy given the damaging fallout from the collapse of FTX and sister trading house Alameda Research. Among the outstanding questions are how Bahamas-based FTX ended up with a US$8 billion hole in its balance sheet and whether it mishandled customer funds, amid reports that FTX lent client money to Alameda.
Mr Bankman-Fried told Mr Sorkin that he did not knowingly commingle funds.
Some observers speculate that Mr Bankman-Fried’s public comments could be used against him in litigation. The fallen former FTX chief executive faces a complex web of lawsuits and regulatory probes into alleged wrongdoing.
The digital asset sector is braced for widening contagion from FTX, which once boasted a US$32 billion valuation before sliding into bankruptcy on Nov 11. It owes its 50 biggest unsecured creditors a total of US$3.1 billion and there may be more than a million creditors globally.

A crypto lender, BlockFi, filed for bankruptcy on Monday after being buffeted by the wipeout. Embattled brokerage Genesis is striving to avoid the same fate.
BlackRock CEO Larry Fink said earlier at the DealBook summit that most crypto companies will probably fold in the wake of FTX’s collapse. The world’s biggest asset manager was among firms stung by the chaotic unravelling of Mr Bankman-Fried’s tangled web of 100-plus FTX-related entities.
Mr Bankman-Fried has provided convoluted and incomplete explanations on social media and in interviews with other news outlets about what led to FTX’s woes. Advisers overseeing the ruins of his business have slammed non-existent oversight and the misuse of client funds.
FTX’s new chief executive officer John Ray III, a turnaround and restructuring expert who formerly oversaw the liquidation of Enron, told the bankruptcy court in the United States that he had never in his career “seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information”.
As if such travails were not enough, the exact break-up of a US$662 million outflow from FTX as it tumbled into bankruptcy remains a mystery.
Treasury Secretary Janet Yellen, another speaker at the summit in New York, called the FTX debacle “the Lehman moment within crypto”, referring to the collapse of investment-banking giant Lehman Brothers in 2008.
Dr Yellen described cryptocurrencies as “very risky assets” and said she was thankful that their recent volatility had not spilled over into the mainstream banking sector.
“I have been sceptical, and I remain quite sceptical,” Dr Yellen said.
The Biden administration over the last year has been studying the landscape of digital assets to develop a new regulatory framework.
Crypto markets have stabilised somewhat after lurching lower in November as the turmoil around FTX thickened. Even so, a gauge of the top 100 tokens is down more than 60 per cent this year, hit by tightening monetary policy and a series of crypto blow-ups, of which FTX is the most spectacular. BLOOMBERG

 

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Sounding a timely note of caution on cryptocurrencies amid FTX crash​

Notwithstanding investment losses, the long-term performance of S’pore’s investment entities is still healthy. As for retail investors, the old adage applies: Do not put all of your eggs in one basket.​

Grace Ho
Insight Editor

FILE PHOTO: The logo of FTX is seen at the entrance of the FTX Arena in Miami, Florida, U.S., November 12, 2022. REUTERS/Marco Bello/File Photo REUTERS

Dec 1, 2022

Many experts have been predicting an extended crypto winter, especially after the epic flameout of TerraUSD and Luna in May. But hardly anyone saw this coming: the spectacular collapse of cryptocurrency exchange FTX, which turned out to be a massive fraud.
Last year’s Crypto.com sales pitch, intoned by actor Matt Damon, now seems almost anachronistic: “History is filled with almosts. With those who almost adventured, who almost achieved, but ultimately for them it proved to be too much. Then there are others. The ones who embrace the moment and commit... They calm their minds and steel their nerves with four simple words that have been whispered by the intrepid since the time of the Romans: Fortune favours the brave.”
What Damon failed to mention was that the first person to utter “fortune favours the brave” did not live long enough to experience good fortune. When Mount Vesuvius erupted in AD79 and destroyed the city of Pompeii, a Roman naval commander by the name of Pliny the Elder ignored the advice of his men and steered directly towards the volcano, hoping to pull off a miraculous rescue.
But he breathed in the thick fumes and died before saving anyone. The last known detail about him is that he was seen leaning on two slaves and trying to stand, with little success.
Hoping to minimise the risk of crypto investors’ fortunes going up in smoke is the Government. On Wednesday, Deputy Prime Minister and Finance Minister Lawrence Wong warned Singaporeans that even if a cryptocurrency platform is well managed, cryptocurrencies themselves are highly volatile and have no intrinsic value.
“Those who trade in cryptocurrencies must be prepared to lose all their value. No amount of regulation can remove this risk,” he told Parliament, adding that the Monetary Authority of Singapore (MAS) has consistently warned since 2017 that dealing in cryptocurrencies is hazardous.
Arising from Temasek’s US$275 million (S$377 million) investment loss in FTX, the supplementary questions from MPs centred on risk management and tolerance, stress testing, regulations, disclosure and the impact on retail customers.

To Ms Tin Pei Ling’s (MacPherson) question on whether FTX was the only cryptocurrency-related investment that Singapore’s investment company Temasek, sovereign wealth fund GIC and MAS were exposed to, Mr Wong replied that GIC and Temasek have exposures to new technologies and early-stage companies, and these investments are within the overall context of the risk parameters set out by the Government. Temasek’s present exposure to early-stage companies is about 6 per cent of its overall portfolio.
There will be other companies in the digital asset space that GIC and Temasek have invested in, but they are within these limited parameters, said Mr Wong. “And so if you talk about concerns of a broader fallout, I think it would be relatively contained.”
To Mr Saktiandi Supaat’s (Bishan-Toa Payoh GRC) question on whether investment entities build into stress test scenarios the risk of cryptocurrencies and digital assets blowing up, Mr Wong gave the assurance that such scenarios are taken into account. This is not just for MAS and the financial sector, but also for the Government’s overall investment portfolio.

Mr Gerald Giam (Aljunied GRC) posed two questions: the risk tolerance levels spelt out to Temasek, GIC and MAS and whether they are published anywhere; and if the President has any say in the setting of their investment parameters, mandates, objectives or risk tolerance levels.
Mr Wong reiterated that the Government does not decide on or micromanage investments, nor does it prescribe asset classes or assets. But it has a role in appointing board members and senior management, and holds them accountable for delivering good long-term performance.
“The President is part of this governance process too because she, in terms of the appointments of people, has the powers as well,” he said, adding that there are processes and risk metrics to monitor, as well as clear accountabilities.
The amount of risk that the Government has set out for GIC is expressed in its reference portfolio, which is made up of 65 per cent global equities and 35 per cent global bonds. Mr Wong noted that it is different in Temasek’s case because it is largely an equities investor, but it puts out in its annual review some of its risk considerations and its risk parameters.

One question that received ample airing was Mr Leon Perera’s (Aljunied GRC), on why GIC is subject to audits by the Auditor-General’s Office but Temasek is not, when both manage public funds.
Mr Wong observed that it is not unusual for private auditors to audit public agencies, whereas the Auditor-General has a remit largely within the public service and government ministries.
“For some stat boards, for a commercial entity like Temasek which also within it has a portfolio of listed entities, well, I think we should let commercial auditors do their job,” he said, adding that if there are good reasons, the Government will have “no hesitation” about asking the Auditor-General to go in to do a full audit.
He also replied to Workers’ Party chief Pritam Singh (Aljunied GRC), saying that Temasek’s internal review would be led by people who are separate from the investment team that made the FTX decision.
“So they will be separate, they will not be clouded by what steps were taken, and they will report directly to the board,” he said.
For retail investors, the main takeaway is this: There will be some basic investor protection measures for digital payment token (DPT) service providers that are licensed in Singapore. These include administering a risk awareness test, segregating customers’ assets from their own assets, and refraining from operating a trading platform while simultaneously taking proprietary positions from their own accounts.

