The Crypto Currier 10th October

FTX- the trial of the year is underway. Here’s what’s come out so far:

The FTX trial is underway, and more is coming out. We already know that SBF allowed FTX sister company Alameda (of which he owned 90%) to withdraw $8 billion of FTX customer funds; that he knew of this shortfall at least months before the exchange collapsed; that Alameda ended up with a $65 billion line of credit from FTX, and that FTX didn’t have the insurance coverage it said it did.

SBF gave Alameda special treatment and allowed it to withdraw $8 billion of FTX customer funds

On July 31, 2019, SBF tweeted that FTX gave its sister company, Alameda, the same treatment as anyone else. Precisely, his tweet said, "Alameda is a liquidity provider on FTX but their account is just like everyone else's. Alameda's incentive is just for FTX to do as well as possible; by far the dominant factor is helping to make the trading experience as good as possible". 

Also on July 31, 2019, FTX did exactly the opposite. That same day, FTX added a new feature in its code that permitted Alameda, its subsidiary accounts, and a few others to have a negative balance, allowing them to withdraw an unlimited amount of funds. Alameda could also place its orders faster than other customers, according to CTO Gary Wang's testimonial. 

Wang described a phone call he overheard between SBF and an Alameda trader, who asked whether it was permissible for Alameda to continue withdrawing from FTX. According to his testimonial, SBF said that as long as what Alameda was withdrawing from FTX was less than the company's overall revenue, "it's fine". 

Alameda, 90% owned by SBF, then proceeded to do exactly this. When asked what Alameda did with its special privileges, Wang replied that it “withdrew more than it had in its account — like, $8 billion, in fiat and crypto.” That money, Wang said, came from FTX customers. (Business Insider) and (Pymnts)

The flag in the code, and how Alameda ended up with a $65 billion line of credit (from FTX customers)

The prosecution spent a whole day zeroing in on the ‘allow_negative’ feature written into the code. Wang testified that SBF asked him and a fellow employee to add this flag. This feature meant that Alameda and accounts with this flag were exempted from checks to see if they had sufficient funds to withdraw. Instead, they could just withdraw away, funds or no. (from FTX customer funds).

This partly explains how Alameda ended up with a $65 billion line of credit on FTX. Its line of credit started at a few million, but, according to Wang’s testimony, SBF kept asking him to increase it because Alameda kept running into its limits.

“FTX was not fine and assets were not fine because FTX did not have enough assets for customer withdrawals,” Wang said. (The Verge)

SBF knew about the $8 billion customer funds debt at least months before the collapse

In an ideal crypto exchange, customer fiat deposits would be held in that exchange, preferably with good custody. On FTX, as we now know, customer fiat funds were sent not to FTX but to Alameda via an Alameda subsidiary called North Dimension. FTX then treated each fiat deposit made by an FTX customer as a debt owed from Alameda to FTX. At the time of FTX's collapse, this liability stood at $8 billion. It's now come out that SBF at least knew about this debt months before the bankruptcy filing. 

Adam Yedida, one of the team members who also lived in SBF's $35 million Bahamas penthouse and who trusted FTX enough to invest his bonus to buy a 5% stake in it asked SBF, in a paddle tennis court, if things were okay regarding Alameda's liability. SBF replied "We are not bulletproof anymore". SBF reportedly added that it would take six months to three years to settle their accounts. "He looked nervous," claimed Yedidia. "I trusted Sam, and Caroline, and others in Alameda to handle the situation," he said. Gary Wang, the co-founder and CTO also said of SBF "I trusted his judgement". (Cointelegraph)

LedgerX employees also found out about the Alameda back door. One of them was fired. They say it’s because they pointed it out.

SBF wasn't alone in knowing about this code or the special privileges it granted Alameda. Employees of a smaller firm FTX bought in 2021, LedgerX, found the code months before the exchange collapsed. 

LedgerX's chief risk officer, Julie Schoening, reportedly told Outen in reply that "there are less rigid rules" offshore but that FTX nevertheless "should clean up this sort of stuff." 

Schoening was fired in early August. She and others at LedgerX claim this was because she "irritated" her superiors by pointing out this part of the code. (Futurism)

FTX didn’t have the $100 million insurance fund it claimed it did

FTX often touted its $100 million insurance fund on its website and on social media. This fund was intended to prevent user losses in the case of sudden market movements, a frequent thing in crypto. And now we find out that FTX didn't exactly have the insurance fund it said it had. Instead, it used a hidden Python code to misrepresent the value of the fund, showing a fictional number calculated by multiplying the daily trading volume of FTX's FTT Token by ‘a random number close to 7,500’, according to testimony from FTX co-founder Gary Wang. In his testimony, Wang claims the amount contained within the insurance fund was often insufficient to cover these losses. In one 2021 exploit, Wang was reportedly told to make Alameda “take on” the loss to hide it, as Alameda’s balance sheets were more private than those of FTX. (Cointelegraph)

SBF’s on-and-off ex, Alameda CEO and star witness Caroline Ellison is on trial today

Today is going to be interesting. Ellison is very hurt by how her former lover/ boyfriend/ flatmate/ boss SBF treated her. I don’t expect she’ll be holding back.

The UK FCA’s crypto marketing crackdown has started, with an already big warning list. Here’s how the first day went

The UK FCA’s new financial promotion rules kick in around crypto marketing. Says it thinks a ‘significant number of firms’ won’t meet the new requirements

The FCA's new financial promotion regime kicked in last Tuesday, 3 October. Yesterday, Monday, the FCA started its crackdown on crypto asset companies that violate its new standards. The main requirements mandate that crypto promotions must be “clear, fair and not misleading” and that companies must offer a 24-hour cooling-off period for customers to rethink their purchases. This is harder for crypto companies to do in practise than in theory, given the volatility in crypto markets. 

