Cryptocurrencies, tokens, NFTs, virtual "assets" frauds

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How one-time crypto titan Do Kwon became a fugitive​

Do Kwon, 31, presided over one of the biggest busts ever seen in the volatile cryptocurrency sector. PHOTO: BLOOMBERG
UPDATED

5 HOURS AGO

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SEOUL - South Korean Do Kwon presided over one of the biggest busts ever seen in the volatile cryptocurrency sector.
His Singapore-based Terraform Labs created the TerraUSD stablecoin, which was meant to have a constant US$1 value via a complex mix of algorithms and trader incentives involving a sister token, Luna.
Their combined value soared past US$60 billion (S$79.7 billion) until confidence in the ecosystem evaporated in May 2022, prompting investors to flee and leaving the tokens almost worthless.
Kwon’s whereabouts became unclear four months later after South Korea issued an arrest warrant on allegations including breaches of capital-markets law.
He denied any wrongdoing and tweeted that he is not “on the run”. But he became the subject of an Interpol red notice.
On March 23, Kwon was arrested in Montenegro, and hours later charged with fraud by United States prosecutors.

1. Who is Do Kwon?​

Kwon, 31, left Stanford University in 2015 with a computer science degree according to his LinkedIn profile.

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He had stints at Apple and Microsoft before, as he puts it, falling “down the crypto rabbit hole”.
Kwon co-founded Terraform Labs in 2018, one of many young coders who saw blockchain technology as a gateway to financial revolution.
His project of creating a stable digital currency outside of mainstream finance and regulators wooed a legion of followers, but also critics who said it was a doomed Ponzi scheme.


At times brash and combative, Kwon trolled naysayers online, telling one critic that the Luna community was not as “poor as your broke ass”.
In May 2022, as his project imploded, he said he was “heartbroken about the pain my invention has brought on all of you”.
He has poked fun at people who see him as an absconder, saying he has not gone running in a while and needs to “cut some calories”.

2. What happened to TerraUSD and Luna?​

TerraUSD and sister token Luna collapsed in May 2022 after swelling in value during a pandemic-era crypto boom.
TerraUSD or UST was not backed by dollars or other assets, but instead was supposed to be worth US$1 because it could be redeemed for US$1 worth of Luna, which in turn was meant to increase in value as the Terraform Labs network became more valuable.
TerraUSD grew in popularity when Kwon started the Anchor Protocol, which offered an eye-popping 20 per cent interest rate on TerraUSD deposits.
But the whole edifice crumbled when investor confidence disappeared amid a sell-off in virtual coins.
On May 7, 2022, TerraUSD’s peg began buckling when its price dropped to 99 US cents.
Terraform Labs dramatically raised the supply of Luna to restore the link, causing the latter’s price to sink. (It was once worth more than US$100.)
A Bitcoin reserve worth a few billion dollars failed to stem the spiral: in a matter of days, TerraUSD and Luna were practically valueless.

3. How did Kwon end up a fugitive?​

TerraUSD’s implosion shook digital tokens globally, exacerbating a US$2 trillion wipeout in crypto market value from a November 2021 peak.
That drew the scrutiny of regulators from the US to Asia, as well as law enforcement in South Korea, where some 280,000 people had bought Luna.
Lawyers for Luna investors filed complaints with South Korean prosecutors alleging Kwon had engaged in fraud and illegal fundraising.
On Sept 14 2022, prosecutors said an arrest warrant had been issued for Kwon and five others on charges including breaches of capital-markets law.
Kwon was thought to be in Singapore, but the city state on Sept 17 said he was no longer there.
Prosecutors on Sept 26 said Interpol had issued a red notice – a request for police worldwide to locate and arrest Kwon, who has also been stripped of his South Korean passport.
In February 2023, the US Securities and Exchange Commission accused Kwon and Terraform Labs of fraud.
Singapore police subsequently said they had begun an investigation in relation to the company.

4. What are the wider implications for crypto?​

The Terra fallout likely presages regulations for stablecoins to try to better protect buyers.
Investors are also more wary of decentralised finance, or DeFi, which refers to the practice of trading, borrowing and lending tokens on digital ledgers like the one Kwon built.
In the US, legislation has been drafted that would ban algorithmic stablecoins such as TerraUSD for two years.
In South Korea, the nation’s ardour for digital assets has cooled.
More broadly, the losses from Terra have heaped pressure on crypto investors to better assess risk.
Billionaire Mike Novogratz, whose Galaxy Digital business had backed Terraform Labs, called TerraUSD a “big idea that failed” and a teaching moment about crypto risk management. BLOOMBERG

 

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Crypto giant Binance, CEO hit with US charges for breaking regulatory rules​

Binance and its CEO and founder Zhao Changpeng were sued for operating an alleged “illegal” exchange. PHOTO: REUTERS

Mar 28, 2023

WASHINGTON - A top United States markets regulator on Monday charged the world’s biggest crypto exchange Binance and its founder Zhao Changpeng with multiple violations, in another move by Washington against the once high-flying sector.
Binance and Zhao, who is also its chief executive officer, were sued by the US Commodity Futures Trading Commission (CFTC) for operating what the regulator alleged were an “illegal” exchange and a “sham” compliance programme.
The regulator’s lawsuit comes amid a broader and increasingly high-profile crackdown on crypto companies.
For years, US prosecutors and civil investigators have targeted crypto firms for illegal offerings and failures to comply with rules designed to prevent illicit activity.
But the pace of such government activity has surged recently.
The CFTC said in its complaint on Monday that from at least July 2019 to the present, Binance “offered and executed commodity derivatives transactions on behalf of US persons”, in violation of US laws.
Binance’s compliance programme has been “ineffective” and the firm, under the direction of Zhao, told employees and customers to circumvent compliance controls, the CFTC said, citing a number of practices first reported by Reuters in a series of investigations into the exchange in 2022.

The CFTC also accused Binance’s former chief compliance officer Samuel Lim of “aiding and abetting” Binance’s violations.
Lim did not immediately respond to calls and messages from Reuters.
CFTC chairman Rostin Behnam said in a statement that Binance executives knew for years “they were violating CFTC rules, working actively to both keep the money flowing and avoid compliance”.

The CFTC is responsible for oversight of commodities and derivatives markets, including for Bitcoin.
Firms such as brokers that facilitate US customers’ trading of such products are required to be registered with the agency.
Reuters reported in December that the US Justice Department had been investigating Binance since 2018 for possible money-laundering and sanctions violations.
Binance has processed at least US$10 billion (S$13.3 billion) in payments for criminals and companies seeking to evade US sanctions, Reuters has found.
Bitcoin plunged below US$27,000 after the news, dropping to US$26,525 on the Coinbase exchange.
The token was trading at US$27,078.27, down 3.2 per cent at 8.40am.
Binance’s cryptocurrency BNB, the world’s fourth-largest by market size, dropped around 4 per cent on the news.
Zhao, a billionaire who was born in China and moved to Canada at the age of 12, has not yet directly addressed the CFTC’s allegations.
In a tweet on Monday afternoon, he wrote “4” – a reference to a previous post listing his “Dos and Don’ts” for 2023.
The fourth item on the list was “Ignore FUD, fake news, attacks,” using an acronym for “fear, uncertainty and doubt” often used in crypto in relation to news perceived as negative.

‘Pirate ship’​

Founded in Shanghai in 2017, Binance sits at the heart of the global crypto industry.
Its core Binance.com exchange processed trades worth about US$23 trillion in 2022, according to data provider CryptoCompare.
Trading volumes hit US$34 trillion in 2021, Zhao said in 2022.
With a holding company based in the Cayman Islands, Binance has never revealed the location of its core exchange.
The CFTC charged the holding company and two other Binance units.
Binance did not require customers to submit information verifying their identity before trading and “failed to implement basic compliance procedures designed to prevent and detect terrorist financing and money laundering”, the CFTC said.
The CFTC’s complaint detailed Binance’s efforts to retain US customers even after the company, in partnership with a purportedly independent American firm, launched a US exchange in 2019 to serve American customers in compliance with US regulations.
Reuters previously reported that this American firm, BAM Trading, was in fact controlled by Zhao and managed by Binance as a de-facto subsidiary.
The CFTC said when Zhao hired BAM’s first CEO, he “described Binance as a pirate ship and explained that he wished for Binance.US to be a navy boat”.

VIP customers​

Though Binance’s global business publicly said it was restricting US customers from trading on its platform, the CFTC said Binance told its commercially valuable US-based “VIP customers” how to evade its compliance controls.
Zhao kept information reflecting Binance’s US customer base secret from some senior managers, CFTC said.
In October 2020, Zhao directed Binance personnel to replace the US value for some data fields in Binance’s internal database with “UNKWN”, it said.
Binance traded on its own platform through some 300 “house accounts”, directly or indirectly owned by Zhao, though the exchange had not disclosed this activity in its public terms of use or elsewhere, according to CFTC.
The house accounts were exempt from Binance’s “insider trading” policy, the CFTC said.
The CFTC said it is seeking monetary penalties, disgorgement of ill-gotten gains and permanent trading and registration bans. REUTERS. AFP

 

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Binance isn’t FTX. It’s much bigger and more systemically important to crypto​

So far in March, the exchange has accounted for about 70 per cent of all crypto trading volumes across the spot market. PHOTO: REUTERS

Mar 28, 2023

LONDON - In every single corner of the crypto landscape, one name pops up: Binance.
Run by Mr Zhao “CZ” Changpeng, the world’s largest crypto exchange is a dominant force in everything from Bitcoin trading and digital art to venture capital.
With its power and influence only increasing after the collapse in 2022 of Sam Bankman-Fried’s FTX empire, the inconvenient truth is that Binance has a grip on the US$1.1 trillion (S$1.5 trillion) industry that has few parallels in traditional finance.
That is despite all the decentralisation talk from crypto’s true believers.
So the news on Monday that the United States Commodity Futures Trading Commission (CFTC) sued Binance and chief executive officer Zhao for allegedly evading federal laws and operating an illegal digital-asset exchange, threatens to send shock waves across the world of virtual currencies.
Bitcoin fell as much as 4.5 per cent after the lawsuit was filed.
It is a big deal for both Binance and Mr Zhao, who famously became crypto’s singular titan after contributing to the demise of FTX.

The CFTC is seeking permanent trading and registration bans in the enforcement action it filed, as well as unspecified penalties and restitution.
It is one of several US authorities, including the Securities and Exchange Commission and the Department of Justice, that have been investigating Binance’s activities.
For all the excitement that accompanied the arrest of former wunderkind Bankman-Fried, Mr Zhao’s sway over the industry is far larger – meaning the fallout may be that much wider.

