Prometheum Exposed: How Deep Does the Rabbit Hole Go?
Weekly News Recap: 🎤 New podcast on the SEC and the crypto regulatory path, 🗣️ Aaron Kaplan's testimony, 🧑⚖️ FTX legal battles, and more ❕
In today’s episode of Unchained, Laura hosts SEC Commissioner Hester Peirce, fondly known as 'Crypto Mom'.
In a candid conversation, she discusses her five-year journey at the SEC, addressing the challenging aspects of digital assets regulation.
Peirce pulls no punches, expressing frustration at the pace of change, and highlights the pressing need for a clear regulatory framework.
“I've been at the agency for over five years, and it's very frustrating to me that in that time we haven't done something more productive,” she said.
From allegations on token securities, the effectiveness of special purpose broker-dealer licenses, to understanding whether the 2018 William Hinman speech reflects the SEC's wider view, this episode provides deep insights into the regulatory challenges crypto faces.
Weekly News Recap
Revelation of Hinman Documents Sparks Ripple's Call for Probe
As mentioned during the show, former SEC Director of Corporation Finance William Hinman's emails about the status of ether as a security or non-security were revealed this week. Ripple has now initiated calls for a renewed probe into Hinman, following the exposure of these documents tied to the ongoing SEC lawsuit against Ripple.
Ripple's Chief Legal Officer Stuart Alderoty stated: “An investigation must be conducted to understand what or who influenced Hinman.”
The documents suggest that Hinman planned a conversation with Ethereum cofounder Vitalik Buterin to better comprehend the workings of the Ethereum Foundation, a point that further fuels Ripple's push for a new investigation. This discussion aimed to underpin Hinman's opinion that ETH wasn't a security.
Gabriel Shapiro, general counsel at Delphi Labs, tweeted: “We need Congress to step up and create a clear, reasonable, easily navigated set of fit-for-purpose rules for crypto.”
Background of Prometheum Founder Prompts Questions
Prometheum, a previously under-the-radar firm, made headlines in the crypto universe after cofounder Aaron Kaplan's testimony before a U.S. House Committee. Kaplan, mirroring the SEC's perspective, advocated for current securities laws to govern the crypto world.
At the committee meeting, Kaplan stood up for the SEC's governing structure, suggesting that existing regulations provide a "compliant path forward" for crypto in the U.S. He sharply criticized those platforms that don't comply with these laws, labeling them as "reckless and unlawful."
During an interview with Unchained, he stated: "[Crypto exchanges] argue that there's a lack of regulatory clarity because they're literally best served by the lack of regulatory clarity."
Some people in the crypto community are claiming Prometheum's past isn't squeaky clean. For instance, it's been revealed that the firm has paid over $1.5 million in sales commissions to a company with numerous regulatory infractions. In fact, it was involved in the Long Island Iced Tea company that pivoted to Long Blockchain and was the subject of an SEC enforcement action. Also, the credentials of two Prometheum officers have come under scrutiny, as their law school lost its accreditation. Adam Cochran, partner at Cinneamhain Ventures, has speculated about Prometheum's strategies, highlighting that the company’s website features tokens that were named as securities in the SEC lawsuits against Binance and Coinbase – potentially suggesting that Prometheum had some foreknowledge of which tokens would be labeled as securities. Cochran suggests that Prometheum may be getting a regulatory break, manipulating its regulatory connections, or even running a dubious scheme.
In response to the revelations, the Blockchain Association submitted a Freedom of Information Act request to the SEC seeking details about the crypto broker.
SEC vs Coinbase: A 120-Day Countdown Begins
In the latest update on the legal battle between the SEC and Coinbase, the agency has requested more time to respond to Coinbase's petition for clarity on digital asset industry rules.
Despite Coinbase's push for a court-mandated response, the SEC said that the breadth of the rulemaking petition, filed just months ago and recently supplemented by Coinbase, needs a thorough review. The SEC anticipates that staff will be able to give a recommendation to the agency on the petition within the next 120 days, with a status report to follow.
