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June 6, 2023

SEC files complaint against Coinbase

The SEC has clearly been busy. The agency followed up its complaint against Binance by smacking Coinbase with charges the very next day. This isn't terribly unexpected: in late March the SEC hit Coinbase with a Wells notice, which is a formal notice saying "we're about to file a complaint against you, convince us not to." Coinbase decided that instead of any real attempt at convincing them not to, they would use the incident as a PR opportunity to try to win hearts and minds (of the public but also critically in Congress), convincing people that the SEC was being unfair to them and stifling innovation in the United States and all sorts of other things.

The SEC, apparently unconvinced by Coinbase's usual spiel, filed a complaint with five claims for relief involving operating without registering with the SEC and offering unregistered securities by way of providing a cryptocurrency staking program.

Coinbase has responded with its usual bluster, and vowed to fight the lawsuit. They don't really have much choice, given their business is almost entirely predicated on being able to continue operating in the US. A tweet by Coinbase CEO Brian Armstrong refers to "the US congress... introducing new legislation to fix the situation", suggesting he is hoping that Congress might bail him out of the mess he's in. Given the amount of lobbying Coinbase has been doing, and the apparent bought and paid for crypto advocates who sit in Congress, his hopes are not entirely misplaced, but we shall see. As with the lawsuit against Binance, this is not likely to resolve anytime soon, particularly if the companies both decide to fight in court.

"SEC Charges Coinbase for Operating as an Unregistered Securities Exchange, Broker, and Clearing Agency", U.S. Securities and Exchange Commission
SEC v. Coinbase
Tweet by Brian Armstrong

June 5, 2023

SEC files complaint against Binance

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The SEC has filed a complaint against Binance, various related companies, and Binance CEO Changpeng "CZ" Zhao. They allege that the company has been acting with "blatant disregard" of US securities laws through their operation of unregistered trading platforms, have performed multiple offers of unregistered securities and investment schemes, and have defrauded investors through material misstatements around supposed controls for manipulative trading activity, such as wash trading, on the Binance platforms.

The complaint echoes some of the allegations made by the CFTC in a March lawsuit, including that Binance.US was primarily a front for Binance's international platform that was used to try to distract US regulators. However, it also goes farther by adding allegations around Binance's lack of controls around market manipulation, which the SEC alleges contradict public statements by Binance that they had sophisticated programs to prevent wash trading and other manipulative actions. The SEC even claims that the CZ-owned and -operated market maker Sigma Chain was engaged in substantial wash trading on the platform.

The SEC lawsuit was also a bit of a bombshell in its naming of some major cryptocurrencies as securities: SOL, ADA, MATIC, FIL, ATOM, SAND, MANA, ALGO, AXS, and COTI. These are the crypto assets associated, respectively, with the Solana, Cardano, Polygon, Filecoin,^[d] Cosmos, The Sandbox, Decentraland, Algorand, Axie Infinity, and Coti projects.

SEC v. Binance

March 2, 2023

Silvergate crypto-focused bank faces crisis

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Silvergate is a US bank that shifted its business toward primarily serving crypto clients. Following the collapse of FTX, there have been concerns over Silvergate's exposure to the losses experienced within the crypto industry. Short sellers piled in, making Silvergate the most shorted stock in late February.

On March 1, Silvergate revealed that they would miss the deadline to file their annual report with the SEC, which they blamed on regulatory inquiries. They also revealed even more losses, which added to the massive $887 million in losses they experienced in Q4 2022. They also disclosed that they were having to evaluate whether the bank was going to be able to survive.

Silvergate's stock plunged on the news, worsening its already marked decline in price over 2022–23. Some crypto firms began distancing themselves from the bank, as well: Coinbase announced on March 2 that they would no longer be transacting with Silvergate "in light of recent developments and out of an abundance of caution". Galaxy Digital, Paxos, CBOE, Gemini, Crypto.com, and Bitstamp also announced they would cease transfers to and from Silvergate, and Circle announced they would be "unwinding certain services with them".