The company is the biggest target by far in a US regulatory crackdown that has engulfed other big players, from US exchange Coinbase Global to entrepreneur Justin Sun and fallen algorithmic stablecoin king Do Kwon.
After Mr Zhao co-founded the exchange in 2017 and embarked on an acquisition spree, Binance has morphed into a brokerage, digital wallet, venture fund, custody service, data provider, digital-art marketplace and token issuer – all in one.
So far in March, the exchange has accounted for about 70 per cent of all trading volumes across the spot market, compared with just 6 per cent for Coinbase Global, according to digital-asset data provider Kaiko.
It is the kind of market heft that dwarfs the role of Apple or Samsung Electronics in the smartphone market, for example.
In a popular product known as perpetual futures, Binance controlled a record 62 per cent of global volumes in 2022, a CoinGecko report shows.
In the US, where Binance started a separate platform in 2019, it has accounted for a more modest share of spot trading at nearly 7 per cent over the past year, Kaiko data show.
The move will reverberate across an industry that boomed outside regulated finance in a decade of low interest rates – before Ponzi schemes, exchange mishaps and more helped snuff out speculative euphoria.
For critics, the charges will look like delayed justice for a firm that has for years refused to name a corporate parent or even its headquarters, amid allegations of corporate mismanagement.
Diehard believers will either cling to the bull case that a new era of regulatory action will legitimise the industry – or will argue crypto needs to go back to the fringes to live up to its libertarian vision.
Some crypto fans may well shrug off the charges, yet Binance’s many ties to traditional finance may now be at risk.
Institutions that have flirted with crypto will have to weigh new charges against the liquidity offered by the world’s largest exchange.
The CFTC complaint noted that Binance had courted US institutions and directed “VIP” clients to open Binance accounts via shell companies.
Binance’s ties with traditional banking channels have also recently frayed after Signature Bank, which had been supporting its dollar transactions, went under and Paysafe, which did the same for trades in the British pound, stopped the service due to regulatory risks.

Large reach​

Born in China, Mr Zhao moved to Vancouver when he was 12 and became a Canadian citizen.
With a computer science degree from McGill University, he began a career building trading systems, including a stint at Bloomberg, the parent company of Bloomberg News.
In 2013, Mr Zhao was running his own software company in Shanghai when he discovered Bitcoin over a poker game with the co-founder of BTC China Bobby Lee and tech investor Ron Cao.
After working at Blockchain.info and OKCoin, he started Binance.
His expertise and the lack of material crypto regulation have helped make Binance a global giant.
In decentralised finance – a corner of crypto where trading runs on software rather than any corporate platform – Binance also has its BNB Chain, a network whose independence has always been in question.
Its own token BNB is the fourth-largest in the world, with a total value of roughly US$62 billion, CoinGecko data show.
As the exchange drew more retail traders, a host of regulators have issued loud warnings, including from Malta, Japan and the Britain.
Binance has subsequently sought to strike a more conciliatory tone.
It expanded its compliance team, registered with regulators in some jurisdictions and admitted to past “gaps” in compliance.
Binance Holdings, a Cayman Islands entity, owns the exchange’s trademarks and is generally presumed to be the main entity.
It was named in the CFTC suit, along with two Binance firms in Ireland and former chief compliance officer Samuel Lim.
In jurisdictions where owners have to be disclosed, the exchange’s local entities are typically owned by “CZ” alone.
Unlike FTX, it is not clear whether there are any external investors in Binance.
The seed round for its US arm raised money from Circle Ventures, VanEck and RRE Ventures. BLOOMBERG

 

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Bitcoin seller loses lawsuit over deal involving $320k in cash​

The High Court found that both the seller and the buyer were not the proper parties to the contract. PHOTO ILLUSTRATION: PIXABAY

Selina Lum
Senior Law Correspondent

Mar 28, 2023

SINGAPORE - A face-to-face transaction to sell $320,000 worth of bitcoin went awry when a quarrel broke out over who was entitled to the cash after the buyer denied having received the cryptocurrency, despite the bitcoin network confirming the transfer.
Mr Christofle Rio, who had transferred 12.14 bitcoin to a digital wallet, eventually left the Tanjong Pagar apartment without the cash and bereft of the cryptocurrency.
He then sued Mr Malcolm Tan Chun Chuen, the man who transacted with him, for breach of contract for failing to pay the agreed price.
But Mr Tan argued that his company, Qrypt Technologies, was merely a middleman that facilitated the sale of bitcoin from Mr Rio’s company, GCXpress Commerce (GCX), to the actual buyers.
He contended that he cannot be liable, nor does Mr Rio have the legal standing to sue, simply because the agreement was not between them as individuals, but between their respective companies.
Mr Rio’s lawsuit was dismissed last Wednesday, after the High Court found that both men were not the proper parties to the contract as they were acting on behalf of their respective companies, and not in their personal capacities.
Mr Rio set up GCX in 2019 as a cryptocurrencies trading business, while Mr Tan, a disbarred lawyer, was the managing director of Qrypt, a digital assets and blockchain company.

According to Mr Tan, he was contacted on Dec 1, 2020 via messaging app Telegram by someone identified as “Kenneth”, who asked to buy more than $300,000 worth of bitcoin.
Mr Tan then contacted Mr Rio, who said he had $320,000 worth of bitcoin to sell. They arranged to conduct the transaction at Mr Tan’s office at 18 Spottiswoode Park Road that afternoon.
Mr Tan then informed Kenneth about the meeting. Kenneth said he would be present at the office with his staff, and emphasised that all communications should be done via Telegram.


At 4.10pm, three men, who identified themselves as Kenneth, Eric Foo and Chua Hong You, arrived at Mr Tan’s office. Mr Foo took cash out of a bag and placed it on a table in the room.
Mr Tan asked Kenneth for his identity card to allow Qrypt’s compliance manager to complete the checks to comply with Monetary Authority of Singapore regulations.
Kenneth declined and asked Mr Chua to provide his identity card instead. Mr Chua was cleared to proceed with the transaction.
Some confusion was caused when a second buyer showed up, also carrying $320,000 in cash. The buyers had apparently arranged for him to wait downstairs. He was told to leave the premises.
At about 4.30pm, Mr Rio, accompanied by a Mr Phoon Chee Kong, arrived with counting machines. After the cash was counted, Mr Rio transferred 12.14 bitcoin to the wallet specified by Mr Tan.
Mr Tan then sent 11.982443 bitcoin – after deducting a 1 per cent administrative fee – to the wallet address stated in the Telegram chat.
However, the verification process took over an hour. Mr Rio and Mr Phoon were stopped by the three buyers from leaving with the cash until the transfer has been verified.

Things fell apart after confirmation was received from the bitcoin network.
Mr Tan said the person to whom he had transferred the bitcoin deleted their entire Telegram chat, while Kenneth denied that the Bitcoin was transferred to his wallet.
Mr Rio called the police and statements were taken from all six men. The buyers were allowed to keep the cash pending further investigations.
Mr Tan transferred the admin fee to GCX’s wallet and also made a police report.
Mr Rio sued Mr Tan for the balance of 11.982443 bitcoin, or $315,846.93 in monetary terms.
Justice Lee said the fundamental question in the suit was who were the proper parties to the contract.
He noted that it was a trite principle of law that only parties to a contract have the standing to sue and enforce those contractual obligations.
The judge said a number of factors point to the conclusion that Mr Rio was not acting in his personal capacity, including the fact that he had communicated with Mr Tan via a chat group that was operated by GCX to facilitate transactions.
As for Mr Tan, the judge said he could not have intended to enter into the agreement in his personal capacity, as it was Qrypt that was allowed by MAS to provide a digital payment token service.
Justice Lee also suggested that the relevant authority look into whether the due diligence process in this case was satisfactory. He noted that Mr Tan was prepared to forgo compliance checks on Kenneth, whom he believed was the ultimate buyer.

 

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FTX failure rooted in ‘hubris’ and ‘greed’, debtors report finds​

At the root of FTX’s spectacular collapse was “hubris, incompetence and greed” on the part of founder Sam Bankman-Fried and top executives, say the company's debtors. PHOTO: AFP

Apr 10, 2023

NEW YORK – Failed crypto exchange FTX Trading lacked fundamental financial and accounting controls, stifled dissent within the company and joked internally about its tendency to lose track of millions of dollars in assets, according to a report by the company’s debtors.
The report is the first released by FTX debtors since Sam Bankman-Fried’s digital asset empire rapidly collapsed into bankruptcy in November, with billions of dollars in customer funds lost.
At the root of FTX’s spectacular collapse was “hubris, incompetence and greed” on the part of Bankman-Fried and top executives, including former engineering director Nishad Singh and former chief technology officer Gary Wang, the report said.
“Despite the public image it sought to create of a responsible business, the FTX Group was tightly controlled by a small group of individuals who showed little interest in instituting an appropriate oversight or control framework,” said the report.
“These individuals stifled dissent, commingled and misused corporate and customer funds, lied to third parties about their business, joked internally about their tendency to lose track of millions of dollars in assets, and thereby caused the FTX Group to collapse as swiftly as it had grown.”
When FTX filed for Chapter 11, the company did not even have a complete list of who its employees were, according to the report.
“We are releasing the first report in the spirit of transparency that we promised since the beginning of the Chapter 11 process,” Mr John Ray III, FTX’s new chief executive officer and chief restructuring officer, said in a press release.

The debtors said they reviewed more than one million documents and analysed the cryptocurrency firm’s available financial records and electronic devices, as well as interviewed 19 employees, as they put together the overview of FTX’s control failures.
Digital assets worth more than US$1.4 billion (S$1.9 billion) have been recovered and secured in cold storage, the debtors said in the report. They added that an additional US$1.7 billion has been identified and is in the process of being recovered.
Despite asset levels of billions of dollars and enormous transaction volumes, FTX “lacked fundamental financial and accounting controls”, the report said.
“Reconstruction of the debtors’ balance sheets is an ongoing, bottom-up exercise that continues to require significant effort by professionals,” it added.
Bankman-Fried faces trial in October after pleading not guilty to fraud and campaign-finance law charges. Singh pleaded guilty in February to fraud as part of a cooperation deal with prosecutors. Wang and former CEO Caroline Ellison pleaded guilty last year to charges in connection to their roles at FTX and its sister trading house, Alameda Research, and are working with the government. BLOOMBERG

 

[LITTLEREDDOT]

Crypto giant Binance, CEO hit with US charges for breaking regulatory rules​

Binance and its CEO and founder Zhao Changpeng were sued for operating an alleged “illegal” exchange. PHOTO: REUTERS

MAR 28, 2023


WASHINGTON - A top United States markets regulator on Monday charged the world’s biggest crypto exchange Binance and its founder Zhao Changpeng with multiple violations, in another move by Washington against the once high-flying sector.
Binance and Zhao, who is also its chief executive officer, were sued by the US Commodity Futures Trading Commission (CFTC) for operating what the regulator alleged were an “illegal” exchange and a “sham” compliance programme.
The regulator’s lawsuit comes amid a broader and increasingly high-profile crackdown on crypto companies.
For years, US prosecutors and civil investigators have targeted crypto firms for illegal offerings and failures to comply with rules designed to prevent illicit activity.
But the pace of such government activity has surged recently.
The CFTC said in its complaint on Monday that from at least July 2019 to the present, Binance “offered and executed commodity derivatives transactions on behalf of US persons”, in violation of US laws.
Binance’s compliance programme has been “ineffective” and the firm, under the direction of Zhao, told employees and customers to circumvent compliance controls, the CFTC said, citing a number of practices first reported by Reuters in a series of investigations into the exchange in 2022.

