The 5 Crypto Stories You Need to Know This Week: FTX, SBF, NASDAQ, Banque de France, SocGen and more (#153 - 24 July 2023)

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1. FTX Sues SBF and Inner Circle to Recover > $1 Billion

FTX’s liquidators sued SBF and other members of his inner circle to recover >$1 billion in stolen funds.

Some crazy new facts have emerged in the 80+ pages of the legal complaint, from wanting to buy the Pacific nation of Nauru to a $10 million illegal transfer to his dad.?

Here are some key takeaways you need to know about:

• Fraudulent transfers of over $1 billion were made from FTX to SBF and his co-founders from February 2020 to November 2022, over a year and a half before the bankruptcy.
• SBF made lots of fraudulent donations. This includes a $35 million donation using customer funds to a PAC called Guardians Against Pandemics that was run by SBF‘s younger brother, which the liquidators, with a sense of humour, specify “did nothing to prevent pandemics.”
• Whilst it is now known that SBF also funneled customer funds for ludicrous projects, like writing a book about “what human utility is” and videos about effective altruism, it seems now that customer funds were also used to make videos about “grabby aliens.”
• Even crazier, SBF allegedly discussed acquiring the country of Nauru (the third smallest country in the world with a population of 10,000 and GDP<$150m) to create a bunker in the event the majority of the world’s population died to ensure that the “effective altruists” survived.
• SBF made VC investments using customer funds with no due diligence, including a $700 million investment to a former Hollywood talent agent that had no asset management experience. Funds were invested in various businesses that had no synergy with FTX, including a celebrity-backed tequila business.
• SBF allegedly paid $236 million to a FinTech company just because the founder said that was the amount he needed to get it over the line with investors. No due diligence was performed, and no financial advisers were used. The software turned out to be completely worthless.
• FTX made illegal amendments to the code, allowing Alameda to borrow up to $65 billion without posting any collateral. When she heard the news, Ellison replied with a claps emoji.
• Ellison allegedly also dipped her hands in the cookie jar. She invested $10 million in an AI start-up in her name using FTX customer funds. She also paid herself multi-million dollar bonuses.
• SBF and his co-founders also received illegal loans from FTX at an annual interest rate of 1% in exchange, of course, for no collateral.? SBF received $170 million, Wang $54 million and Singh $25 million. And, it goes without saying, they never paid these loans back.
• SBF also sent $10 million of customer funds to his father, who then transferred part of the amount to his Morgan Stanley and TD Ameritrade accounts. These funds have allegedly been used to fund SBF’s defense. Not clear if these banks raised STR flags at the time.

The full legal complaint is available to read here .

Now what is the impact of this development?

Although some crazy facts were uncovered (who needs Hollywood writers when you have SBF), there is really nothing materially new from a legal perspective.

However, the liquidators will try to claw back as much as they can from the FTX co-founders and some other parties, including SBF’s father.

One silver lining of this bankruptcy (if there is one) is that it’s maybe good that it happened last year before the fraud got bigger, as the backdoor allowed Alameda to borrow up to $65 billion (vs. the <$10 billion fraud we currently have).

But one thing is for sure, the Netflix producers working on this FTX fiasco are probably salivating with this tsunami of new stories each week.

2. FTX Bahamas Liquidators Accuse CEO of Violating Agreement

FTX CEO John Ray was accused by FTX Bahamas liquidators of trying to sell FTX assets in the Bahamas for $256 million behind their back.?

This is an interesting development. If these allegations are true, they could arguably violate the cooperation agreement signed between the Delaware and Bahamas liquidators last December.?

There has been a lot of criticism of the FTX insolvency, from the fees that Ray and US counsel have been charging to the potential conflicts of interest of the law firms involved in the process. This adds to the list.?

As if the future Netflix series on the FTX fiasco needed more chapters and twists and turns…?

3. Nasdaq Halts Crypto Custody Plans

Nasdaq paused its crypto custody plans.?

As its CEO said on an earnings call the day the news was announced: “Considering the shifting business and regulatory environment in the US, we've made the decision to halt our launch of the U.S. digital assets custodian business and our related efforts to pursue a relevant license.”

However, they still want to remain engaged by supporting ETF providers and dialogue with regulators.?

“More broadly, we remain committed to supporting the evolution of the digital asset ecosystem in a variety of ways, among them through our ongoing engagement with regulators, the delivery of comprehensive technology solutions across the trade lifecycle and through our partnerships with potential ETF issuers to support tradable exchange listed products.”

This is another blow to the development of digital assets in the US whilst at the same time, other jurisdictions are moving forward.?

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4. Banque de France Publishes Wholesale CBDC Report

The French central bank released a new report on wholesale CBDC.

This is interesting as the experimentation was on wholesale CBDC, which is often seen as not sexy as retail CBDC by the media, as wholesale CBDC only impacts banks and their member banks, unlike retail CBDC, which directly affects the retail public.

From an academic perspective, the French central bank tested the three types of wholesale CBDC (including the interoperability, distribution and integration models- which I covered in depth in my last book ), which makes this very relevant.

And finally, the takeaways are very practical. In short, the French central bank finds that:

• Issuing a wholesale CBDC, as a complement to a retail CBDC, would contribute to the singleness of money by ensuring the anchoring value of central bank money for both retail and wholesale payments and convertibility between the different forms of private money.
• International cooperation and public-private partnerships remain a priority to converge towards a more globally inclusive and interoperable wholesale CBDC framework.?
• Interoperability should be prioritized to ensure seamless data and transaction exchange between DLT-based and conventional infrastructures.

This is positive for those following CBDC developments.

Also, it’s positive for France as the country is positioning itself as a more important player in the global crypto ecosystem.

5. Societe Generale Receives First French Crypto License

Societe Generale's cryptocurrency division, SG Forge, has become the first company to receive a license to offer crypto services in France from the country's financial regulator.

SG Forge is now licensed to provide buying and selling, exchange and custody of digital assets.?

This is another example of the proactive role that France is trying to play in the global crypto ecosystem.?

We should not forget that French entrepreneurs, especially traders, play an outsized role compared to their size in the global crypto ecosystem. Anyone who has worked in an investment bank knows the dominant role the French play in all types of TradFi derivative desks. The same is probably true when it comes to sophisticated crypto trading firms.?

The irony is that, as stated earlier, this news came out the same day that Nasdaq announced its intention to stop its crypto plans due “to the regulatory environment in the US.”?

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Henri Arslanian is the co-founder and managing partner of Nine Blocks Capital Management, an institutional-grade hedge fund focused exclusively on digital assets, with a market-neutral crypto fund focused on generating alpha from inefficiencies in crypto markets using relative value, arbitrage, and quantitative strategies.?

Henri was previously a partner and global crypto leader at PwC. In that role, he advised many of the world’s leading crypto exchanges, investors, financial institutions, and tech firms on their crypto initiatives and numerous governments, regulators, and central banks on crypto regulatory and policy matters.

With over 500,000 LinkedIn followers, Henri is a TEDx and global keynote speaker, a best-selling published author, and is regularly featured in global media, including Bloomberg, CNBC, CNN, BBC, The Wall Street Journal, The Economist, and the Financial Times.?

Henri was named by LinkedIn as one of the 2022 global Top Voices in Finance and is the host of the CryptoCapsules? social media video series as well as The Future of Money podcast and newsletter.