Coinbase's Chief Legal Officer Paul Grewal tweeted: "They ignore the clear statements of the Chair that confirm they have no intent to issue new rules."
FTX's Customer Confidentiality Upheld Amid Legal Turmoil
U.S. Bankruptcy Judge John Dorsey has allowed collapsed crypto exchange FTX to permanently redact customer names from bankruptcy-related court documents. This decision concludes a lengthy dispute between FTX's bankruptcy estate and external parties, including media outlets and government lawyers, who sought access to the customer list.
Judge Dorsey emphasized customer protection, stating: "We want to make sure that they are protected and they don’t fall victim to any types of scams." The ruling supports FTX's argument that revealing customer names could harm the exchange's sale value.
Moreover, the U.S. Department of Justice's (DOJ) case against Sam Bankman-Fried, former CEO of FTX, faced a key decision when the Bahamas Supreme Court ruled that Bankman-Fried could contest additional charges being added beyond the original eight brought in December 2022. The additional charges center on wire fraud, securities fraud, money laundering, and conspiracy to defraud the Federal Elections Commission.
The court's decision came after Bankman-Fried's defense team contested the inclusion of five additional charges, including bank fraud and bribery, arguing their inclusion violated the terms of extradition from the Bahamas. Thursday afternoon, Judge Lewis Kaplan agreed to allow prosecutors to charge him on those additional charges in a separate trial set for the spring of 2024.
BlackRock Files for Bitcoin ETF
BlackRock's iShares unit has submitted paperwork to the SEC to create a Bitcoin spot ETF. The proposed fund, named the iShares Bitcoin Trust, will primarily consist of Bitcoin held by Coinbase on behalf of the Trust. Despite the SEC's history of rejecting similar ventures, many people are saying that BlackRock's prominent position in asset management and political influence could potentially sway the outcome.
Uniswap Announces New Draft Code With Customizable Liquidity Pools
Uniswap, the largest decentralized crypto exchange by volume, released the draft code for its fourth version, introducing the concept of customizable liquidity pools. The new V4 version will feature "hooks," smart contracts that allow developers to create custom liquidity pools and introduce innovative features.
These hooks will enable the creation of on-chain limit orders, automatic deposits to lending protocols, auto-compounded liquidity provider (LP) fees, and more. However, in the latest episode of The Chopping Block, Haseeb Qureshi, Robert Leshner, Tom Schmidt, and Tarun Chitra raised concerns that the implementation will bring problems around security and user experience.
The release of the draft code is the first step toward launching Uniswap V4. The team plans to engage with the Uniswap community and iterate on the code base over time. The new version will be deployed once a consensus is reached on the final version.
Don’t miss next Tuesday’s episode of Unchained with Uniswap founder Hayden Adams.
North Korean Hackers Launder $100 Million in Stolen Crypto
The North Korean hacking group Lazarus, known for its prolific cybercrime activities, has reportedly pocketed over $100 million in stolen crypto from the recent Atomic Wallet hack. Initially, the loss was estimated at $35 million, but the amount has nearly tripled, according to blockchain analytics firm Elliptic.
The hackers have started laundering the stolen funds through Garantex, a crypto exchange sanctioned by the U.S. Treasury's Office of Foreign Assets Control (OFAC). The stolen assets were traded for Bitcoin on Garantex, then laundered through the coin mixer Sinbad.
Elliptic, which attributed the attack to Lazarus Group, has been working with investigators and exchanges worldwide to trace and freeze the stolen funds. However, the effort has resulted in just $1 million in stolen assets being frozen so far.
Despite the magnitude of the heist, Atomic Wallet has yet to provide an explanation to its customers.