The CFTC also accused Binance’s former chief compliance officer Samuel Lim of “aiding and abetting” Binance’s violations.
Lim did not immediately respond to calls and messages from Reuters.
CFTC chairman Rostin Behnam said in a statement that Binance executives knew for years “they were violating CFTC rules, working actively to both keep the money flowing and avoid compliance”.

The CFTC is responsible for oversight of commodities and derivatives markets, including for Bitcoin.
Firms such as brokers that facilitate US customers’ trading of such products are required to be registered with the agency.
Reuters reported in December that the US Justice Department had been investigating Binance since 2018 for possible money-laundering and sanctions violations.
Binance has processed at least US$10 billion (S$13.3 billion) in payments for criminals and companies seeking to evade US sanctions, Reuters has found.
Bitcoin plunged below US$27,000 after the news, dropping to US$26,525 on the Coinbase exchange.
The token was trading at US$27,078.27, down 3.2 per cent at 8.40am.
Binance’s cryptocurrency BNB, the world’s fourth-largest by market size, dropped around 4 per cent on the news.
Zhao, a billionaire who was born in China and moved to Canada at the age of 12, has not yet directly addressed the CFTC’s allegations.
In a tweet on Monday afternoon, he wrote “4” – a reference to a previous post listing his “Dos and Don’ts” for 2023.
The fourth item on the list was “Ignore FUD, fake news, attacks,” using an acronym for “fear, uncertainty and doubt” often used in crypto in relation to news perceived as negative.

‘Pirate ship’​

Founded in Shanghai in 2017, Binance sits at the heart of the global crypto industry.
Its core Binance.com exchange processed trades worth about US$23 trillion in 2022, according to data provider CryptoCompare.
Trading volumes hit US$34 trillion in 2021, Zhao said in 2022.
With a holding company based in the Cayman Islands, Binance has never revealed the location of its core exchange.
The CFTC charged the holding company and two other Binance units.
Binance did not require customers to submit information verifying their identity before trading and “failed to implement basic compliance procedures designed to prevent and detect terrorist financing and money laundering”, the CFTC said.
The CFTC’s complaint detailed Binance’s efforts to retain US customers even after the company, in partnership with a purportedly independent American firm, launched a US exchange in 2019 to serve American customers in compliance with US regulations.
Reuters previously reported that this American firm, BAM Trading, was in fact controlled by Zhao and managed by Binance as a de-facto subsidiary.
The CFTC said when Zhao hired BAM’s first CEO, he “described Binance as a pirate ship and explained that he wished for Binance.US to be a navy boat”.

VIP customers​

Though Binance’s global business publicly said it was restricting US customers from trading on its platform, the CFTC said Binance told its commercially valuable US-based “VIP customers” how to evade its compliance controls.
Zhao kept information reflecting Binance’s US customer base secret from some senior managers, CFTC said.
In October 2020, Zhao directed Binance personnel to replace the US value for some data fields in Binance’s internal database with “UNKWN”, it said.
Binance traded on its own platform through some 300 “house accounts”, directly or indirectly owned by Zhao, though the exchange had not disclosed this activity in its public terms of use or elsewhere, according to CFTC.
The house accounts were exempt from Binance’s “insider trading” policy, the CFTC said.
The CFTC said it is seeking monetary penalties, disgorgement of ill-gotten gains and permanent trading and registration bans. REUTERS. AFP

 

[LITTLEREDDOT]

Bitcoin seller loses lawsuit over deal involving $320k in cash​

The High Court found that both the seller and the buyer were not the proper parties to the contract. PHOTO ILLUSTRATION: PIXABAY

Selina Lum
Senior Law Correspondent

MAR 29, 2023


SINGAPORE - A face-to-face transaction to sell $320,000 worth of Bitcoin went awry when a quarrel broke out over who was entitled to the cash after the buyer denied having received the cryptocurrency, despite the Bitcoin network confirming the transfer.
Mr Christofle Rio, who had transferred 12.14 bitcoins to a digital wallet, eventually left the Tanjong Pagar apartment without the cash and bereft of the cryptocurrency.
He then sued Mr Malcolm Tan Chun Chuen, the man who transacted with him, for breach of contract for failing to pay the agreed price.
But Mr Tan argued that his company, Qrypt Technologies, was merely a middleman that facilitated the sale of Bitcoin from Mr Rio’s company, GCXpress Commerce (GCX), to the actual buyers.
He contended that he cannot be liable, nor does Mr Rio have the legal standing to sue, simply because the agreement was not between them as individuals, but between their respective companies.
Mr Rio’s lawsuit was dismissed last Wednesday, after the High Court found that both men were not the proper parties to the contract as they were acting on behalf of their respective companies, and not in their personal capacities.
Mr Rio set up GCX in 2019 as a cryptocurrencies trading business, while Mr Tan, a disbarred lawyer, was the managing director of Qrypt, a digital assets and blockchain company.

According to Mr Tan, he was contacted on Dec 1, 2020 via messaging app Telegram by someone identified as “Kenneth”, who asked to buy more than $300,000 worth of Bitcoin.
Mr Tan then contacted Mr Rio, who said he had $320,000 worth of Bitcoin to sell. They arranged to conduct the transaction at Mr Tan’s office at 18 Spottiswoode Park Road that afternoon.
Mr Tan then informed Kenneth about the meeting. Kenneth said he would be present at the office with his staff, and emphasised that all communication should be done via Telegram.


At 4.10pm, three men, who identified themselves as Kenneth, Eric Foo and Chua Hong You, arrived at Mr Tan’s office. Mr Foo took cash out of a bag and placed it on a table in the room.
Mr Tan asked Kenneth for his identity card to allow Qrypt’s compliance manager to complete the checks to comply with Monetary Authority of Singapore regulations.
Kenneth declined and asked Mr Chua to provide his identity card instead. Mr Chua was cleared to proceed with the transaction.
Some confusion was caused when a second buyer showed up, also carrying $320,000 in cash. The buyers had apparently arranged for him to wait downstairs. He was told to leave the premises.

At about 4.30pm, Mr Rio, accompanied by a Mr Phoon Chee Kong, arrived with counting machines. After the cash was counted, Mr Rio transferred 12.14 bitcoins to the wallet specified by Mr Tan.
Mr Tan then sent 11.982443 bitcoins – after deducting a 1 per cent administrative fee – to the wallet address stated in the Telegram chat.
However, the verification process took over an hour.
Mr Rio and Mr Phoon were stopped by the three buyers from leaving with the cash until the transfer had been verified.
Things fell apart after confirmation was received from the Bitcoin network.
Mr Tan said the person to whom he had transferred the bitcoins deleted their entire Telegram chat, while Kenneth denied that the bitcoins were transferred to his wallet.
Mr Rio called the police and statements were taken from all six men. The buyers were allowed to keep the cash pending further investigations.
Mr Tan transferred the admin fee to GCX’s wallet and also made a police report.
Mr Rio sued Mr Tan for the balance of 11.982443 bitcoins, or $315,846.93 in monetary terms.

Justice Lee said the fundamental question in the suit was who were the proper parties to the contract.
He noted that it was a trite principle of law that only parties to a contract have the standing to sue and enforce those contractual obligations.
The judge said a number of factors point to the conclusion that Mr Rio was not acting in his personal capacity, including the fact that he had communicated with Mr Tan via a chat group that was operated by GCX to facilitate transactions.
As for Mr Tan, the judge said he could not have intended to enter into the agreement in his personal capacity, as it was Qrypt that was allowed by MAS to provide a digital payment token service.
Justice Lee also suggested that the relevant authority look into whether the due diligence process in this case was satisfactory. He noted that Mr Tan was prepared to forgo compliance checks on Kenneth, whom he believed was the ultimate buyer.

 

[LITTLEREDDOT]

FTX founder Bankman-Fried charged in US with bribing Chinese officials​

Bankman-Fried faces several counts of fraud over the collapse of crypto exchange FTX. REUTERS

MAR 29, 2023


NEW YORK - United States prosecutors on Tuesday unveiled a new indictment against Sam Bankman-Fried, accusing the founder of the now-bankrupt FTX cryptocurrency exchange of paying a US$40 million (S$53 million) bribe to Chinese officials so they would unfreeze his hedge fund’s accounts.
The new bribery conspiracy charge adds pressure on the 31-year-old former billionaire, who now faces a 13-count indictment over the November collapse of FTX.
Prosecutors had previously accused Bankman-Fried of stealing billions of dollars in customer funds to plug losses at his Alameda Research hedge fund and orchestrating an illegal campaign donation scheme to buy influence in Washington, DC.
A spokesman for Bankman-Fried declined to comment.
Bankman-Fried is expected to be arraigned on Thursday before US District Judge Lewis Kaplan in Manhattan federal court.
Separately on Tuesday, Judge Kaplan approved modifications to Bankman-Fried’s US$250 million bail package that are designed to prevent the defendant from tampering with witnesses.
The indictment said Bankman-Fried ordered the US$40 million cryptocurrency payment to a private wallet from Alameda’s main trading account, to persuade Chinese government authorities to unfreeze Alameda accounts with more than US$1 billion of cryptocurrency.

Prosecutors said the Alameda accounts had been frozen as part of an investigation into an unnamed Alameda counterparty, and Bankman-Fried’s prior efforts to lobby Chinese officials to lift the freeze were unsuccessful.
They also said Bankman-Fried later authorised a transfer of tens of millions of dollars of additional cryptocurrency to “complete” the bribe.
China’s Foreign Ministry could not immediately be reached for comment after business hours in Beijing.