"Crypto bank Silvergate plunges after warning on ability to survive", Financial Times
"Coinbase, Galaxy, Paxos Stop Accepting Transfers Via Silvergate Network", Bloomberg

February 24, 2023

Per a court order, Oasis rewrites the rules for Jump Crypto to recover stolen assets

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In a world where "code is law", crypto users don't necessarily expect that the smart contracts might change out from under them — particularly given contracts are often assumed to be immutable once they're deployed. However, for various reasons including the need to patch bugs in deployed contracts, some projects use upgradable smart contracts.

This decision was what allowed Jump Crypto to obtain a court order requiring the Oasis platform to "upgrade" a smart contract in such a way that Jump Crypto could remove stolen funds from where the hacker had placed them on the Oasis protocol. Oasis released a defensive statement, writing that their cooperation in the recovery was "only possible due to a previously unknown vulnerability in the design of the admin multisig access", and that "we will be making no further comment at this time". Oasis is a frontend for the MakerDAO project, which was originally started as part of MakerDAO but later spun into a separate entity, though it still appears to enjoy preferred status by MakerDAO.

The stolen funds in question were the proceeds of the February 2022 Wormhole bridge exploit, in which attackers stole 120,000 wETH (then ~$326 million; now $192 million). After the hack, Wormhole's parent company Jump Crypto plugged the hole left by the hack with their own funds. Since then, the attackers have been moving the funds throughout the cryptocurrency ecosystem, even taking out a highly-leveraged position on in Lido-staked Ether last month.

Ultimately, Jump was able to recover around $140 million via their "counter-exploit". While many celebrated the recovery, some were concerned about the precedent of a so-called defi platform changing a smart contract to remove funds from a wallet at the direction of a court. Some described the upgradability as a "backdoor". "If they'd do it for Jump, what does that say about possible coercion via state actors?" wrote one trader on Twitter.

"Jump Executes Counter Exploit Against Wormhole Exploiter", Blockworks Research
"Jump Crypto Just Counter-Exploited the Wormhole Hacker for $140 Million", Blockworks
"Statement Regarding The Transactions From The Oasis Multisig on 21st Feb 2023", Oasis
Tweet by Evanss6.eth

January 19, 2023

Genesis files for bankruptcy

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The Genesis cryptocurrency lending platform filed for bankruptcy, following weeks of turmoil after the FTX collapse. Genesis halted withdrawals shortly after FTX's failure, and shortly afterwards warned of possible bankruptcy if they couldn't raise at least $1 billion in new capital. The past few months have also featured a public conflict between Genesis, along with its parent company DCG and DCG's CEO and founder Barry Silbert, and the Winklevoss twins behind the Gemini crypto exchange.

It remains to be seen what the impact of a Genesis bankruptcy may have on its parent company, Digital Currency Group (DCG). DCG owes Genesis more than $1.65 billion, according to bankruptcy filings, including a $1.1 billion promissory note created to absorb Genesis losses in the Three Arrows Capital collapse.

"Genesis, a Crypto Lending Firm, Files for Bankruptcy", The New York Times

January 12, 2023

SEC charges Gemini and Genesis for allegedly offering unregistered securities

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The SEC filed charges against Genesis Global Capital and Gemini, two crypto firms that collaborated to create Gemini's embattled Earn lending program. According to the SEC, their lending program constitutes an offer and sale of securities and, as such, should have been registered. Other companies, such as (now bankrupt) Celsius, have in the past shut down similar products in the US due to concerns over regulatory action; it's not clear why Gemini thought their product would pass muster.

On November 16, Gemini halted withdrawals from Earn after Genesis halted withdrawals after FTX collapsed. Since then, Gemini and Genesis have been engaged in a very public battle, with Gemini's founders accusing Genesis and its parent company of misconduct and demanding the return of the $900 million in Gemini customer funds.