Bankruptcy Surge Sweeps Industry
In the face of rising financial turmoil, Banq, a unit of crypto custodian Prime Trust, filed for bankruptcy, citing a deficit of $5.4 million against $17.72 million in assets. The company is wrestling with issues, including a contentious acquisition by BitGo and allegations of unauthorized asset transfers to Fortress NFT Group by former officers.
Meanwhile, TrueUSD and South Korean firm Haru Invest, which have banking relationships with Prime Trust, also paused stablecoin mints and redemptions, saying it was due to Banq's internal struggles.
Here’s a recap of related bankruptcy news from this week:
Crypto lender Genesis continues mediated discussions with parent company Digital Currency Group (DCG) to determine paybacks. The latest negotiations indicate "substantial agreement" on key issues, but DCG and hedge fund Three Arrows Capital (3AC) will likely not receive the full value of their claims.
Bankrupt crypto lender Voyager Digital plans to re-open its app for initial distribution of funds to creditors, estimated at 35% of claims worth a collective $1.33 billion. According to bankruptcy plan administrator Paul Hage, Voyager may also permit withdrawals from June 20 to July 5.
The estate of bankrupt hedge fund, Three Arrows Capital (3AC), petitioned a New York court to declare founder Kyle Davies in contempt for his non-compliance with a subpoena, and proposed a $10,000 daily fine.
Meanwhile, Celsius updated its bankruptcy plan after the Fahrenheit consortium's successful bid for assets. However, the plan has met legal resistance from borrowers who claim it violates consumer lending laws.
Lastly, the U.S. wing of Bittrex, another bankrupt crypto exchange, will commence customer withdrawals after gaining clearance from a Delaware court. The exchange had filed for bankruptcy in May amidst legal opposition from the U.S. government over millions in alleged sanction violations.
CFTC Earns a Victory Over Ooki DAO
In a groundbreaking decision, the decentralized autonomous organization (DAO) Ooki DAO has been ordered to halt operations and pay a fine of over $643,000, marking a sweeping victory for the U.S. Commodity Futures Trading Commission (CFTC).
This outcome was determined by U.S. District Judge William H. Orrick, setting a legal precedent by holding a DAO liable for law violations. As the CFTC Division of Enforcement Director Ian McGinley emphasized: "This decision should serve as a wake-up call to anyone who believes they can circumvent the law by adopting a DAO structure."
The CFTC claimed Ooki DAO and its precursor, bZeroX, offered leveraged and margined retail commodity transactions outside of a registered exchange and didn't meet Bank Secrecy Act obligations. DAO members' personal liability could be on the table, according to Jason Civalleri, product counsel at Grayscale, stating that participation in a DAO could make members personally liable if the DAO does something illegal.
USDT Experiences a Massive Selloff
Unusual trading activity was detected in the liquidity pools of major DeFi protocols Uniswap and Curve, as millions of dollars worth of the stablecoin USDT is being aggressively sold off. In Curve's 3pool, a liquidity pool for stablecoin exchanges, USDT made up a whopping 73% of the total pool - a surge only paralleled twice in the past two years.
Research analyst Dan Smith raised concerns about Tether, the firm behind USDT, being forced to redeem the stablecoin, saying: “Bad time to be testing tether.” On the other hand, Paolo Ardoino, CTO of Tether, responded confidently. He tweeted: “We're ready to redeem any amount.”
Curve Finance Founder Faces Lawsuits
Curve Finance founder Michael Egorov is entrenched in legal turmoil as three venture capital firms – ParaFi Capital, Framework Ventures, and 1kx – file lawsuits against him in the U.S. The ongoing legal battle stems from claims of misappropriated trade secrets and an alleged breach of contract involving a near $1 million investment in Curve. The firms claim that Egorov used their investments for purposes other than agreed upon, specifically the funding of Curve's liquidity pools.
Egorov responded, stating that the U.S. lawsuit is simply an attempt to leverage the country's unfavorable crypto climate, following a lack of success in the Swiss proceedings.
FUN BITS 😁
We’ve all heard it. The SEC is coming after crypto. But are they?
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