The Chinese embassy in Washington, DC, did not immediately respond to a request for comment.
Bankman-Fried has pleaded not guilty to eight of the 13 counts he faces, and has not yet been arraigned on the campaign finance or bribery conspiracy charges.
He has acknowledged inadequate risk management at FTX, but has denied stealing money.
Three one-time members of his inner circle – former Alameda chief executive officer Caroline Ellison, former FTX technology chief Zixiao “Gary” Wang, and former FTX engineering director Nishad Singh – have pleaded guilty and agreed to cooperate with prosecutors.

Crypto crackdown​

Bankman-Fried’s case is part of an escalating crackdown on alleged abuses at digital asset exchanges by US prosecutors and regulators, following last year’s plunge in the values of Bitcoin and other tokens as central banks raised interest rates.
Last Thursday, Do Kwon, whose Terraform Labs developed the TerraUSD and Luna coins that crashed last May, was arrested in Montenegro while carrying alleged bogus travel documents, as a Manhattan grand jury indicted him on fraud charges.
And on Monday, the Commodity Futures Trading Commission sued Binance, the world’s biggest crypto exchange, and its founder Changpeng Zhao for executing unauthorised transactions.
Zhao called the complaint “unexpected and disappointing”.
The US Securities and Exchange Commission has separately threatened to sue Coinbase Global over that crypto exchange’s products.
Prosecutors’ newest charge accuses Bankman-Fried of conspiring to violate the Foreign Corrupt Practices Act, which makes it illegal for US citizens to bribe foreign government officials to win business.
Bankman-Fried is confined to his parents’ Palo Alto, California home ahead of his scheduled Oct 2 trial.
His revised bail conditions prevent him from using most electronics, apart from a phone with no internet capability and a basic laptop with limited functions.
The laptop will have monitoring software to track user activity.
Concerns that Bankman-Fried might tamper with witnesses, prompted Judge Kaplan to threaten jailing him unless tighter restrictions could be worked out.
Lawyers for Bankman-Fried have said their client contacted current FTX executives to offer help, not to interfere, but nonetheless agreed to restrictions on his use of electronics. REUTERS

 

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US district court issues summons to crypto mogul Justin Sun in Singapore​

Cryptocurrency mogul Justin Sun has come under scrutiny by the SEC, which sued him on March 22. PHOTO: BLOOMBERG

Aqil Hamzah

Apr 14, 2023

SINGAPORE – Cryptocurrency mogul Justin Sun was on Thursday issued a summons from a United States District Court, and has been given 21 days to respond in relation to the lawsuit filed by the Securities and Exchange Commission (SEC).
The document seen by The Straits Times said failure to respond in time would result in the court ruling in favour of the plaintiff.
The summons was addressed to two locations - 8 Lady Hill Road, a Good Class Bungalow in the Tanglin area, as well as an office space in 9 Temasek Boulevard, Suntec Tower Two.
The 32-year-old China national, who founded Tron Foundation and BitTorrent Foundation in Singapore, has come under scrutiny by the SEC, which sued him on March 22 following allegations of selling and airdropping unregistered securities, fraud and market manipulation.
The lawsuit includes Mr Sun’s three wholly-owned companies - Tron Foundation, BitTorrent Foundation and Rainberry Incorporated, as well as two musicians - Austin Mahone and DeAndre Cortez Way, better known as Soulja Boy.
The SEC alleged that he had “engineered the offer and sale of two crypto assets called TRX and BTT” through the companies.
These assets were labelled as securities and required registration with the SEC, but it is alleged that this was not carried out.

It is also alleged that Mr Sun had manipulated the market for TRX to “create the artificial appearance of legitimate investor interest and keep (its) price afloat”.
Hundreds of thousands of trades were said to have been carried out between accounts that he controlled.
The lawsuit also named six other celebrities, musicians Lil Yachty, Ne-Yo and Akon; actors Lindsay Lohan and Kendra Lust; and social media personality Jake Paul for illegally touting the two cryptocurrencies without disclosing that they were being compensated and by how much.
The majority of them have already settled their respective charges. Only Mahone and Soulja Boy were named in the latest summons.
Bloomberg had earlier in the year reported that Mr Sun was the majority shareholder of Huobi Global, but he denied being the owner of a roughly 60 per cent stake.
Instead, his official position was an adviser, he said.
In a statement on March 22, SEC chairman Gary Gensler described Mr Sun as not just targeting US investors, but also coordinating wash trading to create a misleading impression of active trading in TRX.
He added: “(Mr) Sun further induced investors to purchase TRX and BTT by orchestrating a promotional campaign in which he and his celebrity promoters hid the fact that the celebrities were paid for their tweets.”

 

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Singaporean founder of crypto-trading platform Torque sued by liquidators​

Torque founder Bernard Ong was in May directed by the High Court to respond to the liquidators' questions. PHOTO: TORQUE TRADING SYSTEM/FACEBOOK

Joyce Lim
Senior Correspondent

MAY 14, 2023


SINGAPORE – Singaporean businessman Bernard Ong Hock Fong, who founded the now-collapsed cryptocurrency trader Torque, has been sued by the liquidators of Torque in the High Court to recover hundreds of millions worth of cryptocurrency that were lost under his watch.
In a suit filed on May 5, the liquidators alleged that Mr Ong, 36, had failed in his duties as the sole director and chief executive of Torque Group Holdings (Torque), which caused substantial losses of investors’ funds and eventually the total collapse of its online cryptocurrency trading platform in 2021.
Mr Ong has filed an intention to contest the lawsuit.
Torque, which is in liquidation, and its joint liquidators, Mr Jason Aleksander Kardachi and Ms Elaine Hanrahan, are represented by Mr Yam Wern-Jhien, director and co-founder of Setia Law.
Torque was incorporated in the British Virgin Islands (BVI) on Oct 23, 2019, with management in Singapore and Mr Ong as the sole shareholder. The firm, which operated out of Vietnam, was ordered to be wound up on March 18, 2021.
From 2019 to March 2021, Torque took custody of customer cryptocurrency deposits valued at an aggregate of at least US$205.9 million (S$275.6 million). It claimed that it would use automated and algorithmic trading programs to trade and generate returns for its customers’ deposits. But the liquidators’ investigations found no record of such activities.
The liquidators’ investigations showed that Torque had been using an account registered with Binance.com under a Vietnamese employee’s name and personal e-mail address to hold and trade customers’ deposits, and this account never held more than US$18.7 million worth of customer deposits at any one time.

Torque’s other accounts also never held assets of any significant value.
The liquidators also found a substantial portion of these cryptocurrency deposits were subsequently lost as the total value of customer deposits held by Torque amounted to only US$8.6 million on March 18, 2021 when it was wound up.
Mr Ong, who apparently could not explain or account for the loss of customers’ deposits, has been accused in the current lawsuit of pocketing customers’ deposits by making unauthorised payments of 71.0273 Bitcoins with an estimated value of US$25.3 million to 15 cryptocurrency wallet addresses belonging to himself.


The remaining missing portion of customer deposits, however, remain unaccounted for, despite the investigative efforts of the liquidators since the date of the liquidation.
These missing customer deposits have proven untraceable and unrecoverable, in light of the significant deficiencies in Torque’s financial and trading record-keeping, noted court documents.
Under Mr Ong’s watch, “Torque operated in an utterly shambolic manner” and “did not have even the most basic forms of corporate governance or financial controls in place”, said the liquidators in their statement of claim.
It illegally provided regulated services in Singapore, or to Singapore-based customers, without the requisite licence or exemptions from the Singapore regulators, and without implementing any of the risk management and internal control practices expected of a company of its nature, including those laid out in the Monetary Authority of Singapore’s guidelines, according to the court documents filed.
Notwithstanding that Torque’s trading activities took place in Vietnam, Mr Ong and a group of individuals had apparently begun marketing Torque’s platform and services, onboarding customers and receiving cryptocurrency deposits and conducting trading even before Torque was formally incorporated.

A significant portion of the customers that used Torque’s cryptocurrency trading services were located in Singapore. Between Aug 2, 2019 and Feb 23, 2021, Torque accepted registrations from 2,577 customers located in Singapore to open 41,416 accounts, with cryptocurrency deposit balances amounting to about US$137 million.
It was previously reported that Torque had over 14,000 investors across 120 countries. There were businessmen, working professionals, students, housewives and retirees.
Court documents also noted that Torque’s trading operations and custody of customer deposits were left to be run by “a team of rogue traders and coders in Vietnam” led by two individuals – named Wu Zhongyi and Fong Chee Kiong – without any form of effective supervision or oversight. There was also no independent accounting or auditing department, or record-keeping system.
Mr Fong, who was the former chief product officer, was accused of conspiring with Mr Wu, the former chief technology officer, to misappropriate hundreds of millions worth of cryptocurrency assets from Torque between January 2020 and February 2021. They were declared bankrupt in December 2022, after Torque’s liquidators began bankruptcy proceedings against them.
Mr Ong allegedly breached his duty as the sole director and chief executive of the firm when he failed to prevent unauthorised payments being made by his staff.
The Straits Times reported in 2021 that about 100 police reports were lodged against Torque and Mr Ong. About one-third of the reports were made by foreigners via Singapore police online platform I-Witness.
Police confirmed the reports lodged and said investigations were ongoing.
Investors who spoke to The Straits Times said their investments in cryptocurrency were meant for their retirement, down payments for houses, weddings, medical expenses and children’s education.

 

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US sues Binance and founder Zhao over 'web of deception'​

The United States Securities and Exchange Commission allege that Binance chief executive Zhao Changpeng designed and implemented a plan to “surreptitiously evade US laws". PHOTO: REUTERS

June 6, 2023

WASHINGTON - United States regulators sued Binance and its chief executive Zhao Changpeng on Monday for allegedly operating a “web of deception”, piling further pressure on the world’s biggest cryptocurrency exchange and sending bitcoin to its lowest in almost three months.
The US Securities and Exchange Commission (SEC) complaint, filed in a federal court in Washington, listed 13 charges against Binance, Zhao and the operator of its purportedly independent US exchange.
The SEC alleged that Binance artificially inflated its trading volumes and diverted customer funds, as well as failed to restrict US customers from its platform and misled investors about its market surveillance controls.
The SEC also claimed that Binance and Zhao, its billionaire founder and one of the crypto industry’s highest-profile moguls, secretly controlled customers’ assets, allowing them to commingle and divert investor funds “as they please”.
Binance created separate US entities “as part of an elaborate scheme to evade US federal securities laws”, the SEC also alleged, citing a number of practices first reported by Reuters in a series of investigations into the exchange published in 2023 and in 2022.
From almost three years ago until June 2022, a trading firm owned and controlled by Zhao, Sigma Chain, engaged in so-called wash trading that artificially inflated the trading volume of crypto asset securities on the Binance.US platform, the SEC also alleged.
“We allege that Zhao and Binance entities engaged in an extensive web of deception, conflicts of interest, lack of disclosure, and calculated evasion of the law,” SEC chair Gary Gensler said in a statement.

