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Cryptocurrency, Blockchain, and Fintech News Headlines Update on 2023-05-23

Crypto should be regulated like gambling, UK lawmakers say, pretty much everyone else disagrees. The Secret Service owns crypto, loves blockchain and has its own NFT collection. Tether holdings claims it’s doing well but just pulled $4.5 billion out of banks, whilst trying to prove what Tether’s USDT stablecoin is backed by. DCG has missed a payment to Gemini, which means more negotiations…. FTX is suing SBF for what’s looking like a fraudulent (or at least very, very bad) investment (anyone surprised here?) Attempts to conceal hidden crypto are now showing up in 20-50% of divorces. And crypto hacks are down 70% compared to the same time last year. So quite a balanced week of news in cryptoland!

Crypto should be regulated like gambling, UK lawmakers say

A group of UK MPs has urged the government to regulate cryptocurrency as gambling. The Treasury select committee, in its report, expressed concern that treating crypto under the Financial Conduct Authority could lead to an unjustifiable “halo effect”, portraying crypto as safer than it is and potentially encouraging individuals to enter a speculative market. “With no intrinsic value, huge price volatility and no discernible social good, consumer trading of cryptocurrencies like bitcoin more closely resembles gambling than a financial service, and should be regulated as such” said Committee chair Harriett Baldwin. The Treasury responded, “Risks posed by crypto are typical of those that exist in traditional financial services and it’s financial services regulation — rather than gambling regulation — that has the track record in mitigating them.” Well yes, crypto is volatile and poses many risks AND also brings social good and isn’t all about volatility. They’re 50% right. And 50% totally missing the point.

Secret Service owns crypto, loves blockchain and has an NFT collection

The US Secret Service owns crypto, has its own NFT collection and has praised blockchain’s ability to fight financial crime, according to representatives from the United States Secret Service San Francisco Field Office and the Bay Area Regional Enforcement Allied Computer Team. The reps opened up to questioning in an AMA (ask me anything) on Reddit. The Secret Service also said that if people want to do dodgy things financially, it’s best to take the money in cash than crypto. They said they were “definitely holders of crypto” and described themselves as crypto “enthusiasts”. When asked whether the Secret Service would consider launching its own “memecoin”, it responded by plugging its own NFT collection on OpenSea.

Tether boasts of its financial stability after profits, whilst moving money out of banks

Tether Holdings, the ones behind Tether’s USDT stablecoin, are saying how backed the stablecoin is. But it just pulled $4.5 billion out of banks, in what Tether calls is a “substantial reduction” in counterparty risk. That holding billions of dollars in banks isn’t guaranteed safe is a given. But what is Tether’s now $82 billion of stablecoins backed by? Tether’s market cap grew from $66 billion to over $82 billion in Q1 this year. During this time, its bank deposits dropped 90% from $5.3 billion to $481 million. So Tether is roughly 0.585% backed by bank deposits. It’s also enhanced its position in US Treasury bills, now at $53 billion, representing 64% of its reserves. It claims to now be backed 85% by cash, cash equivalents, and short-term deposits, assets it deems able to swiftly liquidate. It’s also for the first time disclosed gold and Bitcoin holdings in this quarter’s attestation, a move likely intended to counter ongoing skepticism and accusations concerning its backing or alleged lack thereof. The increase of (some would say the creation out of thin air) of $16 billion, in a quarter, is a lot. Tether’s earlier demonstrations of its backing were some colourful pie charts. It’s convenient for the industry to assume that Tether is fully backed. Tether trades make lots of companies a lot of money. Some believe that Tether is more or less backed. Some don’t. Some people know my opinion. Read what you will into the information that is out there.

DCG Missed $630M Genesis Debt Payment

Digital Currency Group (DCG), the parent of bankrupt crypto lender Genesis, has failed to meet its payment on its $630 million debt obligation to Gemini. DCG had faced a 30-day ultimatum by Gemini to gather the funds amid a mediation process. The lending arm of Genesis filed for bankruptcy in January following a dispute with Gemini over the collapse of the exchange’s lending product, Gemini Earn. Gemini claims Genesis failed to repay over $900 million in assets, prompting the closure of Earn. With DCG’s missed payment, the parties involved are deliberating whether to grant additional time to avoid a potential outright default. Gemini say this will depend on DCG’s commitment to transparent negotiations. If the recovery deal fails, it’s reported that Gemini and the others intend to pursue a Genesis reorganisation plan with or without DCG’s involvement. It’s also reported that Gemini plans to file a master claim to recover $1.1 billion in crypto for Earn’s users.

Ripple vs. SEC: Could newly released documents tip the balance, and what does this mean for the industry?

