Is the IRS Killing FTX's Creditors Possibilities?
Weekly News Recap: 🎤 New show on the FTX bankruptcy estate, 🤨 SBF blames the bear market, 📉 Bittrex, 🥶 Aragon's drama, and more ❕
The IRS Wants $44B From Bankrupt FTX. How Is That Possible?
In today's episode of Unchained, Wassielawyer joins us to address the escalating situation surrounding the FTX bankruptcy estate. A staggering $44 billion in claims has been staked by the IRS, setting off alarm bells for the anxious creditors of the now-defunct cryptocurrency exchange.
As Wassielawyer aptly puts it, “The $44 billion in IRS claims will certainly be defended and litigated.” This impending legal battle, sure to be both intricate and contentious, may drastically affect the chances of FTX customers recouping their investments.
Wassie also goes over the “trust argument,” rooted in FTX's terms of service. He debunks the notion that it's a quick fix, highlighting the argument's complexity and potential ramifications on asset retrieval amid the bankruptcy proceedings.
Weekly News Recap
SBF Seeks Dismissal of Charges, Blaming Crypto Winter
Sam Bankman-Fried, the founder of the bankrupt crypto exchange FTX, has intensified his legal fight, petitioning a Manhattan federal court to dismiss the majority of criminal charges against him related to the exchange's collapse.
Bankman-Fried's legal counsel argued on Monday that several accusations, including fraud, conspiracy, campaign finance law violations, and money laundering, do not adequately constitute an offense. The move seeks to nullify 10 of the 13 charges against the FTX founder, leaving only allegations of conspiracy to commit commodities fraud, securities fraud, and money laundering.
The attorneys further claimed that the U.S. government's original indictment was a “classic rush to judgment” amid a turbulent crypto market that saw multiple bankruptcies. They also asserted that the team handling FTX's bankruptcy proceedings, led by the current CEO John Ray III, has been co-opted by the prosecutors to help gather evidence.
The dismissal requests will be heard by U.S. District Judge Lewis Kaplan on June 15. Meanwhile, Bankman-Fried's former associates, including ex-Alameda Research CEO Caroline Ellison and FTX cofounder Gary Wang, have pleaded guilty to multiple federal charges and are cooperating with the ongoing investigation.
Bittrex Bites the Bankruptcy Bullet Amid SEC Pressure
Bittrex, the Seattle-based crypto exchange, filed for Chapter 11 bankruptcy this week, following the company's decision to shutter its U.S. operations amid ongoing legal challenges by the Securities and Exchange Commission (SEC). The regulator accused the company of operating an unregistered securities exchange, though Bittrex has denied the allegations, stating, “securities were not offered or traded on Bittrex.”
The company says U.S. customers’ funds remain secure and that repayment is a priority. Bittrex's attorney, Susheel Kirpalani, stated that the company had sufficient crypto holdings to fully repay all remaining customers, a fact underscored by the approval of a unique bankruptcy loan. The Delaware bankruptcy court permitted Bittrex to borrow $7 million in Bitcoin from its parent company, Aquila Holdings.
Bittrex's Chapter 11 filing does not affect its international operations under Bittrex Global, which continues to service customers outside the U.S.
Nevertheless, the U.S. Treasury Department’s Office of Foreign Asset Control (OFAC) is listed as the company's largest unsecured creditor, with a debt exceeding $24 million tied to a settlement over alleged sanctions violations. The SEC also features among the creditors, with the claim amount yet to be determined pending ongoing litigation.
Regulatory Scrutiny Triggers Strategic Retreat for Major Crypto Market Makers
This week, Bloomberg reported that increased regulatory pressure on digital asset trading in the U.S. has prompted renowned market makers, Jane Street Group and Jump Crypto, to scale back their crypto operations.
On Tuesday, Bitcoin began trading at a premium on Binance.US, a phenomenon that industry experts suggest could be linked to these drops in market making.
Industry analysts are also raising red flags regarding the potential impact of this strategic retreat on Bitcoin trading liquidity. Traditionally, market makers like Jane Street and Jump Crypto have provided stability and depth to the crypto markets. Their reduced involvement could exacerbate existing liquidity challenges, particularly in the Bitcoin market.
Bitcoin's Network Congestion Triggers Withdrawal Halt and BRC-20 Reconsideration
In the wake of substantial Bitcoin network congestion, Binance, the world's largest crypto exchange, temporarily suspended Bitcoin withdrawals. This move followed an influx of over $180 million and a surge in unconfirmed Bitcoin transactions, reaching a record of 488,000. Critics like Swan Bitcoin analyst Sam Callahan argued that Binance either "didn't want to pay up with higher fees or didn't want more bitcoin leaving the exchange."
The rising transaction fees, now up 300% from last year, are due to the proliferation of BRC-20 transactions on the Bitcoin Ordinals protocol. These transactions account for over half the Bitcoin network's activities and have led to calls from Bitcoin core developers to potentially reject all BRC-20 token transfers.
One developer, Ali Sherief, proposed a codebase change to address this issue or the introduction of a runtime option to delete all non-standard Taproot transactions, including BRC-20.
Adding to the network's challenges, the Ordinals system, utilized for inscribing digital collectibles onto the Bitcoin blockchain, recently encountered a bug that disrupted its numbering system. Ordinals creator Casey Rodarmor admitted to uncertainties about the best course of action for addressing the bug.
Aragon Association Curtails ANT Voting Rights
A week after booting several members who questioned leadership from its Discord channel, the Aragon Association has decided to repurpose its Decentralized Autonomous Organization (DAO). The Association has now transitioned its focus towards a new grants program aimed at developers of decentralized applications (dApps) and other DAO creators. Luis Cuende, a cofounder, also called for $30 million in token buy backs.