But MAS cannot prevent DPT service providers from failing or customers from suffering losses, a point that Mr Wong took pains to emphasise several times on Wednesday. Also, even the most comprehensive system in Singapore will not stop some Singaporeans from accessing overseas crypto investment platforms online.
FTX’s bankruptcy filings have described a governance mess, with the crypto exchange deeply tied up with former chief executive Sam Bankman-Fried’s trading firm. Yet, thanks to almost messianic boosterism and Fomo (fear of missing out), retail and institutional investors showered FTX with love and cash in spite of multiple red flags – from its countries of incorporation and operation, to its inexperienced team and skeletal board.
Any lapses on the part of institutional investors in conducting their due diligence should rightly be investigated. But to those who expect perfect information and zero losses, consider this too: If market manipulation is already a problem with stocks which are highly regulated and widely understood, how much worse is the problem with crypto, where almost every asset is new and there is even less transparency?
Mr Wong assuaged the members’ anxieties and stressed the need to look at the bigger picture, saying that the Government evaluates investment entities based on their long-term performance, and their track records show that they have performed creditably even in challenging environments.
“What is important is that our investment entities take lessons from each failure and success, and continue to take well-judged risks in order to achieve good overall returns in the long term,” he said.
He also noted that Temasek’s FTX loss will not affect the stream of income from the reserves available for the Government’s Budget or the Net Investment Returns Contribution (NIRC), because NIRC is tied to the overall expected long-term returns of Singapore’s investment entities, and not to individual investments.
As for retail investors, the old adage applies: Do not put all of your eggs in one basket. Another line should be added to this: Never jump in just because an established institutional investor has invested in a company; and be very, very wary of investing in crypto.

 

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Crypto stocks teeter near abyss as BlackRock CEO’s warning adds to angst​

BlackRock CEO Larry Fink said he expects most crypto companies will fold after FTX’s demise. PHOTO: AFP

DEC 4, 2022

NEW YORK - Analysts and investors are struggling to call a bottom in crypto stocks in the wake of a brutal month that ended with the head of BlackRock saying most digital-asset firms will not survive.
Cryptocurrency firms including Coinbase Global, Galaxy Digital Holdings and MicroStrategy all plunged more than 25 per cent in November. The declines added to the pain of a dismal year amid a deep and extended plunge in Bitcoin and other digital tokens.
While that trio of firms rallied last week, they have still wiped out roughly US$52 billion (S$70 billion) of shareholder value in 2022. A Schwab index tracking crypto-linked stocks is coming off its worst month since June, and is down 63 per cent this year.
Already reeling from the so-called crypto winter, investors were dealt a major blow with the high-profile collapse of Sam Bankman-Fried’s FTX exchange in early November, which sent Bitcoin tumbling.
To top it off, BlackRock chief executive Larry Fink said during the New York Times DealBook Summit on Nov 30 that he expects most crypto companies will fold after FTX’s demise.
Few, if any, companies connected to the sector have been spared during the sell-off, with even banks like Silvergate Capital Corp and Signature Bank taking hits. Mining stocks have been among the worst performers, with Marathon Digital Holdings and Hut 8 Mining both seeing their share prices cut roughly in half in November.
FTX’s sudden downfall sparked fears of contagion across the industry, which ultimately became a reality last week when crypto lender BlockFi also filed for bankruptcy.


“We expect the crypto space to continue to be toxic for investors in the near term and expect overall chain activity to be relatively quiet among users as we continue to wait out potential contagion effects as a result of the bankruptcy of FTX,” analyst at Compass Point Chase White wrote in a note to clients.
Silvergate now finds itself playing damage control. The company, whose shares tumbled by a record 52 per cent in November, said several weeks ago that its exposure to FTX represented less than 10 per cent of its digital-asset deposits. Last week, it said exposure to BlockFi was less than US$20 million.
It has been a similar situation for Coinbase. Chief executive officer Brian Armstrong took to Twitter multiple times in recent weeks in an attempt to reassure investors that the crypto exchange remains on solid footing. So far, it seems to have done little to sway traders and analysts.
Coinbase closed at a record low on Nov 21 and has been downgraded by analysts at firms, leaving it with its lowest number of buy ratings since August 2021, data compiled by Bloomberg show. Coinbase shares just snapped a four-week slide, but they are still down about 80 per cent this year, erasing about US$44 billion in value.
Crypto mining stocks have fared even worse as soaring energy costs add to the challenge of sinking cryptocurrency values. Core Scientific has seen its share price crumble nearly 99 per cent this year. In its third-quarter earnings release, the company said losses for the nine months through September had reached US$1.7 billion and it has also said it might have to file for bankruptcy if it cannot find additional funding.
The slump in crypto-mining stocks is problematic for a group that was already struggling to pay back US$4 billion in loans tied to mining equipment.
To be sure, BlackRock’s Mr Fink, whose firm had invested roughly US$24 million in FTX, said he still sees potential in the technology underlying crypto, including instant settlement of securities.
And some money managers see an opportunity in the beaten-down stocks. Cathie Wood’s Ark Investment Management added crypto investments in the weeks following FTX’s bankruptcy, including in Coinbase, Silvergate and the Grayscale Bitcoin Trust.
Ms Wood also told Bloomberg TV that she stands by her forecast that Bitcoin – which traded at roughly US$17,000 on Friday afternoon in New York – will hit US$1 million by 2030. BLOOMBERG

 

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An online vigilante who exposed a US$1 billion crypto scam​

A Ponzi scheme is an age-old fraud in which inflows of new money pay off earlier investors. A Ponzi scheme is an age-old fraud in which inflows of new money pay off earlier investors.


DEC 4, 2022

New Zealander Danny de Hek, who wears geeky glasses, may not be a crime buster, but thousands of people globally probably owe their life savings to him for exposing crypto scammers.
The 52-year-old social media newbie became an online vigilante in 2021 after his friend forwarded an e-mail about a company that guaranteed outsize and clockwork returns. Investors in what was then known as HyperFund – it has since been rebranded twice – could triple their money in 600 days.
“It’s the best passive income retirement plan I have ever seen,” the acquaintance wrote. That message changed Mr de Hek’s life – after a few days of looking into HyperFund, he concluded it was a scam, one that he estimates has attracted at least US$1 billion (S$1.4 billion) by recruiting thousands of participants, some of whom put up as little as US$300 or as much as US$50,000 or more.
By March 2022, he had crafted a new online identity: crypto Ponzi scheme buster. He has since denounced HyperFund in over 130 videos posted to YouTube, some of them nearly two hours long, lecturing viewers in a style that toggles between goofball and scold.
“When I looked into HyperFund, to me it just seemed black and white,” Mr de Hek said during one of several interviews from his home in Christchurch. “Then I thought, I need to warn people about this.” He is one of the few voices flagging crypto-based Ponzi schemes, which United States investigators say are a severely under-publicised scourge. Just how volatile the market is can be seen in the collapse of one of the world’s largest cryptocurrency exchanges, FTX, in November.
Amid that kind of uncertainty, many investors have decided that if their tokens will not recover from the steep drop in value that began in November 2021, why not take a flier on a company that sounds crypto-adjacent?
“People are desperate, and out of desperation they’re giving it a go,” he said. “It’s depressing because this is often a last-ditch effort.”

A Ponzi scheme is an age-old fraud in which inflows of new money pay off earlier investors. Using cryptocurrencies does little more than lend the whole plate-spinning contraption a patina of the cutting edge and makes it harder to pin down who is in charge. But the story ends the same way: Champagne for those at the top, tears for everyone else.
US investigators have busted a handful of crypto Ponzis over the years. Among them is OneCoin, which was based in Bulgaria and which prosecutors allege brought in roughly US$4 billion from investors around the world. The scam’s charismatic co-founder Ruja Ignatova disappeared after the fund closed in 2017.
“We’ve worked multiple cases that involve more than US$1 billion, and those are only the ones we hear about,” said Mr Jarod Koopman, the acting executive director of the Cyber and Forensic Services section of the US Internal Revenue Service, which spearheads crypto-Ponzi investigations. “These are traditional Ponzi schemes that have been adapted to the digital landscape, recruiting investors through social media to make them look great. And they’re completely bogus.”

For instance, HyperFund has attracted the attention of regulators in Britain, where the Financial Conduct Authority has a webpage warning investors to “be wary of dealing with this unauthorised firm”. Dozens of HyperFund investors have left withering takedowns on the company review site Trustpilot. One person who said he had lost US$10,000 wrote: “For the love of God – stay away from this scam.” A Facebook page called HyperVerse Scam – Now What!? has 6,200 members.
To Mr de Hek, everything about the Hyper empire seems suspicious. On its website and in promotional videos, HyperFund said investors could buy “memberships”, starting at US$300, and earn “rewards” that would accrue daily in their account. Those rewards took the form of “HU”, the internal trading currency, said to have parity with the US dollar.