The ongoing SEC vs Ripple Labs case could affect the future of crypto regulations. On Dec. 22, 2020, the SEC sued Ripple, alleging that Ripple Labs’ sale of its XRP token was an unregistered securities offering. Most companies on the receiving end of an SEC case choose to settle. Ripple chose the fight, at great expensive (over $200 million so far) and took the matter to court. Ripple argues that XRP does not satisfy the Howey test – the test used to check if an asset is a security- and argued the SEC had failed to give it fair notice under U.S. securities laws. Former SEC securities lawyer Marc Fagel, in a recent Twitter space, noted that the SEC’s suit focused on the tokens issued by Ripple and not secondary market transactions. He said Judge Torres “would be overstepping to make a ruling on secondary sales”. Well, yes. He thought the ruling on secondary sales was helpful in the SEC’s case, however, as they illustrate how a secondary market would not have been created without Ripple issuing securities while promoting the network. He said though that the SEC’s case was worded to focus on the tokens initially issued by Ripple, and not on the secondary market transactions. Where this could be critical for the rest of the industry is any precedent that is set. Thousands of other companies launched tokens they would deny are securities, that regulators could/ would argue are securities…. Regulators are just starting with the biggest.

FTX leadership sues Sam Bankman-Fried over $220M deal made prior to bankruptcy

The new leadership and lawyers of collapsed crypto exchange are now going legal against former CEO Sam Bankman-Fried, co-founder Zixiao Wang, and former executive Nishad Singh. They’re alleging misconduct and lack of due diligence over their $220 million acquisition of stock-clearing platform Embed. The lawsuit claims FTX executed the acquisition with little to no due diligence. Looking at it, it seems it’s either that, or they knew exactly what they were doing but seeking to profit one of their own. Other than FTX’s $220m bid, 12 entities had submitted non-binding indications of interest, all but one of which declined to submit a final bid after conducting more comprehensive due diligence. That final bid of $1m was said to be by Embed’s founder and former CEO, Michael Giles, who, according to FTX’s lawyers, had “personally received approximately $157 million in connection with the acquisition”, and was to regain ownership of Embed and subject to reductions at closing. “The bidders had figured out what the FTX Group and FTX Insiders did not bother to assess prior to the Embed acquisition, namely, that Embed’s vaunted software platform was essentially worthless” the suit claims. It’s alleged that FTX insiders exploited the firm’s lack of controls and record-keeping to execute a fraud, employing misappropriated customer funds for the acquisition, while fully knowing of FTX’s coming insolvency. The lawsuit further accuses the defendants of generating misleading records to hide Alameda’s role in financing the acquisition, claiming the funds were transferred among FTX entities, not from the personal resources of the three accused.

BlockFi Creditors Say Crypto Lender Was a Victim of Bad Management

Creditors of failed crypto lender BlockFi aren’t happy. The latest complaint of the BlockFi Creditors Committee accuses it of playing the victim game. BlockFi management had said it was a victim of the FTX collapse. The committee says this is a “false case narrative” of victimhood and instead blames BlockFi management for its downfall and criticises their handling of the company post the FTX collapse. The creditors allege that BlockFi converted about $240m of crypto into fiat at a market low, triggering financial losses and potential tax complications for customers, as well as losing out about $100m had they just waited. They also criticise BlockFi’s decision to deposit these proceeds, along with $10m, into the then unstable, now collapsed Silicon Valley Bank (SVB). A main gripe is that BlockFi bought a $30m insurance policy for its directors and officers soon before it filed for bankruptcy. This in itself wouldn’t be so bad, except for the $30m policy cost $22.5m, and was paid for by customer funds. BlockFi owes just short of $1.3 billion to its top 50 creditors. A lot of the potential recoveries depend heavily on its claims against Alameda and FTX, with around $355m in crypto frozen on FTX and a $671m loan to FTX’s Alameda Research, neither of which in hindsight were the best business decisions…

Voyager bankruptcy plan approved, customers may recover 35.7% of claims initially

A bankruptcy plan has finally been approved for crypto lender Voyager. The Bankruptcy Court for the Southern District of New York has approved the plan after Binance.US withdrew from its intent to purchase $1 billion worth of Voyager’s assets, leading Voyager to liquidate. FTX.US had said it would buy the assets for $1.4 billion, but this fell through when FTX collapsed… Voyager has stated customers could now expect to initially receive 35.72% of their claims in either crypto or cash. It holds $1.33 billion of assets for recovery, but has set $445 million aside to deal with potential claims from FTX/Alameda Research. Voyager is pursuing potential recovery from also collapsed fund 3AC (Three Arrows Capital), which defaulted on a crypto loan currently worth around $768 million.