In a blog post, Binance said: “We intend to defend our platform vigorously,” adding that “because Binance is not a US exchange, the SEC’s actions are limited in reach.”
“All user assets on Binance and Binance affiliate platforms, including Binance.US, are safe and secure,” the blog post said.
Binance.US, which is ultimately controlled by Zhao, said in a tweet that the lawsuit was “unjustified by the facts, by the law, or by the commission’s own precedent”.

Bitcoin, the world’s biggest cryptocurrency, fell as much as 6 per cent on the news to its lowest in almost three months. Binance’s own cryptocurrency BNB, the world’s fourth-largest by market size, dropped more than 5 per cent.
Market players said the SEC’s allegations could hobble Binance, with the lawsuit likely to reverberate through the crypto industry. Binance dominates crypto trading, in 2022 processing trades worth about US$65 billion (S$87.8 billion) a day with up to 70 per cent of the market.
“I think that there’s a big risk here that this could be crippling to Binance,” said Oanda senior market analyst Ed Moya.

Legal headaches​

The SEC complaint is the latest in a series of legal headaches for Binance, which was also sued by the US Commodity Futures Trading Commission (CFTC) in March for operating what the regulator alleged were an “illegal” exchange and a “sham” compliance programme. Zhao called those an “incomplete recitation of facts”.
Binance is also under investigation by the US Justice Department for suspected money laundering and sanctions violations, according to people familiar with the probe.
The holding company of Binance, founded in Shanghai in 2017 by Zhao, a Canadian citizen who was born and raised until the age of 12 in China, is based in the Cayman Islands.
The exchange, however, says it does not have a headquarters and has declined to state the location of its main Binance.com exchange.
The SEC alleged that Zhao designed and implemented a plan to “surreptitiously evade US laws”.
“We do not want.com to be regulated ever,” the SEC alleged that Binance’s chief compliance officer admitted.
Zhao directed Binance.US even though the US entity has long said it operates independently, the SEC said.
The SEC said that billions of dollars in Binance customer funds were commingled – mixed with corporate funds, in breach of US laws – in a bank account of an entity controlled by Zhao, and then transferred to a trading firm, Merit Peak, also controlled by Zhao.

Reuters reported in May that Binance commingled its customers’ funds with its corporate revenues in a US bank account belonging to Merit Peak.
Binance denied mixing customer deposits and company funds, saying that users who sent money to the account were not making deposits but rather buying Binance’s bespoke dollar-linked crypto token.
Reuters reported on Monday before the SEC lawsuit that a senior Binance executive was the main operator for five bank accounts belonging to BAM Trading, the operator of Binance.US, including an account that held American customers’ funds.
The SEC wrote that the executive had at least until Dec 2020, also had “signatory authority over BAM Trading’s US Dollar accounts”. REUTERS

 

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Crypto shares tumble as Binance SEC lawsuit ripples through industry​

Bitcoin, the world's biggest cryptocurrency, was down 5.45 per cent after falling to its lowest level since mid-March. PHOTO: REUTERS

June 6, 2023

NEW YORK - Cryptocurrencies and shares in crypto and blockchain-related companies tumbled on Monday after the United States’ securities regulator sued crypto exchange Binance, another blow to the industry.
The US Securities and Exchange Commission (SEC) sued Binance and its chief executive Zhao Changpeng for secretly controlling Binance.US as part of a “web of deception” to evade US laws, among other charges.
Reuters earlier reported that Binance controlled its US affiliate’s bank accounts, despite claiming it was independent.
The SEC also said Binance artificially inflated trading volumes on the platform, diverted customer funds and failed to restrict US customers from its platform and misled investors about market surveillance controls.
Bitcoin, the world’s biggest cryptocurrency, was down 5.45 per cent after falling to its lowest level since mid-March following the news. Binance’s own cryptocurrency fell 9.72 per cent.
The charges filed in a federal court in Washington are the latest in a string of enforcement actions brought by the agency in a bid to curtail the cryptocurrency industry, which SEC chair Gary Gensler has described as “the Wild West”.
The SEC crackdown has prompted some crypto companies to increase compliance, spike products, and expand overseas, moves that some market watchers said would likely be accelerated by this latest action against the world’s largest crypto exchange.

“This is yet another targeted attack that is devastating in the crypto ecosystem. Pretty soon, the SEC won’t have anyone left to sue,” said Mr John Reed Stark, a former chief of the SEC’s Office of Internet Enforcement.
In statements, Binance said it had been cooperating with the SEC’s probes and had “worked hard to answer their questions and address their concerns” including by trying to reach a negotiated settlement.
“With its complaint today, the SEC abandoned that process and instead chose to act unilaterally and litigate. We are disheartened by that choice,” the company said.

The SEC’s move to abandon a settlement and move to litigate underscores the aggressiveness with which it has approached the cryptocurrency industry, which the agency says has violated its rules on trading and securities issuance. The SEC did not immediately respond to a request for comment.
In April, the SEC charged crypto exchange Bittrex with operating an unregistered securities exchange, broker and clearing agency, and settled with Kraken in February for US$30 million (S$40.5 million) over the exchange’s US crypto staking service.
Coinbase Global disclosed in March that the SEC has threatened to sue the company over some of its products.

Many big crypto companies started out in the belief their products did not fall within the SEC’s jurisdiction and say the rules are confusing.
They are now “in a heap of trouble”, said Georgetown University finance professor James Angel.
“They’d better be hiring lots of the best regulatory counsel that money can buy, because they’re going to need it.”
Shares of Coinbase were down 9.1 per cent on the news of the SEC’s charges against Binance.
Crypto miner Riot Platforms was off 8.8 per cent while Marathon Digital was down 8.4 per cent, and Hut 8 Mining was off 4.6 per cent.
Following some of the SEC’s actions against crypto companies in 2023, several firms have invested in expanding their operations outside the US.
Both Coinbase and crypto exchange Gemini launched international exchanges for crypto derivatives in May.
Still, the regulatory actions in the US “highlight the need to establish safeguards in these markets to meet the expectations of investors and customers,” said Mr Rajeev Bamra, senior vice-president and head of decentralised finance and digital assets strategy at Moody’s Investors Service.
“Consequently, these charges have the potential to reshape the regulatory landscape for digital assets,” he said. REUTERS

 

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Inside the US allegations against Binance and CEO Zhao Changpeng​

Binance and its CEO Zhao Changpeng allegedly engaged in “wash trading,” making it seem like many more tokens were being traded than actually were. PHOTO: REUTERS

JUN 6, 2023


LONDON - For any trading venue, volume is the coin of the realm. But over at Binance.US, the American exchange that operates under Binance Holdings’ branding, that currency was being counterfeited, US regulators alleged on Monday.
From at least September 2019 until June 2022, a Swiss-incorporated trading firm owned by Binance founder Zhao ‘CZ’ Changpeng called Sigma Chain allegedly engaged in “wash trading”, making it seem like many more tokens were changing hands on Binance.US than actually were.
That is just one of the new details that surfaced in the US Securities and Exchange Commission’s (SEC) 136-page complaint accusing Binance, Zhao and its US-based affiliate BAM Trading Services of circumventing US rules by fraudulently inflating trading volume on its US platform – an exchange that is meant to operate separately from the wider Binance.com.
Binance was already facing a similar lawsuit by the US Commodity Futures Trading Commission (CFTC) filed in May, as well as other regulatory and legal investigations worldwide.
But the SEC’s 13-charge rap sheet adds new allegations.
The freshest of these – that Zhao, Binance and Binance.US either conducted or permitted wash trading – are potentially also among the most damning, particularly as the crypto sector grapples with how to combat incoming global standards that would force exchanges to split off brokerage, lending or custody services under new entities.
“These sort of market manipulation tactics are all tools and mechanisms to create the appearance of a legitimate, market-induced increase in prices, when the reality is just a few grifters working amongst themselves to artificially inflate the prices of these securities,” said Mr John Reed Stark, a former SEC enforcement attorney who now runs his own consulting firm, about wash trading. “It calls into question all of the data relating to crypto.”

The SEC also accuses Binance of illegally allowing high-profile US companies to trade on Binance.com and of commingling customer assets between its US and non-US entities, among other charges.
Binance.US said the SEC’s complaint was “baseless”, while Binance.com said its efforts to reach a settlement with the watchdog were dismissed.
The world’s largest crypto exchange, which manages more daily spot volume than all other top centralised exchanges combined, has spent most of the last two years firefighting and pursuing licences outside of the United States as regulators elsewhere cracked down on its services.


Between June 2018 and July 2021, the SEC estimated that Binance earned at least US$11.6 billion (S$15.7 billion) in revenue.

‘Puppet’​

In addition to allegedly soliciting US investors without the correct permissions, Binance was accused of engaging in multiple unregistered offers and sales of crypto assets and investment schemes.
US entities BAM Trading and BAM Management – of which Zhao presently owns an 81 per cent stake – also allegedly defrauded investors about its ability to observe and counteract manipulative trading on Binance.US.
In reality, the SEC said such controls were “virtually non-existent”.
As Zhao confirmed in April 2019 when commenting on a ranking of crypto asset platforms by trading volume: “Credibility is the most important asset for any exchange. If an exchange fakes their volumes, would you trust them with your funds?”
But BAM Trading and BAM Management failed to implement controls to prevent manipulative trading on the Binance.US platform that it falsely claimed to investors to have implemented, resulting in the exact “fake volumes” that Zhao decried in April 2019.
At Zhao’s insistence, Sigma Chain became a market maker on the Binance.US platform from the time of its launch, the SEC said, racking up dozens of user accounts to trade with.
It held great influence over how the platform’s volumes fared on a daily basis, allegedly corrupting Binance.US’s reported trading volume “in a strategic pattern that coincided with at least three critical periods” for crypto and equity investors in such projects.
On June 23, 2020, for example, in discussing a drop in trading volume from market makers on the Binance.US Platform, BAM CEO A asked the BAM Trading’s sales director to “pull (Sigma Chain’s) data to hold them accountable too… they should be consistent too – we can ask for more volume, but they’ve been up to 50 per cent for us before.”
On Jan 6, 2021, the sales director messaged BAM CEO A and other BAM Trading employees that “these are ALL sigma chain”, and then listed 20 account numbers.
Another BAM Trading employee responded: “Whoa.”
Zhao and BAM executives took no steps to alter Sigma Chain’s impact on the platform despite being aware of its interference, the SEC said.
Sigma Chain engaged in wash trading on or around the time of the launch of at least 65 new crypto assets on Binance.US platform, the watchdog added.
Accounts owned by Sigma Chain, which received more than US$200 million from other Zhao-owned entities, allegedly used US$11 million of that amount to purchase a yacht.
Overall, Binance’s alleged activities date back as far as 2018, the SEC said, with Binance.US employees having felt “duped into being a puppet” under Zhao’s control.
As one part of this plan to evade US regulatory oversight over Zhao, Binance, and the Binance.com platform, Zhao and Binance created BAM Management and BAM Trading in the US and claimed publicly that these entities independently controlled the operation of the Binance.US platform.
Behind the scenes, however, Zhao and Binance were intimately involved in directing BAM Trading’s US business operations and providing and maintaining the crypto asset services of the Binance.US platform.
BAM Trading employees referred to Zhao’s and Binance’s control of BAM Trading’s operations as “shackles” that often prevented BAM Trading employees from understanding and freely conducting the business of running and operating the Binance.US platform.
Similar to claims already laid out in the CFTC’s lawsuit against Binance and Zhao, the SEC alleged that the exchange had regularly made outward representations that US investors were not allowed on Binance.com while simultaneously obscuring the tracks of its largest US customers on that venue.