And why would everyone’s HU triple in 600 days? Because HyperFund’s putative founders Ryan Xu and Sam Lee – described on promotional sites as a pair of superstar blockchain entrepreneurs – were going to pour all that cash into promising and profitable crypto projects, which they claimed would eventually serve 30 million customers. They also said the company would go public on the Hong Kong Stock Exchange.
It sounded plausible. Whoever ran HyperFund exploited the craze for crypto, which to most people then was a bafflingly complex technology that seemed to mint millionaires. But HyperFund never went public, and the only product it sold was memberships to HyperFund. Members who recruited new members got a cut of their recruits’ rewards, a perennial feature of pyramid schemes and an occasional feature of Ponzis.
Since end-2021, the HyperFund faithful have been severely tested. In December 2021, the firm rechristened itself HyperVerse, an apparent bid to cash in on the vogue surrounding all things metaverse. Also, everyone’s HU was suddenly called HV. The new packaging did not solve a larger problem. In November 2021, Bitcoin began an epic fall, from about US$64,000 apiece to roughly US$16,000 today. Thousands of other coins are down 95 per cent or more. With a crypto winter under way, it seemed impossible for HyperFund or its successors to keep paying rewards if they were truly the fruits of crypto-related investments.
As the anger mounted, HyperVerse pivoted yet again and became HyperNation. Again, the rules changed. Members could transfer their rewards to the new platform only if they bought one of several bespoke non-fungible tokens, or NFTs, like a “purple box”, which cost US$10,000. Large returns were again promised.
In his videos, Mr de Hek treats all these twists in the Hyper plot with a light touch, one befitting a farce. That is especially true when the topic is Mr H, a figure who now appears on HyperNation videos as some kind of spokesman, wearing a gold mask and a black hoodie and uttering slogans – “HyperNation will be an equal, fair and transparent platform that can solve the pain points of today’s society” – in various slick studio settings. It is like getting lectured about utopia from a character in Squid Game.
Who really runs HyperNation is a mystery that Mr de Hek continues to plumb. In September, a man with a British accent named Keith Williams said in a Zoom call of HyperNation elite – an insider sent Mr de Hek a link to the recording – that he had been named “by corporate” as the global head of sales. He did not name anyone in corporate, and Mr de Hek has theorised that Mr Williams is now in charge.
With just 2,500 subscribers, Mr de Hek’s YouTube audience is tiny, and his labours on that platform have yielded only US$1,200, after taxes, which works out to cents per hour. Without that drop-shipping business, he would struggle. This does not seem to bother him, in part because he is a born optimist and thinks this online scam-busting thing could one day catch on. Viewers have sent him dozens of links to likely online Ponzi schemes, and he plans to name and shame them all. If that creates enemies, fine.
“I’ve already had my life threatened,” Mr de Hek said, with a smile. “My saving grace is that I live in New Zealand. I’m a long way from everyone.” NYTIMES

 

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FTX benefited from venture capitalists’ suspension of disbelief​

Robert Burgess and Chris Hughes

Interviews given by Sam Bankman-Fried in recent days suggest that FTX’s failure is tied to pure incompetence. PHOTO: NYTIMES
UPDATED

DEC 6, 2022

NEW YORK – The narrative that emerged in the days after the collapse of FTX, the US$32.5 billion (S$44 billion) exchange at the centre of Mr Sam Bankman-Fried’s crypto trading empire, was that it had to be the result of some highly sophisticated and nefarious scheme that only came to light following a series of unfortunate events. After all, some of the smartest minds in the financial world were sucked in: Sequoia Capital, Tiger Global Management and the Ontario Teachers’ Pension Plan, to name a few.
And that is what the venture capital (VC) and pension funds that seeded FTX surely want you to believe. That they were unwitting victims in an unfortunate and complex saga nobody could have foreseen. Do not fall for it. While we still do not yet know all the facts, they should not go blameless. Without their continual funding, stamp of approval and lack of questions, FTX never would have grown as big as it did. Their carelessness means FTX customers are out billions of dollars they are unlikely to ever recover.
Interviews given by Mr Bankman-Fried in recent days suggest that FTX’s failure is tied to pure incompetence. This was an enterprise destined to fail.
Exhibit A: In a business where risk management is priority No. 1, Mr Bankman-Fried now says there was no one at the company responsible for risk management. “That feels pretty embarrassing,” he told the audience at the New York Times DealBook Summit on Nov 30.
And that is not all. FTX appears to have lacked anything remotely resembling a conventional board and subcommittees. In a bankruptcy filing, court appointed chief executive John J. Ray III said FTX had been unable to provide a complete list of who worked for it and in what capacity, adding that the lines of responsibility were unclear.
So, how did the VC firms and other so-called sophisticated investors not see this coming? What little they have said leaves more questions than answers.
Top partners at Sequoia, the most storied of all VC firms for seeding companies such as Apple and Google, have defended the due diligence on their US$214 million investment in FTX and related entities. They told investors on a recent conference call that staff reviewed financial statements and asked multiple times about the relationship between FTX and Alameda Research, a trading firm that Mr Bankman-Fried also founded and which reportedly borrowed and lost FTX customers’ money. In the future, they assured investors, Sequoia might push start-ups to use Big Four accounting firms.


Wait! Sequoia invested in a company at a US$30 billion plus valuation and it did not require the company’s financials to be vetted by a reputable accounting firm? Let that sink in.
As for the allegation FTX funds were being used to finance Alameda’s activities, the Sequoia partners said they were assured that was not happening and the two were separate entities. Again, even a cursory audit by any licensed accounting firm, let alone one of the Big Four, would have found otherwise.
It is not as if there were no red flags. The potential for conflicts of interest between FTX and Mr Bankman-Fried’s Alameda and the lack of a proper board of directors were only the most obvious. The Ontario pension fund for teachers, which wrote down its US$95 million investment in FTX, called its due diligence “robust” and said that “no due diligence process can uncover all risks, especially in the context of an emerging technology business”. True, but the effort cannot just entail asking a question and then taking the founder at his word. Trust, but verify. Even a basic amount of scrutiny would have exposed blatant shortcomings in how FTX operated.
The obvious question is if they missed the red flags at FTX, what else are they missing? It is a fair question to ask. As much as anyone, the private capital industry has been a prime beneficiary of an easy money era. Funds have been inundated with more cash than they can deploy, breeding complacency, which then fuelled bets on dicey start-ups that would have gone wanting in a “normal” era.
The best form of accountability is the market. VC firms that lost client money on FTX should be required to make an exceptional case for fresh inflows – even mighty Sequoia. That means demonstrating specific and robust processes for due diligence that go beyond a partner’s gut feeling after becoming starstruck by an entrepreneur or idea.
Insisting that every VC investment be subject to some tire-kicking by an independent consultancy that has to vouch for its work, much like a public company CEO or an auditing firm has to vouch for reported financial results, would be a good start. And how about charging the due diligence provider’s fee separately to the end investor, to make it clear who the firm is meant to be serving? (Bloomberg News reported that Mr Bankman-Fried’s oversight of a vast web of FTX-linked entities was one of the risks highlighted during the due diligence Bain & Co conducted for Tiger Global, but the money manager still believed it was a sound investment at the time.)
Of course, not every start-up will succeed. For every Apple there is a Pets.com. But there is a difference between a start-up failing because of changing market conditions or old-fashioned tough luck, and failing due to appalling governance, like we have seen with FTX. You cannot beat up VC firms for the former, but you certainly should for the latter. And the ones that suffer are not just the wealthy who invest with VC firms, but retirees and regular workers who participate in the pension plans that provide funding to VC firms.
VC firms were not directly responsible for FTX’s collapse, but they certainly share the blame. BLOOMBERG

 

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‘I thought crypto exchanges were safe’: The lesson in FTX’s collapse​

The bottom line: Crypto exchanges are not like stock exchanges, and centralised ones are not safe. If the worst eventuates, whether it be an exchange collapse or cyber attack, you risk losing everything.​

Paul Mazzola and Mitchell Goroch

All investments carry risks, and the unregulated crypto market carries more risk than most. PHOTO: REUTERS
UPDATED

DEC 13, 2022

Anthony* (a friend) called a few weeks ago, deeply worried.
A deputy principal of a high school in Queensland, he spent hundreds of thousands of dollars over the past year buying cryptocurrencies, borrowing money using his home as equity.
But now all his assets, valued at A$600,000 (S$551,000), were stuck in an account he could not access.
He had bought through FTX, the world’s third-biggest cryptocurrency exchange, endorsed by celebrities such as Seinfeld co-creator Larry David, basketball champions Steph Curry and Shaquille O’Neal, and tennis ace Naomi Osaka.
With FTX’s spectacular collapse, he is now awaiting the outcome of the liquidation process that is likely to see him, 30,000 other Australians and more than 1.2 million customers worldwide lose everything.
“I thought these exchanges were safe,” Anthony said.
He was wrong.

