FTX On Trial
This week's big story is coverage of the FTX trial, and I feel like we’re watching some kind of reverse episode of?Survivor?that somehow merges with?Law and Order,?starting on a tropical island and ending in an American courtroom.?
Picture: the show opens onto a shot of a village in the Bahamas. Jeff Probst comes in for the voiceover.?
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“From this tiny Bahamian island, a small handful of Americans are beginning the clusterf*ck of a lifetime. They have volunteered - albeit unintentionally - to be extradited from this beautiful island paradise because they are under arrest for fraud and all kinds of other crimes that have yet to come to light. Some of them will be marooned in the American prison system, stripped of ill-gotten gains and creature comforts. By the end of this, they will be forced to carve out a new existence and, yes -?totally accountable for their actions.?This is their story. This is Survivor. But it’s also Law and Order.”
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["Law and Order" theme music plays]?
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This week, we’re covering:
“Calc”-you-later, ???
Trevor
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P.S. Welcome to our?newest crop of subscribers since last Entry! If you're all out of bug spray, use bear spray. Unfortunately, only one of these is sold at your local Target stores. We checked.
The Big Revelations of the FTX Trial
1 - Thai prostitutes and Chinese bribes
In 2021, the Chinese government froze $1 billion of Alameda’s funds on Huobi and OKX exchanges as part of a money laundering investigation.
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Rather than go the traditional route of getting lawyers involved, the FTX head honchos devised a more creative plan. Ellison revealed that Alameda engaged Thai prostitutes to establish accounts on these exchanges. The strategy? Implement trading tactics to gradually retrieve the immobilized funds, which constituted a significant portion of Alameda's assets at that period.
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When that didn’t work, FTX went with a less creative (and more illegal) strategy of bribing Chinese officials with $150 million.
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Ellison revealed that Alameda engaged Thai prostitutes to establish accounts on these exchanges. The strategy? Implement trading tactics to gradually retrieve the immobilized funds, which constituted a significant portion of Alameda's assets at that period.
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2 - FTX was a fraud from the beginning
Contrary to popular belief, the hole in FTX's balance sheet didn't begin with the collapse of Tera Luna or Three Arrows Capital; it started at the exchange's inception in 2019.?
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That’s right, folks; this is a classic case of “cookin’ the books.”
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Gary Wang, the CTO of FTX, testified that the exchange had a convoluted relationship with Alameda, which allowed the trading firm to borrow customer funds from FTX starting as early as 2019. He disclosed that he coded a "backdoor" initially giving Alameda a $10 million line of credit, which eventually ballooned to an "effectively infinite" $65 billion line of credit.?
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This was done "at Sam's direction," referring to Sam Bankman-Fried, the CEO of FTX.
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3 - Caroline created SEVEN alternate balance sheets (confirming FTX definitely wasn’t managing its money)
In the summer haze of 2022, when crypto was on its rollercoaster ride, one of FTX’s lenders, Genesis, came knocking for financial information. At this point, Alameda had ‘borrowed’ around?$10 billion from FTX customers, and about $5 billion was generously loaned to FTX's VIP club - its executives and close comrades. ?
Caroline claimed she put together not one, not two, but SEVEN "alternative balance sheets" to seemingly camouflage Alameda's hefty borrowings from FTX's clientele. “He suggested I should prepare some alternative ways of presenting the information and send it to him,” she said. “I understood him to be directing me to come up with ways to conceal things in our balance sheet we both agreed would look bad.” ?
Bankman-Fried's favorite pick? 'Alternative 7', a masterpiece that magically reduced Alameda's debts from $15 billion to a cool $10 billion. Ellison wasn't impressed, labeling it "dishonest". ?
As Matt Levine so eloquently describes in Money Stuff, “I am not an accountant or anything but I will say that the good way to do a balance sheet is:
And a bad way would be:
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Well, Matt, I?am?an accountant, and your assessment is spot on.
领英推荐
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The Triple Entry Take
These new revelations really just cement the takes we expressed?HERE?and?HERE?back in 2022 when all the FTX stuff unfolded. Here they are again
Other Significant Findings (OSF)
OSF#1 - The Fake News That Rallied - then Crashed - Bitcoin
It’s amazing how much chaos Twitter - excuse me, “X” - is still capable of causing even while it continues its plummet into dumpster-firedom (although sorry, this story still doesn’t top the unmitigated chaos following the baffling “blue checkmarks now cost $8” decision, which will?never stop being hilarious).
I suppose you could call it an honest mistake. CoinTelegraph’s social team posted something without editorial approval, which I’m sure even Wendy’s does from time to time. Only difference is, Wendy’s probably doesn’t make a false report of a Bitcoin spot ETF approval that results in a Bitcoin price rally from $27,900 to $30k and the liquidation of nearly $100 million across short and long positions in the span of an hour. We’ll let CoinTelegraph explain themselves further because, honestly, it’s way funnier just to read the absolute game of telephone that got us here.??
This is the same kind of “someone shared something after talking to somebody who said they also heard somebody talking to someone else” thing that had everybody thinking aliens are real a few months ago.
Honest mistake or not, we’re pretty sure some poor souls got fired over this. DYOR, kids, but also fact-check yourselves.?