Tai chi​

Employees inside Binance were well aware of the illegal nature of their activities and lack of appropriate registration, the SEC said.
A plan devised by an external consultant in 2018 suggested that Binance establish an entity that could become the scapegoat for all forthcoming regulatory enforcement actions that would undoubtedly follow in the US, which ultimately ended in the creation of Binance.US.
Zhao and Binance understood that they were operating the Binance.com platform in violation of numerous US laws, including the federal securities laws, and that these ongoing violations presented existential risks to their business.
As Binance’s chief commercial officer bluntly admitted to another Binance compliance officer in December 2018, “we are operating as a f***ing unlicensed securities exchange in the USA, bro”.
That firm, known as the Tai Chi entity, would eventually integrate with the main Binance parent for a nominal fee once it had served its purpose, the consultant allegedly recommended.
The SEC said Binance ended up implementing most of this plan.

Altcoins​

Several cryptocurrencies that trade on Binance’s platforms were identified by the watchdog as unregistered securities. Binance’s own tokens BUSD – issued by Paxos Trust – and BNB were named in the complaint as examples of the company’s unregistered activity, as well as its interest earning product BNB Vault and staking service Simple Earn.
The list of tokens at hand includes Solana’s SOL, a cryptocurrency once favoured by former FTX chief executive Sam Bankman-Fried, whose platform collapsed in November 2022.
Bankman-Fried is facing his own raft of charges by the SEC, CFTC and others.
Other tokens targeted by the SEC included Cardano’s ADA, Polygon’s MATIC, Filecoin’s FIL and Algorand’s ALGO.
Animoca Brands, a major Web3 investor, saw two of its affiliated projects’ tokens affected in The Sandbox’s SAND and Decentraland’s MANA.
The allegations that these tokens were offered and sold as securities could have wide implications for other exchanges that offer them in the US.
Even as recently as this month, the SEC said not all crypto assets currently trading on Binance.US are under the exclusive custody and control of personnel at its US-based parent BAM Trading.
“Binance is by far the world’s largest exchange, and thus any action against it carries increased importance,” said Mr Riyad Carey, a research analyst at crypto data firm Kaiko. “While it will take time for this complaint to play out, it is one of the most significant regulatory actions in recent years.” BLOOMBERG

 

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US regulator’s net now covers $155 billion of crypto after lawsuit against Binance​

The US regulator in its complaint against Binance cited a dozen coins as assets that fall under its purview. PHOTO: REUTERS

June 6, 2023

NEW YORK - The list of digital tokens deemed as unregistered securities by the Securities and Exchange Commission (SEC) now spans more than US$115 billion (S$155 billion) of crypto after the US agency’s lawsuit against Binance Holdings.
The regulator in the complaint on Monday cited a dozen coins as assets that fall under its purview. Such a designation comes with strict investor protection rules and could make the tokens harder to trade if exchanges shy away from listing them for fear of falling foul of the SEC.
Binance’s BNB – which has a market value of US$44 billion – stablecoin BUSD, Cardano’s ADA, Solana’s SOL, Polygon’s Matic, Filecoin’s FIL and Algorand’s Algo were among those mentioned in the lawsuit.
When added to other tokens like XRP separately targeted by the SEC, the agency has now categorised more than US$115 billion of coins specifically as unregistered securities.
SEC chairman Gary Gensler has long said most tokens are subject to the agency’s investor protection laws and that trading platforms should register with the regulator.
But labelling specific tokens represents a tougher approach. US officials have cracked down on digital assets this year following a rout in 2022 and a series of blow-ups, including the bankruptcy of the FTX exchange.

Delisting risk​

“Who actually gets hurt by this is Coinbase, Kraken and other US-based exchanges, who then have to make a decision on whether to delist, and US market makers, who potentially have to stop making markets on some of the tokens being listed as securities,” said Mr Jeff Dorman, chief investment officer at digital asset specialist Arca.

At the same time, he predicted that the lawsuit will not have long-lasting impact on token prices since they are still traded on offshore exchanges.
Filecoin is down roughly 10 per cent in the wake of the SEC’s complaint, while BNB has shed about 9 per cent.
The other assets mentioned are also nursing losses.


In wider digital asset markets, both Bitcoin and a gauge of the top 100 coins have fallen approximately 6 per cent.
Coinbase and Kraken did not immediately respond to an inquiry on the implications of the SEC action.
Coinbase has previously said it may not delist tokens that the SEC deems as securities, pending a final court decision.

Bitcoin, Ether​

Mr Gensler has said Bitcoin, the largest cryptocurrency, is not covered by the agency’s securities rules.
But he has been less unequivocal on Ether, the second-largest digital token.
Overall crypto market value stands at about US$1.1 trillion, compared with a peak of more than US$3 trillion during a pandemic-era boom, according to CoinGecko.
In the lawsuit on Monday, the SEC accused Binance and its chief executive Zhao Changpeng of mishandling customer funds, misleading investors and regulators, and breaking securities rules.
“While we take the SEC’s allegations seriously, they should not be the subject of an SEC enforcement action, let alone on an emergency basis,” Binance said. “We intend to defend our platform vigorously.”
One of the key SEC cases is a 2020 lawsuit against Ripple Labs.
The complaint alleges the company failed to register XRP as a security.
Ripple’s CEO Brad Garlinghouse said in late May that he expects a court ruling in weeks.
The result could have major implications for US crypto rules. BLOOMBERG

 

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US SEC charges crypto platform Coinbase, one day after suing Binance

Shares of Coinbase’s parent Coinbase Global Inc were down 16.2 per cent, at $49.33, after earlier falling as much as 20.9 per cent. PHOTO: NYTIMES
UPDATED 49 MINS AGO
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NEW YORK - The U.S. Securities and Exchange Commission (SEC) on Tuesday sued Coinbase, accusing the largest U.S. cryptocurrency exchange of operating illegally because it failed to first register with the regulator.

The lawsuit is the SEC’s second in two days against a major crypto exchange, following its case against Binance, the world’s largest cryptocurrency exchange, and founder Changpeng Zhao.

Both civil cases are part of SEC Chair Gary Gensler’s push to assert jurisdiction over crypto markets, which he on Tuesday again labeled a “Wild West” of investing, and protect investors while shoring up their trust in capital markets.

“The cryptomarkets are undermining that trust, and I would say this: it undermines our overall capital markets,” Mr Gensler told CNBC on Wednesday.

Paul Grewal, Coinbase’s general counsel, said in a statement the company will continue operating as usual.

“The SEC’s reliance on an enforcement-only approach in the absence of clear rules for the digital asset industry is hurting America’s economic competitiveness and companies like Coinbase that have a demonstrated commitment to compliance,” he added.

Shares of Coinbase’s parent Coinbase Global Inc were down US$9.37, or 16.2 per cent, at $49.33, after earlier falling as much as 20.9 per cent.


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In a complaint filed in Manhattan federal court, the SEC said Coinbase has since at least 2019 made billions of dollars by operating as a middleman on crypto transactions, while evading disclosure requirements meant to protect investors.

The SEC said Coinbase traded at least 13 crypto assets that are securities that should have been registered, including tokens such as Solana, Cardano and Polygon.

Founded in 2012, Coinbase recently served more than 108 million customers, and ended March with US$130 billion of customer crypto assets and funds on its balance sheet. Transactions generated 75 per cent of its US$3.15 billion of net revenue last year.

Tuesday’s complaint addressed several aspects of Coinbase’s business including Coinbase Prime, which routes orders; Coinbase Wallet, which lets investors access liquidity; and the Coinbase Earn staking service.

In the staking program, Coinbase pools crypto assets and uses them to facilitate activity on the blockchain network, in exchange for “rewards” it provides customers after taking a commission for itself.

The SEC said Coinbase was “fully aware” that its business was subject to federal securities laws, but ignored it.

“You simply can’t ignore the rules because you don’t like them or because you’d prefer different ones,” SEC Enforcement Chief Gurbir Grewal said in a statement.

Tuesday’s lawsuit seeks civil fines, the recouping of ill-gotten gains and injunctive relief. The SEC had in March warned Coinbase that securities charges might be coming.

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Coinbase’s friction with Mr Gensler dates to 2021, when the SEC threatened to sue if Coinbase were to let users earn interest by lending digital assets. The company scrapped the idea.

In the Binance case, the SEC accused that exchange of inflating trading volumes, diverting customer funds, improperly commingling assets, failing to keep wealthy U.S. customers off its platform, and misleading customers about its controls.

