This week in crypto:
- Crypto and stablecoins regulations pass into law in the UK
- Crypto custody is having a bad month. Custodian Prime Trust didn’t custody its customers’ crypto assets and is the first custodian to collapse
- Germany’s regulator has rejected Binance’s crypto custody licence request
- FTX bankruptcy team are burning through money, quickly
- Are crypto exchanges teaming up to face the US SEC?
- and, people are realising that ‘bitcoin is the next bitcoin’ – Michael Saylor’s Microstrategy is still investing
UK Crypto, Stablecoin Rules Receive Royal Assent, Passing Into Law
The UK has (finally) taken a step in cryptocurrency regulation. The U.K.’s Financial Services and Markets Act 2023 has officially become law after receiving royal assent, marking the end of its formal legislative journey. The new law brings cryptocurrency and stablecoins under regulatory supervision. Financial Services Minister Andrew Griffith said the Act “gives us control of our financial services rulebook,” facilitating (hopefully) safe crypto adoption in the UK. Introduced in July 2022, the bill underwent revisions to ensure that all cryptocurrency operations fell under regulatory supervision, including crypto promotions. It also extends payment rules to encompass stablecoins. This means there might even be a chance that most so-called stablecoins might actually be backed by something. The Act hands more control to regulators over the financial system, including cryptocurrency. The U.K.’s Treasury, Financial Conduct Authority, Bank of England, and Payments Systems Regulator now have the power to create and enforce needed crypto sector regulations, in line with the government’s stated ambitions to establish the country as a crypto hub. Regulatory clarity is what has been needed, and is a good thing. It won’t make everyone happy, but it’s a big step in the right direction and is what companies need to choose to base there. Now it will be down to regulators to proactively and actually work with crypto companies.
Crypto custody is having a bad month
Apparently, It’s Very Difficult to Custody Crypto. Custodian Prime Trust Is Having a Bad Month.
One thing that crypto custody companies are meant to do is custody crypto. That isn’t one of the things, it is the thing. So it isn’t ideal if a crypto custody company loses a load of money, then uses its customers’ crypto in a gamble which doesn’t play out to try and get some money back. Individuals and institutions use crypto custodians because they’re meant to be better at custodying crypto than others whose sole job isn’t to custody crypto. Crypto custodians are also meant to not lose access to that crypto or to their wallets. Crypto custodian Prime Trust lost access to its wallets. Specifically, its “legacy wallets,” leading to a shortfall in client assets.
Until 2020, Prime Trust had managed to custody its customers’ crypto in its own wallets. So far so good. Then, in 2020, it migrated customer assets to Fireblocks’ non-custodial custody platform. In 2021, after reported issues on the Fireblocks platform and turnover in Prime Trust’s management team, Prime Trust set up a “legacy wallet forwarding” for clients and sent its customers’ crypto funds back to its old pre-2020 wallets. In December 2021, it found that it was inexplicably unable to access those “legacy” wallets. Then, according to a new Nevada state filing, “It is understood that from December 2021 to March 2022, to satisfy the withdrawals from the inaccessible Legacy Wallets, Prime Trust purchased additional digital currency using customer money from “omnibus customer accounts.” I.e, to fulfil the withdrawal requests of some customers, the company purchased additional digital currency using customer money from other customers, a problematic move considering that the role of custodians is to securely store assets. Prime Trust now owes its customers $69.5 million in crypto, and has $68.6 million in crypto on hand. Not too far off, except it also allegedly owes its clients $85 million in fiat, and has about $3 million in fiat currency on hand. A total shortfall of roughly $83 million, at current estimates.
Crypto custody giant BitGo had been looking at taking over Prime Trust. On June 22nd, BitGo terminated its acquisition of what had been its competitor. The same afternoon Nevada’s Financial Institutions Division ordered Prime Trust to cease all activities alleging the company’s “overall financial condition had considerably deteriorated.” Nevada’s FID has now filed to place Prime Trust into receivership. Despite many crypto collapses, this has been the first of a custodian, and raises some key questions about the safety of crypto assets stored in custody. Prime Trust was hardly an unknown, tiny player. Last year it secured over $100 million in a funding round last year and counted several large, known crypto firms among its clients. The case is ongoing.
Crypto exchanges are also having a bad month
German regulator reportedly rejects Binance’s crypto custody licence request
Another week, another regulator rejecting Binance. The exchange has faced a setback in its expansion plans as Germany’s Federal Financial Supervisory Authority (BaFin) reportedly rejected its crypto custody licence application. The specific reasons remain unclear. It’s also as yet unclear if the rejection is official or just a verbal notification. A Binance spokesperson stated they are “unable to share details of conversations with regulators” but that “We continue to work to comply with BaFin‘s requirements. As expected, this is a detailed and ongoing process.” This rejection won’t help Binance’s advertising efforts in Germany where it has 2 million customers, and where only licenced firms can advertise. This setback follows Binance’s recent regulatory issues in the U.S., prompting a stronger focus on the European market. There, it has faced further challenges including investigations in France, exiting the Dutch market due to licensing issues, and winding down services in the UK and Cyprus.