Not like stock exchanges​

Cryptocurrency exchanges are sometimes described as being like stock exchanges. But they are very different to the likes of the London or New York stock exchanges, institutions that have weathered multiple financial crises.
Stock exchanges are both highly regulated and help regulate share trading. Cryptocurrency exchanges, on the other hand, are virtually unregulated and serve no regulatory function.
They are just private businesses that make money by helping “mum and dad” investors to get into crypto trading, profiting from the commission charged on each transaction.


Indeed, the crypto exchanges that have grown to dominate the market – such as Binance, Coinbase and FTX – arguably undermine the whole vision that drove the creation of Bitcoin and blockchains – because they centralise control in a system meant to decentralise and liberate finance from the power of governments, banks and other intermediaries.
These centralised exchanges are not needed to trade cryptocurrency, and are pretty much the least safe way to buy and hold crypto assets.

In the early days of Bitcoin (all the way back in 2008) the only way to acquire it was to “mine” it – earning new coins by performing the complex computations required to verify and record transactions on a digital ledger (called a blockchain).
The coins would be stored in a digital “wallet”, an application similar to a private bank account, accessible only by a password or “private key”.
A wallet can be virtual or physical, on a small portable device similar in appearance to a USB stick or small phone. Physical wallets are the safest because they can be unplugged from the Internet when not being used, minimising the risk of being hacked.
Before exchanges emerged, trading involved owners selling directly to buyers via online forums, transferring coins from one wallet to another like any electronic funds transfer.

Decentralised v centralised​

All this, however, required some technical knowledge.
Cryptocurrency exchanges reduced the need for such knowledge. They made it easy for less tech-savvy investors to get into the market, in the same way Web browsers have made it easy to navigate the Internet.
Two types of exchanges emerged: decentralised and centralised.
Decentralised exchanges (DEXs) are essentially online platforms to connect the orders of buyers and sellers of cryptocurrencies. They are just there to facilitate trading. You still need to hold cryptocurrencies in your own wallet (known as “self-custody”).
Centralised exchanges go much further, eliminating wallets by offering a one-stop shop service. They are not just an intermediary between buyers and sellers. Rather than self-custody, they act as custodian, holding cryptocurrency on customers’ behalf.

Exchange, broker, bank​

Centralised exchanges (CEXs) have proved most popular. Seven of the world’s 10 biggest crypto exchanges by trading volume are centralised.
But what customers gain in simplicity they lose in control.
You do not give your money to a stock exchange, for example. You trade through a broker, who uses your trading account when you buy and deposits money back into your account when you sell.
A CEX, on the other hand, acts as an exchange, a brokerage (taking customers’ fiat money and converting it into crypto or vice versa), and as a bank (holding customer’s crypto assets as custodian).
This is why FTX was holding cash and crypto assets worth US$10 billion (S$14 billion) to US$50 billion. It also acted like a bank by borrowing and lending cryptocurrencies – though without customers’ knowledge or agreement, and without any of the regulatory accountability imposed on banks.
Holding both wallets and keys, founder Sam Bankman-Fried “borrowed” his customers’ funds to prop up his other businesses. Customers realised too late they had little control. When it ran into trouble, FTX simply stopped letting customers withdraw their assets.

The power of marketing​

Like stockbrokers, crypto exchanges make their money by charging a commission on every trade. They are therefore motivated to increase trading volumes.
FTX did this most through celebrity and sports marketing. Since it was founded in 2019, it has spent an estimated US$375 million on advertising and endorsements, including buying the naming rights to the stadium used by the Miami Heat basketball team.
Such marketing has helped to create the illusion that FTX and other exchanges were as safe as mainstream institutions. Without such marketing, it’s debatable the value of the cryptocurrency market would have risen from US$10 billion in 2014 to US$876 billion in 2022.

Not your key, not your coins​

There’s an adage among crypto investors: “Not your key, not your coins, it’s that simple.”
What this means is that your crypto is not safe unless you have self-custody, storing your own coins in your own wallet, to which you alone control the private key.
The bottom line: Crypto exchanges are not like stock exchanges, and CEXs are not safe. If the worst eventuates, whether it be an exchange collapse or cyber attack, you risk losing everything.
All investments carry risks, and the unregulated crypto market carries more risk than most. So follow three golden rules.
First, do some homework. Understand the process of trading crypto. Learn how to use a self-custody wallet. Until governments regulate crypto markets, especially exchanges, you are largely on your own.
Second, if you are going to use an exchange, a DEX is more secure. There is no evidence to date that any DEX has been hacked.
Last, in this world of volatility, only risk what you can afford to lose.

• Paul Mazzola is a lecturer in banking and finance at the faculty of business and law at the University of Wollongong in Australia. Mitchell Goroch is a cryptocurrency trader and researcher at the same university. This article was first published in The Conversation.
• Pseudonyms have been used in this opinion piece.

 

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FTX founder Sam Bankman-Fried charged with defrauding investors by building crypto ‘house of cards’​

Sam Bankman-Fried acknowledged oversight failings at FTX, but doesn’t personally think he has any criminal liability. PHOTO: AFP
UPDATED

DEC 13, 2022

NEW YORK - FTX founder Sam Bankman-Fried was charged by the United States Securities and Exchange Commission (SEC) on Tuesday with defrauding investors in what regulators called “a house of cards”, hours before he was set to appear before a magistrate in the Bahamas.
Since at least May 2019, FTX raised more than US$1.8 billion (S$2.4 billion) from equity investors in a years-long fraud in which Bankman-Fried concealed that FTX was diverting customer funds to its affiliated crypto hedge fund Alameda Research, the SEC alleged in a statement.
Bankman-Fried used commingled FTX customers’ funds at Alameda to make undisclosed venture investments, “lavish real estate purchases” and political donations, it said.
Separate charges would be announced by the US Attorney’s Office for the Southern District of New York and the Commodity Futures Trading Commission later on Tuesday, the SEC said.
Representatives for Bankman-Fried did not respond immediately to requests for comment.
The SEC said it would seek a director and officer bar and a penalty against Bankman-Fried. It would also seek to prevent him from participating in future securities purchases, offers and sales except for his personal account.
“We allege that Sam Bankman-Fried built a house of cards on a foundation of deception while telling investors that it was one of the safest buildings in crypto,” said SEC chair Gary Gensler in a statement.

Bankman-Fried was arrested on Monday evening in the Bahamas and was expected to appear before a magistrate on Tuesday, marking his first in-person public appearance since the stunning collapse of FTX, which filed for bankruptcy in November after struggling to raise money as traders rushed to withdraw US$6 billion from the platform in just 72 hours.
Police in the Bahamas, where FTX was based, said the 30-year-old was arrested after 6pm on Monday at his luxury gated community called the Albany in the capital, Nassau.
Mr Damian Williams, the US Attorney for the Southern District of New York, said in a statement on Monday evening that the arrest came at the request of the US government, and an indictment against Bankman-Fried would be unsealed on Tuesday.