Binance pledged to defend vigorously against the lawsuit, and said the case reflected the SEC’s “misguided and conscious refusal” to provide clarity and guidance to the crypto industry. REUTERS

 

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US SEC charges crypto platform Coinbase, one day after suing Binance​

Shares of Coinbase’s parent Coinbase Global Inc were down 16.2 per cent, at $49.33, after earlier falling as much as 20.9 per cent. PHOTO: NYTIMES

June 7, 2023

NEW YORK - The U.S. Securities and Exchange Commission (SEC) on Tuesday sued Coinbase, accusing the largest U.S. cryptocurrency exchange of operating illegally because it failed to first register with the regulator.
The lawsuit is the SEC’s second in two days against a major crypto exchange, following its case against Binance, the world’s largest cryptocurrency exchange, and founder Changpeng Zhao.
Both civil cases are part of SEC Chair Gary Gensler’s push to assert jurisdiction over crypto markets, which he on Tuesday again labeled a “Wild West” of investing, and protect investors while shoring up their trust in capital markets.
“The cryptomarkets are undermining that trust, and I would say this: it undermines our overall capital markets,” Mr Gensler told CNBC on Wednesday.
Paul Grewal, Coinbase’s general counsel, said in a statement the company will continue operating as usual.
“The SEC’s reliance on an enforcement-only approach in the absence of clear rules for the digital asset industry is hurting America’s economic competitiveness and companies like Coinbase that have a demonstrated commitment to compliance,” he added.
Shares of Coinbase’s parent Coinbase Global Inc were down US$9.37, or 16.2 per cent, at $49.33, after earlier falling as much as 20.9 per cent.

In a complaint filed in Manhattan federal court, the SEC said Coinbase has since at least 2019 made billions of dollars by operating as a middleman on crypto transactions, while evading disclosure requirements meant to protect investors.
The SEC said Coinbase traded at least 13 crypto assets that are securities that should have been registered, including tokens such as Solana, Cardano and Polygon.
Founded in 2012, Coinbase recently served more than 108 million customers, and ended March with US$130 billion of customer crypto assets and funds on its balance sheet. Transactions generated 75 per cent of its US$3.15 billion of net revenue last year.


Tuesday’s complaint addressed several aspects of Coinbase’s business including Coinbase Prime, which routes orders; Coinbase Wallet, which lets investors access liquidity; and the Coinbase Earn staking service.
In the staking program, Coinbase pools crypto assets and uses them to facilitate activity on the blockchain network, in exchange for “rewards” it provides customers after taking a commission for itself.
The SEC said Coinbase was “fully aware” that its business was subject to federal securities laws, but ignored it.
“You simply can’t ignore the rules because you don’t like them or because you’d prefer different ones,” SEC Enforcement Chief Gurbir Grewal said in a statement.
Tuesday’s lawsuit seeks civil fines, the recouping of ill-gotten gains and injunctive relief. The SEC had in March warned Coinbase that securities charges might be coming.

Coinbase’s friction with Mr Gensler dates to 2021, when the SEC threatened to sue if Coinbase were to let users earn interest by lending digital assets. The company scrapped the idea.
In the Binance case, the SEC accused that exchange of inflating trading volumes, diverting customer funds, improperly commingling assets, failing to keep wealthy U.S. customers off its platform, and misleading customers about its controls.
Binance pledged to defend vigorously against the lawsuit, and said the case reflected the SEC’s “misguided and conscious refusal” to provide clarity and guidance to the crypto industry. REUTERS

 

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Binance CEO’s trading firm received $14.8 billion of client assets, says US regulator​

The United States has sued Binance and its billionaire chief executive for allegedly operating a “web of deception”. PHOTO: REUTERS

June 8, 2023

LONDON – Merit Peak, an offshore trading company controlled by Binance chief executive Zhao Changpeng, received around US$11 billion (S$14.8 billion) of client assets through a Seychelles-based firm set up to take customer deposits, a United States Securities and Exchange Commission (SEC) filing shows.
The filing, which on Tuesday asked a US court to freeze Binance’s US assets, came a day after the SEC sued Binance, its billionaire CEO, and the operator of its US affiliate exchange for allegedly operating a “web of deception”.
In its 13 charges, the SEC alleged that Binance and Mr Zhao used Merit Peak and Sigma Chain, another trading firm controlled by him, to commingle corporate funds with client assets and use the monies “as they please”.
This put customers’ assets at risk while Binance sought to “maximise” its profits, the SEC wrote in its civil complaint on Monday.
In response to the SEC’s lawsuit, Binance said it would defend its platform vigorously.
“All user assets on Binance and Binance affiliate platforms, including Binance.US, are safe and secure,” it said in a statement on Monday.
The funds received by British Virgin Islands-based Merit Peak between 2019 and 2021 flowed from Key Vision Development, also controlled by Mr Zhao, the SEC filing on Tuesday showed.

The US$11 billion sent from Key Vision to Merit Peak form part of the US$22 billion in assets – mostly belonging to Binance and its US affiliate – that Merit Peak received between 2019 and 2021, the filing showed.
Reuters reported in May that Key Vision and Merit Peak, along with Binance’s Cayman Islands holding company, formed the core of the global crypto exchange’s financial network.
In response to that article, Binance denied mixing customer deposits and company funds, saying users who sent money were not making deposits but rather buying Binance’s bespoke dollar-linked crypto token.

The SEC said in its lawsuit that Merit Peak, which described itself as trading with the “self-made wealth” of Mr Zhao, operated on both the Binance.com and Binance.US platforms.
The SEC said in the Tuesday filing that it could not determine why an entity “purportedly trading” on Binance.US with Mr Zhao’s personal funds “acted as a ‘pass through’ account for billions of dollars of Binance Platforms customers’ funds”.
Between 2019 and 2023, Sigma Chain’s US bank accounts received almost US$500 million, mostly from Binance and BAM Trading, with US$15 million coming from Key Vision, the filing said.

Money sent offshore​

Some Zhao-owned accounts have sent monies “offshore” over the last few months, the SEC wrote in the filing.
Through 2022, a US account for a company called Swipewallet, of which Mr Zhao is the beneficial owner, sent US$1.5 billion in foreign exchange wires offshore, the SEC said in the filing without elaborating.
The SEC said in such processes, dollars are converted to a foreign currency before transmitting to a beneficiary.
Binance acquired Swipe, a digital wallet and debit card platform, in 2020.
There have been no public posts on Swipe’s social media accounts since early 2022. Swipe did not respond to a request for comment.
In some of the most detailed examples of the fund transfers by Binance and Mr Zhao, the SEC’s filing alleged that on Jan 1, 2023, US$840 million was deposited into eight companies owned by Binance and Mr Zhao, with US$899 million withdrawn from those accounts “during that same time frame”.
At the end of March, all but one of the accounts had a balance of zero, the SEC said.

The SEC’s filing also said that between January and March this year, multiple Binance bank accounts then wired more than US$162 million offshore to a foreign account belonging to a Singapore company beneficially owned by Binance back office manager Chen Guangying, a close associate of Mr Zhao.
Binance did not respond to requests for comment on these alleged transfers.
Some US$32 million was also sent from Sigma Chain to Ms Chen, the SEC said, without elaborating.
Ms Chen did not respond to Reuters’ requests for comment. REUTERS

 

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Why the future of the crypto industry rests on whether digital tokens are securities or commodities​

The US Securities and Exchange Commission has just warned it considers a range of widely traded digital assets to be securities. PHOTO: REUTERS

June 8, 2023

WASHINGTON - Cryptocurrency traders have been put on notice that the US Securities and Exchange Commission (SEC) considers a range of widely traded digital assets to be securities, a position that could impose regulatory requirements that many boosters say could be crippling. But figuring out what does or doesn’t make a coin a security is a complicated question.

1. What is the SEC doing?​

Its chairman Gary Gensler has said that many digital assets have the hallmarks of securities. Mr Gensler warned that the agency was planning to take a hard line in enforcing its rules over those tokens. Anxiety among crypto traders grew when, in July 2022, the markets regulator took the unusual step of identifying nine cryptoassets that it considered to be securities as part of an insider trading case. Seven of them were traded on Coinbase, the biggest crypto trading platform in the United States In March, Coinbase said it had received a notice from the SEC signaling the agency’s intent to bring an enforcement action against the company. The notice identified several products or offerings that it considered to be securities, including Coinbase’s staking service and a portion of its listed digital assets.

2. What does it mean for something be a security?​

In its most simple form, whether something is or isn’t a security under US rules is basically a question of how much it looks like shares issued by a company raising money. To make that determination, the SEC applies a legal test, which comes from a 1946 Supreme Court decision. Under that framework, an asset can be under SEC purview when it involves investors kicking in money with the intention of profiting from the efforts of the organisation’s leadership. In December 2020, the agency sued Ripple Labs for allegedly raising money by selling the XRP digital token without registering it as a security. The SEC claimed that the company was funding its growth by issuing XRP to investors betting that its value would rise. The case is now a massive legal battle, with Ripple having hired a former SEC chair, Mary Jo White, as an attorney.

3. Why does calling a token a security matter?​

For starters, such designations would make running a cryptocurrency exchange more expensive and complex. Under US rules, the label carries strict investor-protection requirements for platforms and issuers. Exchanges would face continuous scrutiny by regulators, which could lead to fines, penalties and, in a worst case, prosecutions if criminal authorities ever got involved. It could also mean losing future funding from investors who may be skittish of those increased compliance burdens and regulatory scrutiny. Supporters of more regulation believe designating cryptocurrencies as securities would result in more information and transparency for investors because of the SEC disclosure requirements that would apply.

4. What does the crypto community want?​

The crypto crowd desperately wants the Commodity Futures Trading Commission (CFTC) to be their regulator and not the SEC. The CFTC - and the US’s rules around commodities and their financial derivatives - are widely seen as a less onerous regulatory regime. There have been efforts to give the CFTC more power to regulate cryptoassets directly. Currently it primarily oversees crypto futures and has the ability to take enforcement action if there’s fraud or manipulation in the underlying market, as it has in dozens of crypto cases. Crypto executives joined an industry push behind a bill from lawmakers that would give the derivatives watchdog more turf — at the expense of the SEC. Opponents of that approach say that the SEC’s securities-focused rules offer more protections for mom-and-pop investors. The industry-backed effort stalled after the collapse of crypto exchange FTX, which was one of the most vocal companies backing the effort.

5. What coins are or aren’t considered a security?​

The short answer is that beyond the very biggest cryptocurrency there’s a lot of ambiguity. US regulators including the SEC agree that Bitcoin, which is by far the largest digital asset, isn’t a security. It was started by an unknown person or persons going by the pseudonym Satoshi Nakamoto and does not exist as a way to raise money for a specific project. The second-biggest token, Ether, was deemed not to be a security during the Trump administration by a senior SEC official who signaled that while Ether may have started out qualifying as a security - the Ethereum Foundation used it to raise money - it had grown into something sufficiently decentralised that it probably no longer was one. But after Ethereum changed to a system in which coins that are “staked” play a role in recording transactions, the SEC said that the fact that staked coins can earn interest might lead regulators to start treating it as a security. The CFTC deems Ether a commodity, and the CME lists futures on it as well as Bitcoin.