"SEC Charges Genesis and Gemini for the Unregistered Offer and Sale of Crypto Asset Securities through the Gemini Earn Lending Program", U.S. Securities and Exchange Commission

December 27, 2022

Mango Markets exploiter arrested despite claiming all his actions were legal

A very close-up portrait of Avraham Eisenberg, who has curly red hair and a beard

Avraham Eisenberg (attribution)

In October, an exploiter was able to manipulate collateral prices to extract tokens from the Mango Markets defi project, ultimately resulting in a $116 million loss for the project. The exploiter then tried to create a governance proposal in which he would agree to return some of the stolen funds in exchange for an agreement that the protocol would not try to freeze the tokens or pursue criminal charges.

It quickly became apparent that a man named Avraham Eisenberg was behind the exploit. In screenshots leaked from a conversation in a private Discord channel shortly before the attack, Eisenberg talked about the exploit he had planned. "I'm investigating a platform that could maybe lead to a 9 figure payday. Should I do it?" he wrote. When someone replied, "unles[s] it is highly illegal", Eisenberg responded: "Are there rules these days?" When someone suggested responsibly disclosing the vulnerability to the protocol, Eisenberg refused, saying the bug bounty was likely to be too small.

Eisenberg later owned up to the attack, tweeting a thread in which he wrote that he "was involved with a team that operated a highly profitable trading strategy last week. I believe all of our actions were legal open market actions, using the protocol as designed, even if the development team did not fully anticipate all the consequences of setting parameters the way they are."

The feds apparently disagreed with his evaluation, and arrested Eisenberg in Puerto Rico on December 26. He is charged with commodities fraud and commodities manipulation.

December 17, 2022

Scammer steals fourteen Bored Apes from one victim, flips them for over $1 million

A Bored Ape with grey fur, wearing a red baseball cap, a green army jacket, and a blindfold over its eyes

BAYC #2060, which the scammer claimed to want to license (attribution)

A scammer spent a month setting up a con in which they stole fourteen Bored Ape NFTs belonging to one individual. Posing as a casting director at a real film production company—complete with a fake website, a fake partner company, and fake individuals pretending to have signed deals with the company—a scammer was able to convince the collector that they were interested in paying $13,000–$17,000 to license a Bored Ape for use in an animation.

After some back-and-forth, with legitimate-looking contracts and falsified emails appearing to come from the real company's real founding director, the NFT collector was asked to use their crypto wallet to sign a contract, via the fake company partner website that had been set up.

When the collector did so, the smart contract drained the collector's wallet of its fourteen pricey Bored Ape NFTs, then accepted the highest offers that were outstanding on each of the Bored Apes, netting 852.9 ETH. The scammer converted the stolen ETH to the DAI stablecoin, making off with $1,075,000 in DAI.

December 12, 2022

Sam Bankman-Fried arrested

Sam Bankman-Fried pictured from the shoulders up

Sam Bankman-Fried (attribution)

Sam Bankman-Fried has been arrested by Bahamian authorities, who said in a press release that they took the action "follow[ing] receipt of formal notification from the United States that it has filed criminal charges against SBF and is likely to request his extradition".

November 28, 2022

BlockFi files for bankruptcy

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Crypto lending firm BlockFi has filed for Chapter 11 bankruptcy in the wake of the FTX collapse. The company was in dire straits in the spring after Terra and Three Arrows Capital blow-ups, but was bailed out in June by a $250 million loan from FTX, followed by a deal giving BlockFi a $400 million credit facility and giving FTX the "option to acquire" BlockFi.

Because of this dependency, it was no surprise when BlockFi announced they were once again in crisis following the FTX explosion. On November 15, the Wall Street Journal reported they were preparing for possible bankruptcy and considering layoffs.

On November 28, BlockFi filed for bankruptcy. Their filing estimates they have more than 100,000 creditors (the maximum option on the form), between $1–10 billion in assets, and between $1–10 billion in liabilities.

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