Tag: Investigations

‘Snow Job’: The Plot to Hand the Crypto Industry to the Big Banks

by Decrypt

In brief

  • The Biden Administration’s crypto strategy hinges on stablecoins.

  • The strategy is to use federal agencies to squeeze stablecoin issuers.

  • The ultimate beneficiary is likely to be the big banks.

“Just because you’re paranoid doesn’t mean they aren’t after you.” That adage has been attributed to everyone from Henry Kissinger to Kurt Cobain, but these days it would be a fitting motto for the crypto industry.

In 2021, crypto believers became convinced that the U.S. government has it in for them. And not without reason: a series of decisions by the SEC and other regulators suggested that federal officials are not just indifferent to the industry, but actively hostile to it.

The question is why. While many crypto advocates insist the government is corrupt or inept, the reality is that the Biden Administration is pursuing a crafty strategy to tame an industry it views as a threat. 

Interviews with former regulators and executives at top crypto firms reveal a sophisticated plan not to crush crypto, but to co-opt it by handing a core part of the crypto industry—stablecoins—to the big banks. Doing this, regulators believe, will bring the free-wheeling crypto economy to heel.

“It’s a very thought-through doctrine about how to stop the crypto industry from growing too fast and too much,” says Maya Zehavi, a crypto entrepreneur and investor who has advised regulators.

Who exactly is behind the strategy? While many view the ambitious SEC Chair Gary Gensler as the architect of the Biden Administration’s anti-crypto policies, his influence has been overstated. It is instead Treasury Secretary Janet Yellen, Senator Elizabeth Warren, and a clique of Federal Reserve veterans who appear to be calling the shots.

According to Zehavi and others, the Biden Administration doesn’t want to kill stablecoins altogether. Instead, the aim is to cull what these lawmakers perceive as “shadowy” operations like Tether while bringing “regulator-friendly” ones like Circle and Paxos under the umbrella of the U.S. banking system.

Recent actions by regulators suggest the plan is already underway. The question now is whether the crypto industry can avoid being owned by the same big banks it set out to disrupt. 

Stablecoins: The key to taming crypto

Bitcoin was born in 2008, but it would take more than a decade for the U.S. government to take crypto seriously. When it finally did, it was because of stablecoins. 

According to Jerry Brito, executive director of the non-profit Coin Center, Facebook’s announcement in 2019 that it would launch its own digital currency was a watershed moment. The company said the currency, originally called Libra, would be a stablecoin pegged to a basket of government-issued currencies.

Facebook was hardly the first to hit on the idea of a stablecoin. As early as 2014, crypto users have relied on digital tokens pegged to so-called fiat currencies like the U.S. dollar or the euro. But when Facebook announced it would offer a stablecoin to its more than 2 billion users, Congress snapped to attention. The company’s crypto ambitions represented not just a new product but a challenge to governments’ power over the purse. As crypto lawyer Preston Byrne wrote at the time, “If Facebook raised an army, this would be only slightly more hostile to the people of the United States.”

While stablecoins have yet to enter the mainstream, they have become a critical part of the crypto industry. Tokens like Tether’s USDT and Circle’s USDC provide a shelter from volatility, while also letting traders avoid the fees that typically come with moving money back to traditional currency. And it doesn’t hurt that stablecoins make it easier to avoid the tax and legal regimes that kick in whenever a customer touches so-called “fiat rails” where traditional banks operate.

All of this comes as the U.S. Treasury has grown sensitive to challenges to its sovereignty, including efforts by geopolitical rivals Russia and China to weaken the dollar’s role as the world’s reserve currency. While China has promoted its digital yuan as one alternative, America’s antagonists would be equally pleased if Bitcoin or another cryptocurrency replaced the dollar in global commerce. These geopolitical considerations help explain the blowback to Facebook’s Libra project (and to crypto writ large). 

Political backlash all but neutered Libra, but the broader stablecoin market is still flourishing. Today its market cap sits around $155 billion while trades involving stablecoins account for more than 70% of all crypto transactions on any given day. And this could be just the beginning. Circle, the second-largest issuer of stablecoins, told its investors in July that the value of USDC in circulation could reach $194 billion by 2023—an amount that matches the GDP of Greece.

Circle, which is allied with crypto giant Coinbase, has long touted its efforts to stay on the right side of regulators—even as the company has been entangled in an SEC investigation and controversies over its reserves. Tether has been dogged by more serious allegations related to sketchy accounting practices, and questions of whether some stablecoins are actually backed by dollars at all. The company has already been fined $41 million by the CFTC and $18.5 million by the state of New York, and is the subject of multiple federal investigations over what exactly backs its stablecoin.