Bittrex challenges SEC’s authority in crypto lawsuit, seeks dismissal
Bittrex is one of the list of crypto platforms facing lawsuits from the US SEC. The crypto exchange is seeking to dismiss the lawsuit. In so doing, it’s joined fellow crypto exchange Coinbase in arguing that the SEC doesn’t have the authority to regulate cryptocurrencies as securities unless Congress explicitly gives them such power. Like Coinbase, Bittrex argues that while the initial sale of certain crypto assets can be classified as securities contracts, this definition doesn’t apply to assets traded on secondary markets. Rather, that crypto assets traded on secondary markets should be considered commodities or a different class of digital assets. Bittrex also argues that the SEC’s failed to clearly communicate that their activities were not allowed, a common defence strategy employed by crypto defendants against SEC allegations. It seems Bittrex is trying to align with Coinbase to establish a unified defence. The exchanges have a point. They’d been doing what had been ok, until recently, and now the SEC has not moved but set new goalposts, and now seem to getting punished for kicking the ball at the old goal.
How Much Is Too Much to Spend on FTX’s Bankruptcy?
FTX’s bankruptcy process has already cost over $200 million, a figure still rising by the day. Some are starting to question these high amounts. Former FTX customer Sunil Kuvari is one of those arguing that the expenses, paid out of funds intended to reimburse creditors, are excessive compared to similar cases. Kuvari uses the example of Celsius Network whose bankruptcy costs were $87 million after six months. If FTX’s bankruptcy lasts two years, costs could total around $800 million, nearly 75% of Enron’s adjusted cost, despite FTX being significantly smaller in terms of assets and scale, an estimated $7.3 billion lost compared to Enron’s $190 billion in today’s money. Restructuring firm Alvarez & Marsal, in charge of recovering FTX’s assets, is alleged to be charging FTX six times the amount it charged Celsius for a bankruptcy of only 50% more liabilities. That saying, SBF was particularly good at spending customers’ money and not keeping any records of it. It’s now transpiring that he wasn’t as smart as he liked to make out, with his chaotic spending of his users’ money described as improvised rather than strategic. Enron, by contrast, had meticulous records of it’s fraudulent practices.
SEC Dismisses Latest Spot Bitcoin ETF Applications as Inadequate
The US Securities and Exchange Commission (SEC) isn’t in a rush to approve crypto ETF applications. It has rejected recent applications from asset managers to launch spot Bitcoin ETFs, including from BlackRock and Fidelity. Other companies like Invesco and WisdomTree have also reportedly sought regulatory approval for similar ventures. Invesco, managing $1.4 trillion in assets, previously tried unsuccessfully to launch a spot Bitcoin ETF in 2021. Sources familiar with the matter claim the SEC found the applications neither “sufficiently clear nor comprehensive”. The SEC’s concerns over the potential fraud and market manipulation linked to these funds hasn’t dissuaded a number of optimistic asset managers from recently seeking to list spot Bitcoin ETFs.
Other crypto companies collapsed and collapsing
Three Arrows Capital Liquidators Seek $1.3B From Hedge Fund’s Founders
Until now, the founders of collapsed crypto hedge fund Three Arrows Capital, Su Zhu and Kyle Davies, have been living a relatively luxurious life in Bali, probably thinking they’d done quite well out of their customers’ funds. 3AC liquidators are now targeting the two founders for $1.3 billion. The liquidators allege the fund, which became insolvent following heavy losses from the collapse of the Terra ecosystem in May 2022, took on excessive additional leverage. This move has prompted liquidators from consulting firm Teneo to chase the lost funds via a British Virgin Islands court. It would be very fair and very deserved if 3AC users get their money back and the two founders get less of an easy life.