Crypto hacks down 70%, hackers are returning more funds, 2 possible reasons why

Crypto hacks came down 70% in Q1 this year compared to the same period in 2022. Q1 this year saw around $400m stolen in nearly 40 hacks, at an average of $10.5m per hack lost. This is down from an average of $30m per hack in Q1 2022, which also saw around 40 hacks. Hacking victims have so far recovered over half of all crypto stolen in Q1 2023, with hackers giving back more in return for keeping agreed bug bounties. A new report by crypto analytics firm TRM Labs suggests 2 possible reasons for this: 1) Avraham Eisenberg, who outed himself for a manipulation against DeFi platform Mango Markets and returned over half on the understanding he wouldn’t face legal action, was arrested and jailed by US authorities anyway, then sued by Mango Markets. 2) In August 2022, the US Treasury sanctioned crypto mixer Tornado Cash, making it harder to launder stolen crypto funds.

Ledger co-founder clarifies ‘there is no backdoor’ in ‘Recover’ firmware update PR fail

Ledger’s announcement of a new optional – keyword optional- firmware update facilitating backup of user’s secret recovery phrases hasn’t done too well on a PR front. Ledger has been seen as a safe way to store crypto assets. It does however rely on the user not losing certain details. Those certain details, such as backup seed phrases, have been lost by more than a few crypto users. Lose your keys, lose your crypto. Ledger Recover lets users backup seed phrases via third-parties. This wasn’t exactly perceived well by users who value Ledger’s trustless storage of cryptocurrencies. Ledger’s co-founder and former CEO, Éric Larchevêque, addressed the backlash head-on, calling it as a “PR failure” rather than a technical issue and maintained the safety and trustworthiness of Ledger. He emphasised that there is no backdoor in the firmware and that the usage of Ledger Recover remains optional.

Secret crypto holdings are becoming an increasingly common conflict in divorce

Lying about crypto in marriage, that your ex finds out about in the divorce, what could go wrong? Divorce lawyers say 20-50% of divorces are now becoming about ‘find the hidden crypto stash’. Crypto assets, especially hidden crypto investments, have become an increasing source of conflict in divorce, with divorce lawyers saying it’s becoming more common for people to try and hide crypto from their partner, even by trying to hide their holdings. One complicating factor is the quick changes in value of crypto- do you claim fiat or crypto? One wife just hired a forensic accountant only to find her now ex husband had hidden an undisclosed stash of 12 bitcoins, then worth $500k, from her in the divorce. Seems the world is slowly learning that tracking down crypto is a lot easier than other assets.

Crypto Browser Opera Integrates Layer 1 Blockchain MultiversX

Metaverse focused blockchain platform MultiversX, formerly known as Elrond, is teaming up with crypto-friendly browser Opera to integrate support for its growing ecosystem. Opera users can explore the decentralised internet with the MultiversX network integrated into the browser’s interface, use its native tokens, connect to MultiversX-based NFTs and access decentralised applications built on the network. Beniamin Mincu, MultiversX CEO, said integrating the network into Opera gives users a more accessible path into the Web3 ecosystem. MultiversX aims to make Web3 interoperable and easily accessible for new users. In February, it launched its Web3 “super app” xPortal for users to access decentralised applications and metaverses. Until the Metaverse and decentralised applications are easier to use, it’ll be a struggle to make it mainstream.

Pakistani finance minister says crypto will never be legal because of FATF

Pakistan’s stance on crypto has turned into an outright ban. The ban is said to satisfy the Financial Action Task Force’s requirements and is thought to be a strategic move to boost the country’s financial situation and ongoing bailout negotiations with the IMF. FATF observations influence governmental and corporate policies globally. Crypto is, however, popular in Pakistan, with citizens holding $20 billion worth in 2021. The decision has proven unpopular within the Pakistani crypto community. “I pray that government focuses on the right area which lead to scams and the apps which traps people instead of banning crypto” wrote @CryptoPak_. The State Bank of Pakistan, whilst backing the crypto ban, is planning to launch a central bank digital currency by 2025 and has implemented a national blockchain-based KYC platform. One could argue this is using the technology to control people.

World Bank explores tokenising infrastructure projects

The World Bank is looking at blockchain for financing large-scale infrastructure projects. A new report goes into two primary ways in which the technology could contribute: tokenising infrastructure securities to widen access to investment, and using blockchain’s transparency for project management. Around $3-$4 trillion is spent annually on infrastructure, mostly funded by governments. However, the financial gap for infrastructure projects is projected to be $15 trillion between 2018 and 2040. The report notes, “Using blockchain might reduce the costs of issuances, although a special purpose vehicle will still be required,” adding that “It could possibly democratize access by making it more accessible to a wider range of investors.” Blockchain could streamline management by “sharing the data around purchase orders and invoicing between subcontractors and contractors to reduce the potential for disputes.”

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