OSF #2 - US government now among largest holders of Bitcoin, multitudes cry out in terror
Right off the bat, let’s acknowledge that on its own, that headline could make you say, “Huh, I’m feeling a sense of foreboding I can’t quite explain, kind of like when I found out?who owns the largest amount of private farmland in the United States.” That sense of foreboding doesn’t necessarily vanish when we go beyond the headline, but it at least helps it all make more sense; the numbers are pretty hefty - according to a data analysis based on public filings, crypto firm 21.co estimates that the U.S. government still holds 194,188 BTC, estimated to be worth $5.3 billion (this is after selling off a few million dollars worth of BTC earlier this year). So the U.S. government is now “among the largest” hodlers of BTC (a list that includes the nation of El Salvador, Tesla, and of course, Satoshi Nakamoto), and 21.co even admitted this is probably still a lowball estimate. That said, it’s not like Uncle Sam has been buying all this BTC - just seizing it, which is definitely better, and no, we are not taking any questions on this. The BTC is being held (mostly) in encrypted hardware wallets following three massive BTC seizures of the last three years: Silk Road in November 2020 (69,369 BTC), the Bitfinex Hack seizure in January 2022 (94,643 BTC), and the James Zhong seizure in March 2022 (51,326 BTC). So even though small quantities are periodically sold off based on court liquidation orders and the rest of it is effectively sitting in an evidence room somewhere like the laptop in?Breaking Bad?(IYKYK), that’s still a lot of Bitcoin in the hands of the same government that’s working hard to bring crypto to heel via regulatory action. Hmmmmmm.
OSF #3 -?Ferrari: a small use case for crypto payments
When I was a kid, I remember there was an outlet store for a particular famous motorcycle brand in the local mall. They didn't just have branded clothing and swag, but also actual motorcycles in the store. I always figured the motorcycles were there just for badass ambiance because it was a mall, not a dealership, but I distinctly remember my dad insisting that you could buy one. To this day, I remember him saying, “Trust me, if you walk in there with $22,000 dollars, you’ll walk out with a motorcycle.”
Well, now we can amend my dad’s quote for crypto investors looking to snag Italy’s most well-known luxury car - “If you walk in there with the right amount of crypto, you’ll walk out with a Ferrari.” This story is a dual feature of two trends we’ve commented on before - major brands getting involved in crypto, and the rise of crypto payments.
This expansion into crypto will start in the US, followed closely by Europe, with the help of crypto payment processor?BitPay?for U.S. operations. For now, payments will be limited to the usual suspects - bitcoin, ether, and the stablecoin USDC - and those aren’t welcome to stick around on the balance sheet, at least not in this case. Any cryptocurrencies used to purchase a Ferrari will be swiftly converted to fiat, lest crypto price volatility serve as a sort of backdoor coupon for a Ferrari. (“Use code CRYPTO at checkout to save 10% on your next Ferrari!”)?
Spotlight????-? Accounting Today on the 1099-DA
Bitwave co-founder & CEO Patrick White wrote a fantastic article in?Accounting Today?about crypto’s new tax form, the 1099-DA. We touched on this a little in last Entry and hinted there might be more to come. Well, we're excited to help you go deeper into the intricacies of the new form and its implementation timeline in this article.?
If you’re curious what the form means for brokers, tax preparers, and taxpayers, give it a read!
The Water Cooler ??
Things worth talking about at the office water cooler…if you 1) talk to people, 2) still work in an office, and 3) have a water cooler.
???????Featured Funding Find:?Bitmain, Bitcoin Miners, and Bankruptcy
What is this: Today’s funding feature is less about a?round?of funding and more about a company who was?really in need of funds?finding a way to procure them. To wit: Core Scientific (CORZ), the world's largest publicly listed miner (relative to total hashrate) and second-largest publicly listed bitcoin miner -?filed for bankruptcy last December?and has been struggling to stay afloat since. In today’s headline, Bitmain - the world's largest bitcoin mining rig maker - and crypto platform Anchorage Digital are expected to take equity stakes in Core Scientific as part of Core's bankruptcy, in exchange for Core buying 27,000 units of Bitmain’s most powerful air-cooled mining rigs.
Why we noticed:
Let us once again draw from the wisdom of Crypto Twitter:
“In the midst of ‘It’s so over,’ I found there was, within me, an invincible ‘we are so back.’”?
CORZ bankruptcy filing was a big deal last December. At a time when it felt like the hits just wouldn’t stop coming for this industry, having the second-largest publicly-listed bitcoin miner file for bankruptcy felt like a death knell, yet another of the “it’s so over” moments that crypto Twitter knows so well.?
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But with this story it seems a light has emerged at the end of the tunnel, not just for Core Scientific but for other bankrupt crypto companies starting to rebound.?
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Bitmain has long been the largest supplier of mining equipment for BTC miners. If there is a large BTC miner, they’ve probably purchased a majority of their machines from Bitmain. The interesting component here is that Bitmain is willing to take equity in CORZ as some portion of payment for the machines.?
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It’s a potential win for both parties. Bitmain has the chance to breathe new life into what is still an important name in the industry, and Core Scientific gets a little breathing room on their need for new cash by using equity as partial payment for top-of-the-line mining equipment.
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That said, bear in mind that this is not the first round of life support that Core Scientific has received. Shortly after filing for bankruptcy last year they got a?cash infusion?to the tune of $500m from Apollo Global Management and (color me not surprised at all) BlackRock.? The latter at one point was Core Scientific’s largest shareholder, and may still be, though it can be hard to tell from public filings since a lot of these shares are in convertible notes that will convert sometime in the future. Investing in bitcoin miners was a common strategy for BlackRock and other TradFi giants like Vanguard and Fidelity back in the “good ol days” of the bull run, offering a direct route of exposure to the sector while still remaining insulated from regulatory uncertainty.
Extraordinary Items ??
We’ll sign off with this stellar analysis of BTC price action. The facts speak for themselves. Just ask Not Jerome Powell.?