The FCA says it will scrape around 100,000 websites each day in search of breaches. Any breaches it finds, it will then turn over to international regulators. The FCA will also work with tech providers to take down non-compliant apps and websites. The FCA has already created a list of companies violating the new rules, and is set to start updating this list on an hourly basis, publishing the names of violators on its website.

Extensions to comply have been granted to a few firms, giving these select few firms until January. This only applies to those crypto asset firms registered with the FCA or eligible to apply through an authorised approver. For anyone else not complying, it'll mean getting their website shut down.

“There are a significant number of firms who we don’t think we’ll be able to meet the new requirements,” Lucy Castledine, the FCA's director of consumer investments said, without specifying any names. Castledine added “There are a number of fairly large overseas crypto exchanges that are targeting the U.K. that have failed to engage with us.” (Pymnts)

FCA issued 146 alerts on first day of crypto asset promotion regime

The FCA issued 146 alerts in its 'Warning List' about crypto asset promotions on the first day its new rules came into play around the marketing of crypto. Crypto firms on the warning list include exchanges Kucoin and Huobi, as well as some firms impersonating real, regulated firms. Not complying with the new financial promotions regulations "would be a criminal offence punishable by up to 2 years imprisonment, an unlimited fine, or both," the FCA stated, adding, "We will take action against firms illegally promoting to UK consumers including, but not limited to, placing firms on our Warning List and taking steps to remove or block any illegal financial promotions such as websites, social media accounts and apps." The FCA warning states: "This firm may be promoting financial services or products without our permission. You should avoid dealing with this firm." (Finextra) and (Finance Magnates)

UK crypto companies are adhering to the FCA’s new finprom regime. Or not.

Some crypto companies have adhered to the UK FCA's new rules. Binance has set up a new website for the UK with lots of warnings. Nexo ended its crypto card transactions in the UK, cashback payouts for transactions on its Nexo Exchange and its Nexo Card and terminated their referral and affiliate programmes. Other companies haven't yet. Some of those have already made it to the FCA's warning list. (Finance Magnates)

Otherwise in crypto. Even the best of us can get coins stuck and lost, exchanges are hit by lots of attempted exploits, blackmail is leading the way in crypto scams, and almost half of users are using crypto to improve their lives

Crypto developer platform Gitcoin gets $461,000 of its tokens stuck

Not just anyone can mess up a crypto transaction; crypto developers can too. Crypto developer platform Gitcoin mistakenly sent $461,000 worth of its Gitcoin tokens to an unrecoverable contract address, meaning those tokens are now lost. “This has rendered the funds stuck in the contract, with no way of recovering them,” a project lead explained. (Cointelegraph)

South Korean exchange hit by 159,000 exploits in first half of 2023

One of the biggest cryptocurrency exchanges in South Korea experienced over 159,000 hacker attacks in the first half of this year, according to its operating company. This is up 117% from the first half of 2022 and up 1800% from the first half of 2020. The exchange, Upbit, suffered a $42 million exploit in 2019, but since then hasn't suffered a security breach. It's also upped its security and transferred 70% of the funds it holds to safer cold storage. Still, 159,000 hacking attempts in half a year is a lot! (Cointelegraph)

Approximately 50% of crypto users are investing in digital assets to improve their everyday living standards

46%, 44%, and 41% of respondents in South Korea, Canada, and Turkey respectively said improving their living standards is their main goal when investing in digital assets. 36% of respondents in Malaysia and Taiwan said enhancing their family's quality of life was their main priority when investing. Around 27% of female crypto investors in the U.S. and Turkey said they invested in digital assets to fund their children's education, according to a new survey by crypto exchange Bitget. (Cointelegraph)

Crypto funding hits lowest levels since 2020

The general bear market is hitting crypto companies seeking funding. "Q3 marked new lows in both overall funding amounts and deal counts that have not been seen since Q4 2020”, according to a new report by blockchain intelligence firm Messari.

Under $2.1 billion was invested in just under 300 deals, 36% down from Q2. Of this, most went to early-stage rounds with seed funding counting for $488 million of the total. “Trends in deal counts show a significant shift away from later-stage projects and into early-stage projects over the last three years,” the report said.

This trend isn't unique to crypto. Many small and medium businesses are struggling to access funding. (Pymnts)

Blackmail leading the way in crypto scams

Blackmail is the most common type of crypto scam, currently, for the amount raised. This is followed by sextortion, and ransomware, according to a new study by Coin Kickoff. Blackmail scams often threaten to release personal data or embarrassing photos if the victim doesn’t pay up in crypto. (Finance Magnates)

Binance’s market share keeps dropping

Binance’s spot market share has now fallen for seven consecutive months. In January 2023, it accounted for 55.2%. It dropped from 38.5% in August to 34.3% in September. This will partly be in response to ongoing regulatory issues, partly a change to its fee structures, and perhaps partly other concerns. (Cointelegraph)

Disclaimer: The Crypto Currier offers information, not advice or recommendations.  It does not recommend any particular investment or investment strategy and focus on news, use cases and applications of the technologies rather than investment. You should carry out your own independent research including your own independent verification of facts and data. I write the Currier carefully but we can’t guarantee the accuracy or completeness of any information we publish and we accept no liability for any act or omission by a reader of our content. Opinions entirely my own and might be totally incorrect.