The Bahamas’ attorney-general’s office said it expected him to be extradited to the US. It was not immediately clear what would take place at the hearing or whether Bankman-Fried would decide to fight extradition, potentially setting up a high-stakes battle.
Police in the Bahamas said in a statement that he was arrested due to “various financial offences against laws of the United States, which are also offences” in the Bahamas.
Bankman-Fried has apologised to customers and acknowledged oversight failings at FTX, but said he does not personally think he has any criminal liability.


The charges come just hours before Bankman-Fried was previously scheduled to testify before Congress about the collapse of the exchange.
He planned to say he was pressured into nominating Mr John J. Ray III as FTX’s new chief executive by the lawyers advising his firm at the time, according to a draft of his prepared remarks seen by Reuters.
Bankman-Fried founded FTX in 2019 and rode a cryptocurrency boom to build it into one of the world’s largest digital token exchanges. Forbes pegged his net worth a year ago at US$26.5 billion, and he became a substantial funder of US political campaigns, media outlets and other causes.
FTX’s liquidity crunch came after Bankman-Fried secretly used US$10 billion in customer funds to support his proprietary trading firm, Alameda Research, Reuters has reported, citing two people familiar with the matter. At least US$1 billion in customer funds had vanished, the people said.
Bankman-Fried resigned as FTX’s chief executive officer the same day as the bankruptcy filing.
The U.S. Attorney’s Office in Manhattan, led by veteran securities fraud prosecutor Williams, in mid-November began investigating how FTX handled customer funds, a source with knowledge of the probe told Reuters.
Mr Ray is expected to tell members of the US House Financial Services Committee that the cryptocurrency exchange had “unacceptable management practices” including the commingling of assets and lack of internal controls, according to prepared remarks. REUTERS

 

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Binance see withdrawals of $2.6 billion in last 24 hours, data firm Nansen says​

The Nansen data came as Binance halted withdrawals of USDC, citing a “token swap”. PHOTO: REUTERS


DEC 14, 2022

LONDON - Binance has seen withdrawals of US$1.9 billion (S$2.6 billion) in the last 24 hours, blockchain data firm Nansen said on Tuesday, as the world’s biggest crypto exchange said it had “temporarily paused” withdrawals of the USDC stablecoin.
How crypto exchanges such as Binance and its now-bankrupt former rival FTX handle customer deposits is under close scrutiny from users and regulators. FTX’s founder Sam Bankman-Fried was charged by the US Securities and Exchange Commission on Tuesday with defrauding investors.
Binance, whose dominance of crypto was cemented by the fall of FTX, last week tweeted a so-called proof-of-reserves report by audit firm Mazars. The report showed its holdings of bitcoin exceeded customer deposits on a single day in November.
The US$1.9 billion ethereum-based withdrawals marks the largest daily outflow over a 24-hour period since June 13, the Nansen data showed, and accounted for the majority of the funds being pulled in the last seven days.
“Binance’s withdrawals are increasing due to the growing uncertainty about its reserves report,” a Nansen spokesman said.
A spokesman for Binance said “People deposit and withdraw assets everyday for a variety of different reasons. User assets at Binance are all backed 1:1 and Binance’s capital structure is debt free.”
“We always have more than enough funds to fulfil withdrawal requests,” the spokesman added.

Asked whether Binance had enough USDC to meet USDC withdrawal requests, the spokesman said: “From time to time we may need to top up hot wallets from our cold wallets, convert one stablecoin to another or carry out routine network maintenances upgrades, all of which can cause occasional short delays. This is business as usual.”
Crypto news outlet CoinDesk reported earlier that Binance saw outflows of US$902 million on Monday.
The exchange is already under pressure from authorities. Splits between US Department of Justice prosecutors are delaying the conclusion of a long-running criminal investigation focused on Binance’s compliance with US anti-money laundering laws and sanctions, Reuters reported on Monday.
The report sparked a drop of almost 4 per cent in Binance’s BNB token, traders said.
The Nansen data came as Binance halted withdrawals of USDC, citing a “token swap” - where digital token holders exchange their crypto coins, typically over different blockchains.
“On USDC, we have seen an increase in withdrawals,” Binance’s chief executive Changpeng Zhao tweeted.
Binance said in September it would automatically convert user balances and new deposits of USD Coin and two other stablecoins into its own stablecoin, Binance USD.
Mr Zhao said on Tuesday swapping USDC with two other tokens - Paxos Standard and Binance USD - requires using traditional dollars at a bank in New York. “The banks are not open for another few hours. We expect the situation will be restored when the banks open.” REUTERS

 

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Poor management, inexperienced leaders led to FTX collapse, new CEO tells lawmakers​

New FTX chief John Ray answers US lawmakers' questions at a meeting of the House Financial Services Committee in Washington, DC. PHOTO: EPA-EFE
UPDATED

DEC 14, 2022

WASHINGTON - Shortly after US regulators on Tuesday charged FTX founder Sam Bankman-Fried with defrauding investors, its new chief executive told lawmakers the crypto exchange’s implosion stemmed from poor management practices and inexperienced individuals at the helm.
“The FTX group’s collapse appears to stem from absolute concentration of control in the hands of a small group of grossly inexperienced, non-sophisticated individuals,” said Mr John Ray, who was named chief executive officer of FTX after Bankman-Fried stepped down and the company filed for bankruptcy on Nov 11.
Mr Ray also said there was virtually no distinction between the operations of FTX and Alameda Research, Bankman-Fried’s crypto trading firm, which maintained close ties with his exchange.
“I’ve just never seen an utter lack of record keeping - absolutely no internal controls whatsoever,” Mr Ray told the US House of Representatives Financial Services Committee.
It will take weeks, perhaps months, to secure all the group’s assets, Mr Ray said.
Bankman-Fried was arrested on Monday evening in the Bahamas and was set to appear before a magistrate on Tuesday. US federal prosecutors on Tuesday alleged he committed fraud and violated campaign finance laws. FTX’s founder and former CEO also faces additional charges by US regulators.
The Bahamas attorney-general’s office said it expects Bankman-Fried will be extradited to the United States.

Mr Ray said in his testimony that he had hired a new chief financial officer, a head of human resources and administration, and a head of information technology. He has also appointed a board of directors, which is chaired by former US attorney Joseph Farnan.
Since he took over as CEO, Mr Ray said he has established that customer assets at FTX were commingled with those of Alameda Research. Client funds were used to engage in margin trading, which exposed customers to massive losses, he said.
MORE ON THIS TOPIC
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Mr Ray also addressed why FTX US was included in the bankruptcy filing. Bankman-Fried has expressed confusion about that in media interviews, claiming the company’s US entity was financially sound.
But Mr Ray said such a step was necessary to avoid a “run on the bank” and to allow FTX’s new leadership to identify and protect its assets.
Bankman-Fried had also been scheduled to appear before the committee on Tuesday, and his testimony had been highly anticipated.
“Unfortunately, the timing of his arrest denies the public the opportunity to get the answers they deserve,” said the panel’s chair, Democratic US Representative Maxine Waters.
“Rest assured that this committee will not stop until we uncover the full truth behind the collapse of FTX just a few months ago.” REUTERS

 

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FTX was engaged in a ‘massive, years-long fraud’: US prosecutors​

In a 13-page criminal indictment, Sam Bankman-Fried was charged with eight counts. PHOTO: REUTERS


DEC 17, 2022


NEW YORK - Sam Bankman-Fried’s lies, US prosecutors say, stretched back to the very beginning.
From the founding of his cryptocurrency exchange FTX in 2019, Bankman-Fried engaged in widespread fraud, federal authorities charged on Tuesday, and used his customers’ deposits to finance his political activities, buy lavish real estate and invest in other companies.
According to civil and criminal charges filed against Bankman-Fried in the Southern District of New York, he repeatedly lied to customers, investors and lenders about the structure of his business empire and how he handled the billions of dollars in funds that crypto users deposited in his exchange.
In a 13-page criminal indictment, Bankman-Fried was charged with eight counts, including wire fraud against customers and lenders, as well as conspiracy to defraud the United States and violate campaign finance laws. A civil complaint filed by the US Securities and Exchange Commission (SEC) laid out a detailed narrative of FTX’s collapse, claiming that for three years Bankman-Fried had misappropriated billions in customer deposits to fund his business and political activities.
The charges against Bankman-Fried came on one of the most dramatic days in the rapidly unfolding collapse of FTX, which has rocked the crypto industry. In Washington, the company’s new chief executive officer, who took over when the firm filed for bankruptcy, testified in Congress, laying out the myriad management failures that contributed to the exchange’s implosion. In Nassau, the capital of the Bahamas, Bankman-Fried appeared in court for the first time, having spent the night in a police cell after being arrested at his home on Dec 12. He was denied bail and will remain in custody.
The arrest surprised the FTX founder and his parents, who were visiting him, according to a person with knowledge of the matter. Bankman-Fried was taken away in handcuffs.
Bankman-Fried appeared in Magistrate Court, dressed in a blue suit and white shirt, eschewing his usual disheveled outfit of shorts and a T-shirt. He was escorted inside by police, while his parents, Stanford Law School professors Joe Bankman and Barbara Fried, sat in the rear of the gallery.