6. What’s next?​

SEC’s Mr Gensler has said the agency could waive some of its rules to better suit digital assets, while also ensuring investors are protected, if exchanges work with the agency to register. However, he hasn’t provided a road map of how exactly that could be accomplished. The SEC also ramped up enforcement against crypto companies after the failures of several in 2022 including FTX, which is now at the centre of a criminal investigation over misuse of customer funds. Meanwhile, some lawmakers have pointed to last year’s turmoil as reason for needing clear-cut rules for the industry, though it’s unclear if a Republican-led House and Democrat-led Senate can find enough common ground to reach agreement. Pending litigation, including the Ripple case and the SEC’s insider trading case, could also help shed light on some of the murkier legal questions surrounding the industry, including which tokens are securities and which are commodities.

7. Is this an issue elsewhere?​

Yes. Globally, different regulators have taken a range of positions on whether to treat cryptocurrencies as securities. The UK’s Financial Conduct Agency regulates digital assets it considers investments that come with rights to repayment or a share in profits, while “payment tokens” like Bitcoin or “utility tokens” that provide access to a service are unregulated. Singapore regulates both types but under different laws. It considers coins that are digital representations of other assets, such as unlisted shares, to be securities. In June, the European Union reached a provisional agreement to impose common cryptocurrency rules across all 27 member states and to develop a new legal framework to regulate public offers of cryptoassets. BLOOMBERG

 

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FTX blow-up is ‘an aberration’ in early stage investments: Temasek CEO​

(From left) Temasek’s chief investment officer Rohit Sipahimalani, deputy chief executive Chia Song Hwee, executive director and CEO Dilhan Pillay and chief financial officer Png Chin Yee at the annual Temasek Review on July 11. ST PHOTO: JASON QUAH

Claire Huang
Business Correspondent

July 11, 2023

SINGAPORE - The blow-up of disgraced American cryptocurrency exchange FTX is “an aberration” in early stage investments, Temasek Holding’s chief executive said, adding that it is “very difficult” to determine how an investment will turn out from the start.
In early stage investing, one has to accept the binary outcome of the investment, said Mr Dilhan Pillay, who is also Temasek’s executive director.
He said in the case of FTX, which resulted in the group writing off its US$275 million (S$369 million) bet on the firm, the blow-up was to do with what is perceived to be individual actions, in a reference to FTX founder Sam Bankman-Fried.
Bankman-Fried is accused of conspiracy to commit mail and wire fraud, as well as orchestrating the theft of billions of dollars of customer assets, following the collapse of FTX in November 2022.
Temasek said in late May that it would cut the pay of its investment team and senior management as a result of the FTX debacle, although no misconduct was found. The one-off pay cut was reported to have been carried out.
Speaking at the Singapore state investor’s annual review on Tuesday, Mr Pillay said the investment team and senior management decided to take a pay cut because of the reputational damage from the FTX incident, particularly as the implosion came so soon after the investment was made. Temasek had pumped money into FTX across two funding rounds from October 2021 to January 2022.
When asked why no one was let go as a result of Temasek’s poor investment in FTX, Mr Pillay said: “If you were to start to punish people beyond what we’ve done, who would want to be an investor?”

He added that as an investor, one takes calibrated risks, and “as long as you’ve done the work required to make the investment, the committee approves it, it goes forward”.
However, should an investment turn sour and negatively impact Temasek’s reputation, more punitive actions such as pay cuts could be taken, Mr Pillay said.
This is “to remind ourselves that every time we do something, the issue is not just the financial risk associated with the investment, it’s the reputational risk associated with us, and we take that very seriously,” he said.

Mr Pillay noted that most of Temasek’s investments have done well and very few have done very badly, like FTX. Others had started off performing well but became progressively worse, either due to external market conditions or internal conditions.
The state investor had held a 1.5 per cent stake in FTX and the investment constituted 0.09 per cent of its $403 billion portfolio as at end March 2022.
The group was one of the exchange’s largest external investors, alongside Sequoia Capital and Canada’s Ontario Teachers’ Pension Plan. In November 2022, Sequoia wrote down the full value of its US$214 million investment in FTX.
Mr Rohit Sipahimalani, Temasek’s chief investment officer, said at the briefing that “FTX clearly was a situation we’re all disappointed with”.
He said Temasek caps the exposure to early-stage companies at 6 per cent of its total portfolio, of which half are venture capital funds and the other half comprise over 200 companies that included FTX.
“We invested in FTX because at that time, it seemed like a company having good technology, it was rapidly gaining market share and all the checks with regulators suggested that they were very regulatory compliant and wanted to get licensed everywhere, so all that led us to invest in that company,” said Mr Sipahimalani.

He added that lessons have been learnt and that the group has enhanced its due diligence processes in the hopes of avoiding such situations in future, while “recognising that fraud is something that is difficult to protect against completely”.
Looking ahead, the group has built what it calls the “Temasek operating system” as part of its 2030 strategy.
This refers to a suite of specialised, next-generation capabilities in five areas – artificial intelligence (AI), blockchain, cyber security, data and digital, and sustainable solutions.
Temasek’s deputy chief executive Chia Song Hwee said these capabilities will be essential for the future and could differentiate the group as a value-adding investor and shareholder.
For now though, the group is trying to understand more about the business-to-business applications of AI and its investment in this area is “still a very small portion” of the portfolio, he said.
Mr Sipahimalani said the group will continue to invest in established tech companies as it is clear they will be winners, but said Temasek is less excited about investing directly in some of the start-ups for now as their revenue models are unclear and valuations are high.

 

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Founder of crypto platform Torque denies failing in director’s duty, liability for investor losses​

The liquidators have sued Mr Bernard Ong Hock Fong in the High Court to recover hundreds of millions worth of cryptocurrency PHOTOS: TORQUE TRADING SYSTEM/FACEBOOK, TORQUE

Joyce Lim
Senior Correspondent

SEP 11, 2023

SINGAPORE - The Singaporean founder of the collapsed cryptocurrency trading platform Torque has denied accusations that he failed to perform his duty as a director in a lawsuit filed by the company’s liquidators.
The suit, filed in May, alleged that Mr Bernard Ong Hock Fong’s failure as the sole director and chief executive of Torque Group Holdings had caused substantial losses of investors’ funds and eventually the collapse of the online cryptocurrency trading platform in 2021.
The liquidators sued Mr Ong in the High Court to recover hundreds of millions worth of cryptocurrency that were allegedly lost on his watch.
In his defence filed in the High Court, a copy of which was obtained by The Straits Times, Mr Ong claimed he had put in place proper corporate guidance and financial controls.
He also said that he had taken active steps to ensure Torque was compliant with the relevant laws and regulations.
Mr Ong is represented by lawyer Sarbrinder Singh of Sanders Law.
Torque, which is in liquidation, was incorporated in the British Virgin Islands on Oct 23, 2019, and operated out of Vietnam.

Its joint liquidators, Mr Jason Aleksander Kardachi and Ms Elaine Hanrahan, are represented by lawyer Yam Wern-Jhien of Setia Law.
Between 2019 and March 2021, Torque took custody of customer cryptocurrency deposits valued at an aggregate of at least US$205.9 million (S$281 million).
In February 2021, Mr Ong made a police report alleging Torque’s chief technology officer Wu Zhongyi, also known as Zee, had conducted unauthorised trades resulting in significant losses of investor funds.

Mr Ong then applied to the courts in the British Virgin Islands to wind up the company.
With its management in Singapore and Mr Ong as the sole shareholder, Torque was ordered to be wound up on March 18, 2021.
The liquidators later found that a substantial portion of the cryptocurrency deposits were lost.
On March 18, 2021, when Torque was wound up, the total value of customer deposits it held came to just US$8.6 million.
In December 2022, Mr Wu and Torque’s former chief product officer Fong Chee Kiong were declared bankrupt, after the liquidators started bankruptcy proceedings against them in relation to hundreds of millions worth of missing cryptocurrency.
Based on court documents, the duo allegedly misappropriated more than US$479 million worth of cryptocurrency assets from Torque between January 2020 and February 2021.

The liquidators said Mr Ong apparently could not explain or account for the missing cryptocurrency.
Their statement of claim against Mr Ong in May alleged that Torque had operated in a “shambolic manner” and lacked even basic forms of corporate governance or financial controls.
It was seemingly left to be run by “a team of rogue traders and coders in Vietnam” led by Mr Wu and Mr Fong, raising concerns about accountability and oversight.
Mr Ong refuted the claims, saying he made frequent trips to Vietnam, where he held discussions with staff, provided guidance, and set the direction and was involved in the development of Torque.
Mr Ong also noted in his defence that he received daily reports and regular updates from his team.
“No one had free and unfettered rein over Torque,” Mr Ong said.
On the significant shortfall flagged by the liquidators, Mr Ong denied being liable for the vanished funds.
He attributed it to potential losses to trading activities, stressing that customers’ funds in Torque’s wallets were subject to trading risk.
In his defence, Mr Ong also claimed Torque’s collapse was due to Mr Wu’s “clandestine acts”, which happened despite the founder’s “proper supervision and control”.
The liquidators had also alleged that on Mr Ong’s watch, Torque illegally provided regulated services in Singapore or to Singapore-based customers without the requisite licence or exemptions from the Republic’s central bank, the Monetary Authority of Singapore.
Mr Ong refuted this claim, asserting that since Torque did not market or offer its services to people in Singapore, it did not require the licences indicated by the liquidators.
Even so, he did not explain the platform’s sizeable user base in Singapore.
As part of the lawsuit, Mr Ong has also been accused of pocketing customers’ deposits by making unauthorised payments of 71.0273 bitcoins, 34.71 ether and about 21.14 million USDT, with an estimated value of US$25.3 million (as at March 18, 2021), to 15 cryptocurrency wallet addresses belonging to himself between October 2019 and February 2021. Bitcoin, Ether and USDT are cryptocurrencies.
Mr Ong denied any wrongdoing. He said that as Torque’s director and chief executive, he was due compensation and could not be expected to work for free.
He said he had been under the impression, based on daily financial reports, that Torque remained solvent then.
The Straits Times reported in 2021 that Torque had more than 14,000 investors across 120 countries.
When the trading platform folded suddenly, more than 100 police reports were lodged against Torque and Mr Ong.
Many investors affected by its shutdown – including businessmen, students, housewives and retirees – were aggrieved, saying their investments were meant for significant life events, such as retirement and their children’s education.
Investigations by the liquidators later showed a sizeable portion of customers who used Torque’s cryptocurrency trading services were based in Singapore.
Between Aug 2, 2019 and Feb 23, 2021, Torque accepted registrations from 2,577 Singapore-based customers to open 41,416 accounts, with cryptocurrency deposit balances totalling about US$137 million.