South Korean crypto lending firm Delio under investigation by regulators
One crypto lender after the next is crumbling, if not due to bankruptcy, then due to regulatory fire. South Korean lender Delio is the latest to face a probe by regulators. The Country’s Financial Services Commission is investigating the firm on charges of fraud, embezzlement, and breach of trust. These allegations come in response to Delio’s suspension of user deposits and withdrawals on June 14. The lender has promised to resume withdrawals at a later date and has re-opened some of its staking services, but this isn’t exactly the first time a crypto lender has made promises it hasn’t adhered to, and the FSC investigation is continuing. The company’s CEO, Jung Sang-ho, stated, “[Delio] will secure as much capital as possible to compensate.” Delio’s management has been restricted from leaving the country. The controversy hasn’t been helped by Delio’s sister firm Haru Invest suspending its deposits and withdrawals due to issues with a “consignment operator”. This has raised concerns about shared exposure between the two companies. Prior to the suspension, Delio management allegedly dismissed concerns over its exposure to Haru Invest. If the allegations are true, it also wouldn’t be the first time a crypto company has lied about its interrelated nature with its sister investment firm (FTX and Alameda). Delio currently holds around $1 billion in BTC, $200 million in ETH, and $8.1 billion in altcoins.
Some big corporations are still investing big into crypto and tokenised assets
Mastercard pilots tokenised bank deposits
Mastercard seems to be in a bid to out-crypto Visa. Mastercard has announced a platform for developing digital asset products and user validation. This platform aims to help and thus encourage others to create digital asset products on its own platform. It’ll also verify users for financial institutions, fintechs, and central banks. The Multi Token Network (MTN) will launch in the UK in Q3, then expand globally. Mastercard blockchain and digital assets lead Raj Dhamodharan says: “Our vision for MTN is to provide a set of foundational capabilities designed to make transactions within the digital asset and blockchain ecosystems secure, scalable and interoperable — ultimately enabling more efficient payment and commerce applications.”
Mastercard is focused on the potential of tokenised assets, and is developing a tokenised deposit platform. It’s Regulated Liability Network focuses on security and compliance protocols for blockchain-based payments. “There is plenty of opportunity in buying and selling tokenized assets,” Chief Digital Officer Jorn Lambert, said, adding “People think of NFTs as art, but they can also be invoices or carbon credits or titles of ownership. NFTs can also go into trade finance, supply chains, insurance or capital markets.”
‘Bitcoin is the next Bitcoin’- MicroStrategy buys more Bitcoin
Michael Saylor’s MicroStrategy has bought another 12,333 Bitcoin for about $347 million, taking its total holdings to 152,333 Bitcoin, valued at around $4.6 billion. With Bitcoin’s rally this year, MicroStrategy saw its first profitable quarter in over two years. Saylor believes that the ongoing regulatory crackdown on cryptocurrencies will lead to Bitcoin doubling its market share. He said, “Now I think that the public is beginning to realize that Bitcoin is the next Bitcoin. The next logical step is for Bitcoin to 10x from here and then 10x again.”
Crypto Custody Firm Ledger Introduces Institutional-Grade Trading Network
Cryptocurrency hardware storage provider Ledger has launched an institutional custody solution with Ledger Enterprise Tradelink, an open, enterprise-grade trading platform. It’s designed to cater to institutions’ risk management and regulatory requirements. The platform, unveiled last week, has attracted several crypto exchange and broker partners, including Crypto.com, Bitstamp, and Huobi. Pascal Gauthier, CEO of Ledger, says, “This solution… means you can trade without having funds on the exchange, so it removes that exchange risk.” The network is also open to multiple custodial partners.
Insider trading and scams aren’t leaving crypto any time soon
Insider trading is widespread in a popular corner of the crypto market
New York-based Solidus Labs claims that insider trading is widespread in the crypto market, specifically surrounding ERC-20 tokens during their initial listing on top centralised exchanges. The company, specialising in monitoring suspicious crypto transactions, noted in a study that this behaviour was identified in 56% of the tokens. “If more than half of all tokens listed are not ones you can buy in trust, it’s a less effective market,” stated Solidus co-founder Chen Arad, in a classic understatement about one of the bigger issues of the crypto markets. Arad underscores that this issue is key to advancing crypto to the next level. The firm found that many entities used DeFi exchanges to buy tokens pre-listing, selling them post-announcement to profit from price jumps. These findings further support suspicions of widespread token manipulation on DeFi exchanges, attracting the attention of the SEC, which is also scrutinising centralised exchanges for insider trading.
$7.8B lost in crypto Ponzi and pyramid schemes in 2022
A total of $9.04 billion in crypto was lost to financial fraud schemes in 2022, according to a report by blockchain intelligence firm TRM Labs. Despite the crypto market downturn, crypto-related crime showed no signs of abating. TRM Labs stated: “Investment fraud involving cryptocurrency rose by nearly 200% from USD 907 million in 2021 to USD 2.57 billion in 2022.” Pyramid and Ponzi schemes took $7.8 billion, with the top 10 accounting for 54% of the total sum. 40% of the total incoming volume of such schemes was on Tron, mostly via Tether (USDT). An additional $1.5 billion in crypto was used on darknets for illicit activities, and $3.7 billion was lost in hacks or exploits.