The lead prosecutor for Bahamian authorities, Franklyn Williams, argued that Bankman-Fried was a flight risk, with sufficient financial resources to escape the country. A lawyer for Bankman-Fried said his decision to remain in the Bahamas after FTX collapsed showed he had no intention to flee, adding that Bankman-Fried required medication for depression and attention deficit disorder.
The court’s chief magistrate, Joyann Ferguson-Pratt, ruled that Bankman-Fried should remain in custody. He was allowed a few minutes with his parents, who embraced him in a long hug as the courtroom was cleared.
Bankman-Fried’s arrest was a stunning fall from grace for an executive who was once described as a modern-day John Pierpont Morgan, and became a darling of big investors in Silicon Valley and a prolific Democratic Party donor. These days, Bankman-Fried, 30, is more often likened to Bernie Madoff, the fraudster who orchestrated a notorious Ponzi scheme.

As FTX collapsed, the SEC said in its complaint, investors were kept in the dark about what was going on. Federal prosecutors said Bankman-Fried’s lenders were also kept in the dark. And hundreds of thousands of FTX customers around the world were kept in the dark, too – only to find out that their money was gone.
“Bankman-Fried was orchestrating a massive, years-long fraud, diverting billions of dollars of the trading platform’s customer funds for his own personal benefit and to help grow his crypto empire,” the SEC said.

According to court filings, Bankman-Fried was indicted by a grand jury on Dec 9. The arrest took place three days later, when Bahamian authorities took him into custody at Albany, the luxury apartment complex where he has lived since he moved FTX to the island from Hong Kong in 2021.
At a news conference on Dec 13, Damian Williams, US attorney for the Southern District of New York, said the investigation into FTX was “very much ongoing” and “moving very quickly”.
He called the company’s collapse “one of the biggest financial frauds in American history”.
Federal prosecutors will need to extradite Bankman-Fried so he can face trial in federal court in the US. But while the Bahamas has an extradition treaty with the US, that process could stretch for weeks or months if Bankman-Fried contests it.
Mark Cohen, a lawyer for Bankman-Fried, said his client “is reviewing the charges with his legal team and considering all of his legal options”.
Just over a month ago, Bankman-Fried was widely viewed as one of the few reliable figures in a freewheeling, loosely regulated industry. He contributed US$5.6 million (S$7.6 million) to President Joe Biden’s 2020 election effort, and FTX spent lavishly on TV commercials with an array of celebrity endorsers such as basketball star Stephen Curry and NFL quarterback Tom Brady. He was at the forefront of an industry-wide effort to bring crypto into the mainstream of American commerce.
But strip away all the references to crypto in the SEC’s civil complaint, and a picture emerges of garden-variety lies to investors – falsehoods that date back to 2019.
Regulators say Bankman-Fried lied to dozens of big venture capital firms and wealthy family offices, as he raised nearly US$2 billion (S$2.7 billion) to finance his company.


The SEC claims that he misled those investors in reports about the financial health of FTX and its sister company, Alameda Research, a crypto trading platform that he had helped start. He also misled investors about the close ties between the two companies, the SEC said, and concealed how he had allowed his trading firm to routinely borrow money from FTX customers – borrowing that occurred despite claims that all customer money was safe.
The mixing of money allowed Alameda to make bigger trades, invest in other crypto companies, buy Bahamas real estate and make personal loans to FTX executives. The fraud was enabled in two key ways, the SEC said: FTX customers were directed to deposit fiat currency, such as US dollars, in bank accounts controlled by Alameda, and the trading firm could draw down from a “virtually limitless” line of credit funded by FTX customer assets.
Then in the spring, when the crypto market began to crater, other crypto firms that were lenders to Alameda began to call in their loans, demanding repayment, according to authorities. That forced Bankman-Fried and others at FTX to double down and take even more money from FTX customers to make Alameda whole.
The strategy of taking money from FTX to keep Alameda afloat imploded when customers of the crypto exchange started demanding their money this fall. The financial hole was US$8 billion (S$10.86 billion), so big that the whole enterprise collapsed.
In the indictment and accompanying court papers, federal prosecutors echoed many of the allegations in the SEC’s complaint. They also claimed Bankman-Fried had broken campaign finance laws by making political contributions to both parties “in the names of co-conspirators, when in fact those contributions were funded by Alameda Research with misappropriated customer funds”.
The scheme was “in the service of the defendant’s desire to influence the direction of policy and legislation on the cryptocurrency industry”, prosecutors wrote in court papers.

Before his arrest, Bankman-Fried was scheduled to testify at a Dec 13 hearing in front of the House Financial Services Committee, which is investigating the collapse of FTX. The hearing went ahead without him, featuring testimony from John Jay Ray III, a veteran of corporate restructuring who has taken over as CEO of FTX.
In his opening statement, Ray blamed the collapse of FTX on the “absolute concentration of control in the hands of a small group of grossly inexperienced and unsophisticated individuals”.
In the early 2000s, Ray oversaw the unwinding of Enron, the energy trading firm that collapsed in an accounting scandal. At the hearing, he called the perpetrators of Enron’s crimes “highly sophisticated”, whereas FTX executives appeared to have engaged in “really just old-fashioned embezzlement”, he said.
“Even with most failed companies, we have a fair road map of what happened,” Ray said in his testimony. “We’re dealing with a literal paperless bankruptcy. It makes it difficult to track.”
The SEC, in its complaint, amplified those concerns and warnings. The complaint said that from the beginning, “FTX had poor controls and fundamentally deficient risk management procedures”. The SEC said the company treated assets and liabilities as “interchangeable” in its accounting ledgers and bookkeeping.
For now, however, no one other than Bankman-Fried has been charged.

• This article originally appeared in The New York Times.

 

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Why Tether and stablecoin USDT have become a big crypto worry​

USDT, the stablecoin issued by Tether Holdings, is the biggest stablecoin, with around US$65 billion in circulation at present. PHOTO: REUTERS
UPDATED

DEC 19, 2022

NEW YORK – USDT, the stablecoin issued by Tether Holdings, isn’t the most valuable cryptocurrency or the most likely to make you rich. Tether simply promises that if you give it US$1, it’ll give you a coin that will almost always be worth US$1.
That dull utility has made it the most widely traded digital token in crypto. It’s also become a focus of concern in the wake of the collapse of the FTX exchange, whose knock-on effects continue to reverberate throughout the sector. If USDT stumbles, the risk of broader turmoil across already troubled crypto markets could rise significantly.

1. What is USDT?​

It’s a stablecoin, a category of cryptoassets that is designed to always be worth a set value, typically US$1. That’s in contrast to most cryptocurrencies, which can experience big swings.
Most stablecoins maintain their peg by promising to hold an equivalent value of funds in reserve as collateral to match the coins sold. For stablecoins backed by fiat currency like USDT, the majority of that collateral pile is typically held as a mix of cash and highly liquid cash equivalents.

2. What’s USDT’s appeal?​

USDT is by far the biggest stablecoin, with around US$65 billion in circulation at present. Its closest rival is Circle’s USDC, at a circulation of around US$42 billion; meanwhile, Bitcoin and Ether are the only cryptocurrencies of any kind to top Tether by market value.
Investors can use stablecoins either as an easier entry point into buying crypto, or to trade between different tokens. Their price stability makes transactions much simpler, and because there’s so much more USDT out there than anything else, using that stablecoin in particular can be easier than alternatives, because exchanges will offer more options for converting USDT into other tokens.