These moves come in response to the activities of the Risk-Free Value (RFV) Raiders, a group of activist investors whose members include Arca Capital Management and which has become active in DAOs whose treasuries are larger than the market caps of their coins. The Association considered their activities to be potential "financial attacks."
Critics have questioned the Aragon Association's motives and the lack of a community vote on these decisions. Arca, for instance, has called for more transparency and community empowerment. The Association maintains that the repurposing of the DAO is a necessary step for the project's security and the advancement of its mission.
Digital Currency Group Wrestles With Genesis Bankruptcy
Tuesday was the due date for Digital Currency Group’s first loan repayments to its insolvent lending subsidiary, Genesis Capital. Instead of repayment, the conglomerate announced that it is seeking to refinance its obligations to Genesis and raise capital.
DCG and Genesis are currently engaged in a 30-day mediation period with stakeholders, following several creditors abandoning a previous agreement. Genesis had first filed for bankruptcy in January, owing at least $3.5 billion to its creditors.
As the clock ticks toward the end of May, DCG and Genesis are racing to agree on a restructuring plan to salvage the situation. If you are a little lost with this topic, don’t miss last Friday’s show of Unchained with Ram Ahluwalia.
Grayscale Targets Expansion With New ETF Proposals
Grayscale Investments, the world's largest digital asset manager, announced plans to launch three new exchange traded funds (ETFs) and created a new entity, the Grayscale Funds Trust. The firm’s CEO Michael Sonnenshein highlighted the company's aim to continue creating and managing "regulated, future-forward products.”
The new ETFs include 1) the Grayscale Ethereum Futures ETF, which would mimic Bitcoin futures ETFs, unless, because of the uncertain status of ether, the SEC rejects it; 2) the Grayscale Global Bitcoin Composite ETF, which will invest 40% in internationally listed Bitcoin ETFs and 60% in Bitcoin mining companies, and 3) the Grayscale Privacy ETF; which will invest 10% in Grayscale’s ZCash Trust and other privacy-related companies.
BlockFi Clients to Be Reimbursed $300 Million
BlockFi, one of the many crypto lending platforms that went bust last year, has been ordered by a bankruptcy judge to refund nearly $300 million to its customers.
The ruling, issued by Judge Michael Kaplan, determined that assets in BlockFi's custodial wallets are considered client property, not assets of the bankruptcy estate.
However, a further $375 million that clients attempted to withdraw from BlockFi's interest-bearing accounts after November 10, 2022, remains in contention. Kaplan stated that these transactions, initiated after the company froze funds due to the fallout of FTX's collapse, were not completed. While these funds can technically be returned immediately under bankruptcy law, a dispute over their status has delayed the reimbursement process.
Voyager Digital Moves Forward With a Self-Liquidation Plan
Crypto lender Voyager Digital is charting its path towards dissolution and asset liquidation after unsuccessful negotiations with both FTX US and Binance.US. The termination of a $1 billion asset purchase agreement with Binance.US after the company abruptly pulled out has left Voyager in a predicament.
The consequent liquidation will enable Voyager's creditors to recoup approximately 36% of their crypto assets, a considerable decrease from the previously projected 72-73% recovery rate under the aborted acquisition plans. With a focus on making amends, Voyager has declared that initial distributions of cash and crypto to its customers are expected to commence in the upcoming weeks.
Ex-Coinbase Manager Is Sentenced to Prison
Ishan Wahi, previously a product manager for Coinbase, has been handed a two-year prison sentence in crypto’s second insider trading case. Wahi admitted guilt to two conspiracy counts involving wire fraud.
Wahi shared private company data about upcoming asset listings on Coinbase with his brother, Nikhil, and a friend, Sameer Ramani. This insider knowledge allowed the trio to make informed trades ahead of listing announcements, netting them $1.5 million across 55 digital assets.
U.S. Attorney Damian Williams emphasized that Wahi's sentence should serve as a deterrent to other crypto insiders, warning against any misuse of confidential corporate information.
Wahi expressed remorse for his actions in court, stating, “I made a huge mistake that will follow me for the rest of my life.”
Do Kwon Puts Forward a Bail Proposal
Lawyers for Terraform Labs founder Do Kwon, presently held in Montenegro on charges of travel document forgery, proposed that he be released on supervised bail of 400,000 euros ($437,000). Both Kwon and fellow Terra executive Han Chang-Joon deny the charges, insisting on their innocence at a recent court hearing.
Arrested in March, the Terra executives now await the court's decision on their bail proposal, with the next trial scheduled for June 16. Beyond the Montenegrin case, extradition awaits Kwon to either the U.S. or South Korea, where he faces additional criminal charges tied to the collapse of Terraform Labs in May 2022.
Su Zhu Gets Singapore Court to Muzzle Arthur Hayes
Arthur Hayes, the cofounder of BitMEX, has been issued a Singaporean court restraining order at the request of Su Zhu, cofounder of now-defunct crypto hedge fund Three Arrows Capital (3AC). Hayes is prohibited from using any language or communication that could distress Zhu. This order follows Hayes' persistent tweets demanding $6 million he alleges to be owed since 3AC's collapse.
Some crypto community members had harsh words for Zhu. Mike Dudas of 6th Man Venutres tweeted, “su zhu is a coward to the core who betrayed his friends - investors in his fund - raiding the remaining 3ac funds under false pretenses before going on the lam and ghosting those he grifted from “beyond disgraceful to see him trying to play the victim.”
FUN BITS 😁
Unchained’s Ginny Hogan has something to say about Binance needing to temporarily halt Bitcoin withdrawals.
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