3. Why is it important?​

USDT can be exchanged for more than 4,000 other currencies on centralised exchanges, and possibly an even greater number on decentralised ones that don’t always accept regular dollars.

As a result, it’s quite hard for traders to actively engage in crypto without using USDT at some point. If USDT were to face problems that reduced its appeal or usage, that could cause a chain reaction across the entire sector and sharply crimp trading volumes.

4. What are the concerns about Tether?​

The big worry is the “almost” in the statement that USDT is “almost always” worth US$1. The question is whether Tether, as USDT’s issuer, really is setting aside enough in assets to keep its dollar peg secure. These questions have been raised since shortly after it was first issued in 2014, in part because the company has never released the kind of audited financial statements that normal deposit-taking banks are required to report.
Investor doubts prompted the company to start issuing attestations on its reserves in 2017, currently conducted by external accounting firm BDO Italia (though the Wall Street Journal reported in mid-December that the firm was “evaluating” whether to continue its work for Tether and other crypto companies).
As part of a 2021 settlement with the New York Attorney General, which included allegations that Tether lied about its reserves in the past, these attestations are now filed quarterly.

5. What’s known – and not – about Tether’s finances?​

Attestations aren’t actual audits, like the kind that public companies publish annually for shareholders. That means that while Tether’s reports say it has about 82 per cent of its reserves in cash and cash equivalents, we don’t know exactly where those assets are held, which money market funds it invests in or other details that might imply the level of risk around its collateral.
For example, the proportion of Tether’s reserves that it lends out to other companies has been rising, according to the attestations – but we don’t know who’s borrowing the money, or what due diligence Tether conducted to make sure they can pay it back. Tether said on Dec 13 that it plans to steadily reduce its secured lending activities to zero in 2023.
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6. Why is that a problem?​

Because USDT is supposed to always be worth US$1, crypto investors have tended to treat Tether a bit like a bank – but without the deposit insurance that regular banks carry to protect their customers. If people start to feel less confident in Tether’s ability to make good on that promise during times of market stress, USDT’s peg to the dollar can erode and leave the cryptocurrency vulnerable to runs.
If it’s in trouble, USDT being worth more or less than a dollar for too long would start to impact both how people trade in crypto on a regular basis, and the treasuries of the many crypto companies and projects that use USDT holdings like a regular bank balance.
In 2022, several major company collapses elsewhere in crypto saw investors flee to assets that they considered to be safer – and Tether’s USDT bore the brunt of that, slipping from $83 billion in circulation at its April peak. In May when the Terra ecosystem collapsed, USDT fell to as low as 95 US cents because users rushed to offload their USDT tokens for other stablecoins, or just wanted their dollars back.
And when FTX was facing imminent bankruptcy in November, Tether briefly lost its peg again. Given how much anxiety investors are feeling since the FTX collapse, any erosion of confidence in USDT would likely eat away further at confidence in crypto in general.

7. What do regulators think?​

Stablecoins have been a major point of concern for regulators for a while. They’ve seen what happens when institutions that are like banks but lack the same protections run into trouble. When US money-market funds couldn’t hang on to their US$1-per-share price pledge during the 2008 financial crisis, the Federal Reserve had to step in to provide a bailout.
Regulators are also worried because stablecoins are the main point of overlap between the buyer-beware crypto world and the institutions of traditional finance. Ultimately, they fear about what could happen if USDT grew to be systemically important in the real world without any checks and balances – an even bigger concern after one stablecoin, TerraUSD, already went bust this year.

8. What do they propose?​

The Financial Stability Board, a panel of global regulators, issued a report in October calling for an approach it summarised as “same activity, same risk, same regulation,” under which stablecoins would come under the same rules as firms that conduct similar activities in the real world.
Meanwhile, lawmakers in the US, the EU, the UK, Japan and others have spent a lot of time this year considering rules that would overhaul the US$150 billion stablecoin sector.
Regulators want a say over the types of assets that stablecoin providers like Tether can use to fill their coffers, and are expected to require more detailed disclosures on their reserves. BLOOMBERG

 

[LITTLEREDDOT]

Visionaries or charlatans: The many faces of crypto downfalls​

Sam Bankman-Fried (left) and Heather Morgan are among a number of crypto champions now seen as charlatans, who pocketed millions before their empires unravelled. PHOTO: REUTERS, RAZZLEKHAN/INSTAGRAM

Osmond Chia

Dec 27, 2022

SINGAPORE – The popularity of Bitcoin and other cryptocurrencies has given rise to a number of personalities whose fall from grace has been nothing short of spectacular.
The Crocodile of Wall Street, Do Kwon, and the self-titled crypto-queen Ruja Ignatova are among a number of crypto champions now seen as charlatans, who pocketed millions before their empires unravelled.
Sam Bankman-Fried, the disgraced founder of the now-collapsed crypto exchange FTX, made headlines in November after he filed for bankruptcy in the United States and resigned – a downfall that has left investors reeling and sent shock waves throughout the industry.
In the bankruptcy filing, FTX indicated it had more than 100,000 creditors and liabilities of beween US$10 billion (S$13.5 billion) and US$50 billion.
Bankman-Fried faces a litany of criminal charges in the US, tied to his role in the collapse of FTX.
Cryptocurrency experts say the crash of FTX and several other cryptocurrencies and crypto-linked schemes come as no surprise.
Dr Wayne Huang, co-founder and chief executive of fintech firm XREX, said internal governance was almost non-existent within these fallen organisations, many of which built their value on loans or coins that were not backed by actual dollars or assets.

He warned that investing in crypto is high-risk in nature and requires expertise.
“The (Luna and TerraUSD) and FTX crashes have proven that even the most reputable venture capitals can be compromised... Investors should assist and ensure that their portfolios incorporate robust governance involving strong checks and balances,” he said.
Mr Anson Zeall, co-founder of the International Digital Asset Exchange Association, said many investors were lured by the idea of quick returns, and the hype generated by social media.

Twitter was rife with wild claims and unverified reactions to crypto investments, clouding the judgment of investors who poured in money and helped the value of coins to rise, said Mr Zeall.
“Everyone was saying ‘to the moon’ and greed really set in. When everything is going up, people take it for granted,” said Mr Zeall, who cautions against impulsive investing and is urging buyers to fact-check against multiple sources.
The fall of FTX will not be the last, he said, adding that the impact to economies could be worse when traditional institutions and large private investors are intertwined with unregulated cryptocurrencies.
Mr Zeall said: “The main difference is that each crash is definitely getting bigger and will likely impact the traditional financial markets in the next crash.”

Sam Bankman-Fried​

Sam Bankman-Fried being led out of an US Federal Courthouse in New York on Dec 22, 2022. PHOTO: EPA-EFE
He fought for a new lease of life for crypto trading platform FTX, but now 30-year-old crypto entrepreneur Sam Bankman-Fried is in need of a bailout himself, having lost 94 per cent of his net worth in a day on Nov 8.
Bankman-Fried went to Massachusetts Institute of Technology (MIT), a prestigious university in the United States, where he studied physics and maths.
After trading stocks for a short stint, he turned to Bitcoin when he found success by buying the cryptocurrency cheap and selling it to other markets where it could fetch higher prices. Soon, he and some college friends launched a trading business called Alameda Research and were making about US$1 million a day.
Bankman-Fried officially became a billionaire in 2021 on the back of the success of FTX, which grew to be the second-largest crypto exchange in the world, facilitating up to US$15 billion in trades daily.
FTX was endorsed by celebrities like American footballer Tom Brady. It even had its name stamped to a basketball stadium.
Throughout his success, Bankman-Fried, an avid League of Legends gamer, kept up with followers on Twitter, giving them an insight into his extravagant lifestyle in his US$30 million penthouse in the Bahamas.
But faith in his company was shaken when leaked documents showed that Alameda Research held an unusually large amount of cryptocurrencies invented by FTX and was not backed by independent assets. The Wall Street Journal also reported that Alameda Research used FTX’s customer deposit as loans for trading.
The revelations prompted FTX’s main competitor, Binance, to publicly sell off all its crypto tokens linked to FTX, causing crypto customers to withdraw billions from the exchange.
Singapore’s investment firm Temasek has since written down its US$275 million investment in the exchange.

Do Kwon​

Terraform Labs’ co-founder Do Kwon, 31, is on the run with a US$56.9 million lawsuit in Singapore hanging over him for his alleged role in a wipe-out of cryptocurrencies he created.
Once lauded for its stability, the TerraUSD (UST) stablecoin was tied to the US dollar but lost its peg after a series of massive withdrawals that sent crypto investors into panic.
Interpol have also put up a Red Notice for his arrest. But for a wanted man, Do Kwon seems unusually nonchalant, taking on Twitter to say he is making “zero effort to hide”, adding that he still goes on walks and to the malls.
Kwon earlier this year moved from South Korea to Singapore, where his now collapsed Terraform Labs project had a base, but his location became unclear after police here in September said that he had left the country.
He remains active on his Twitter account, which has one million followers. He last posted on Nov 25, and frequently chimed in on crypto trends, his work, and even mocked the police amid the global manhunt.

Heather Morgan​

Heather Morgan, the self-proclaimed “Crocodile of Wall Street”, is accused of laundering some US$4.5 billion worth of bitcoins. PHOTO: @RHAZZLEKHAN/ INSTAGRAM
She raps, makes YouTube videos and even taught in a Hong Kong university.
Heather Morgan, or the self-proclaimed “Crocodile of Wall Street”, was considered by some a savant. But she is now seen as a fraudster, accused of laundering some US$4.5 billion worth of bitcoins.
Holding a degree from the University of California, Davis, she taught American culture in university, and worked as an economist for the World Bank before launching her own software company, SalesFolk. Morgan, 32, was also a columnist at Forbes, providing business tips to new investors, and writing about her love of rapping.
She gained public attention when the US Federal Bureau of Investigation (FBI) arrested her and her husband Ilya Lichtenstein on suspicion of laundering some 120,000 bitcoins stolen from the 2016 hacking of Bitfinex – a crypto-exchange platform based in Hong Kong.
It was believed to be the second-largest security breach ever of such an exchange. The couple is in custody in the US.

Ruja Ignatova​

In one of the biggest scams in history, Ruja Ignatova, 42, allegedly charmed investors of some US$4 billion and is now among the top of the FBI’s list of most wanted fugitives.
Her whereabouts are unknown.
Born in Bulgaria, Ignatova moved to Germany with her family when she was 10, and later earned a law degree from Oxford University and a Ph. D. in private international law from the University of Konstanz in Germany.
Ignatova’s rise to power started when she founded OneCoin in 2014 during the early days of cryptocurrencies. She is said to have lured victims from 175 countries into her Ponzi scheme by offering them a commission to invite others.
As she grew in prominence, she would often show up in company events decked in jewellery and expensive gowns. She held glamorous events worldwide, including a lavish party to lure in investors at London’s Wembley Arena.
But investors had little clue that OneCoin did not have a payment system or possess blockchain technology.
Ignatova has been on the run since 2017, after discovering her boyfriend Gilbert Armenta had cooperated with the authorities in a probe into OneCoin. She has been handed multiple charges, including wire fraud and money laundering.
The FBI is offering a US$100,000 reward for any information leading to her arrest.

 

[LITTLEREDDOT]

Singapore-based crypto lender Vauld faces debt-plan deadline with takeover talks in limbo​

Vauld and Nexo entered talks about a takeover deal in July and hired advisers to explore a potential restructuring. PHOTO: REUTERS

Dec 27, 2022

NEW YORK– Acquisition talks between crypto lenders Nexo and Vauld have not yet resulted in an agreement, as Vauld stares down a Jan 20 deadline to present a restructuring plan to creditors.
Discussions with Nexo “had unfortunately not come to fruition”, Vauld wrote on Monday in an e-mail to creditors.
Nexo said that it had submitted a revised proposal for the acquisition to Vauld on Dec 2. In a letter to Vauld creditors, it cited “challenges” during the months of talks, including “defamation” and “the spread of misinformation on social media”.
“We remain dedicated to offering the creditors the most favourable recovery path forward,” Nexo wrote. “Nexo is determined to continue working for the benefit of the creditors and to support the development of the blockchain ecosystem.”
Vauld and Nexo entered talks about a deal in July after Singapore-based Vauld froze withdrawals and hired advisers to explore a potential restructuring.
Crypto lending has been devastated in 2022 amid the collapse of entities like hedge fund Three Arrows Capital and the FTX/Alameda Research empire. Celsius Network, Voyager Digital and BlockFi are among firms that have filed for bankruptcy.
One stumbling block to an agreement is Nexo’s announcement on Dec 5 that it would phase out service in the United States. Vauld said more than 40 per cent of its US customers would not have full access to the benefits of the acquisition, and that Nexo has not responded to questions about the issue. BLOOMBERG

 

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Bankman-Fried, FTX execs received billions in hidden loans, says ex-Alameda CEO​

FTX founder Sam Bankman-Fried being led out of a US federal courthouse after being released on bail in New York on Dec 22, 2022. PHOTO: EPA-EFE

Dec 27, 2022

NEW YORK - Sam Bankman-Fried and other FTX executives received billions of dollars in secret loans from the crypto mogul’s Alameda Research, the hedge fund’s former chief told a United States judge when she pleaded guilty to her role in the exchange’s collapse.
Caroline Ellison, former chief executive of Alameda Research, said she agreed with Bankman-Fried to hide from FTX’s investors, lenders and customers that the hedge fund could borrow unlimited sums from the exchange, according to a transcript of her Dec 19 plea hearing that was unsealed last Friday.
“We prepared certain quarterly balance sheets that concealed the extent of Alameda’s borrowing and the billions of dollars in loans that Alameda had made to FTX executives and to related parties,” Ellison told US District Judge Ronnie Abrams in Manhattan federal court, according to the transcript.
Ellison and FTX co-founder Gary Wang both pleaded guilty and are cooperating with prosecutors as part of their plea agreements. Their sworn statements offer a preview of how two of Bankman-Fried’s former associates might testify at trial against him as prosecution witnesses.
In a separate plea hearing on Dec 19, Wang said he was directed to make changes to FTX’s code to give Alameda special privileges on the trading platform, while being aware that others were telling investors and customers that Alameda had no such privileges.
Wang did not specify who gave him those directions.
Mr Nicolas Roos, a prosecutor, said in court last Thursday that Bankman-Fried’s trial would include evidence from “multiple cooperating witnesses”. He added that Bankman-Fried carried out a “fraud of epic proportions” that led to the loss of billions of dollars of customer and investor funds.

Bankman-Fried has acknowledged risk-management failures at FTX, but said he does not believe he has criminal liability. He has not yet entered a plea.
He founded FTX in 2019 and rode a boom in the values of Bitcoin and other digital assets to become a billionaire several times over as well as an influential donor to US political campaigns.
A flurry of customer withdrawals in early November amid concerns about commingling of FTX funds with Alameda prompted FTX to declare bankruptcy on Nov 11.

Bankman-Fried, 30, was released last Thursday on a US$250 million (S$337 million) bond. His spokesman declined to comment on Ellison’s and Wang’s statements.
Ellison told the court that when investors in June 2022 recalled loans they had made to Alameda, she agreed with others to borrow billions of dollars in FTX customer funds to repay them, understanding that customers were not aware of the arrangement.
“I am truly sorry for what I did,” Ellison said, adding that she is helping to recover customer assets.

Wang also said he knew what he was doing was wrong.
The transcript of Ellison’s hearing was initially sealed out of concern that the disclosure of her cooperation could thwart prosecutors’ efforts to extradite Bankman-Fried from the Bahamas, where he lived and where FTX was based, court records showed.
Bankman-Fried was arrested in the capital Nassau on Dec 12 and arrived in the US last Wednesday after consenting to extradition.
A magistrate judge ordered him confined to his parents’ California home until trial.
Last Friday evening, Judge Abrams recused herself from the case, saying in a court order that the law firm Davis Polk & Wardwell, where her husband is a partner, advised FTX in 2021. REUTERS