All of this has led stablecoins to become the prime target in the federal government’s belated attempt to oversee the crypto markets. The response has included a January report from the Federal Reserve that discussed the potential for a central bank digital currency, but concluded the Fed would not act without a clear mandate from Congress and the White House.

Far more significant was a report published in November by the President’s Working Group, an inter-agency group of the country’s most senior financial regulators, including Yellen. Titled “Report on Stablecoins,” the document called on Congress to pass laws requiring stablecoin issuers to operate as banks and to restrict their “affiliation with commercial entities.”

The report also stated that regulators may take the step of labeling stablecoin issuers as “systemically important,” a designation created in the wake of the 2008 financial crisis to oversee institutions that, in the parlance of those times, are “too big to fail.”  

Few people think the report’s authors are serious about treating stablecoins as too big to fail. Unlike the massive insurer AIG, which fell into that category, stablecoins are not interwoven with the rest of the U.S. financial system. 

Three images of the top stablecoins.
Tether, USDC, and Binance all offer stablecoins for the crypto industry. Image: Shutterstock

Steven Kelly, a researcher at the Yale Program on Financial Stability, points out that the $155 billion stablecoin economy is a drop in the bucket compared to money market funds, which are today worth nearly $5 trillion and have been a catalyst of past financial crises.

In this light, claims that stablecoins pose an existential threat to the financial system look flimsy. Nonetheless, there is little doubt U.S. regulators view crypto as a threat to the financial status quo, and believe stablecoins are the key to stopping it.

Zehavi says the Biden Administration’s strategy is to choke the stablecoin market through regulation; the government believes this can yield new opportunities for tax collection and also slow the growth of the broader crypto market. That’s because stablecoins are the tool crypto traders use to move in and out of positions—new restrictions on stablecoins are therefore likely to create friction for traders, and make trading other forms of crypto inconvenient or expensive.

“Give it to the banks”

U.S. regulators can lay down the law, but they are constrained by law themselves. What they want to do is not always the same as what they can do.

This is especially the case for Gensler, who is rumored to be seeking the job of Treasury Secretary. When it comes to regulating stablecoins, the SEC chairman is more like the Wizard of Oz (appropriately enough, a political allegory about control of the U.S. money supply) than an all-powerful policeman.

According to many legal observers, the SEC does not have clear jurisdiction over stablecoins since they are not securities. Unlike shares of stock (or most cryptocurrencies for that matter), people do not acquire stablecoins in the hopes of making a profit—one of the key factors in the SEC’s favored “Howey Test” for determining whether something is an investment contract. Since the value of stablecoins stays constant, it’s hard to make a case that they are an investment. 

According to Brito of Coin Center, the legal status of stablecoins is more akin to the money used in PayPal or Venmo transactions. In such transactions, customers don’t send actual dollars to each other but rely on companies to debit or credit their accounts using internal funds. A dollar sent via Venmo, or a stablecoin, serves as money, but that doesn’t mean it’s treated as an investment overseen by the SEC.

The question of who does get to regulate stablecoins came up in the President’s Working Group report published in November. The report, which will be the subject of a February 8 Congressional hearing, notes the SEC has claimed stablecoins could be classified as securities, but it adds that another agency—the Federal Reserve—views stablecoins as bank deposits that fall under its jurisdiction.

And according to experts like Josh Mitts, a securities law professor at Columbia University, the Fed has more political juice than the SEC. “If push comes to shove, the Fed will win,” says Mitts. 

Indeed, it appears the Fed has already won. A source familiar with the drafting of the stablecoin report says Gensler pushed for it to include language granting clear jurisdiction to the SEC, but the Treasury Department rebuffed him. 

Instead, the Biden Administration intends to exert control over the stablecoin market—and potentially the broader crypto industry—through the Fed and two of its sister banking agencies: the Office of the Comptroller of the Currency (OCC) and the Federal Insurance Deposit Corporation (FDIC), both of which have immense authority over the country’s banks.

“There are many ways these banking regulators can strangle crypto if they force all these requirements from the traditional banking space into the crypto space,” says Mary Beth Buchanan, a former U.S. Attorney who is now the top lawyer for crypto forensic firm Merkle Science.

Early evidence of the Fed’s putting the screws to crypto includes its treatment of Kraken and Avanti, two crypto companies that have obtained state banking charters in Wyoming. The firms applied more than a year ago to receive a so-called master account at the central bank—essential for federal banking operations—but the Fed has so far refused to process them. Fed Chair Jay Powell recently justified the delay on the grounds that the Wyoming firms’ applications are “novel” and “precedential.” Wyoming Senator Cynthia Lummis has countered that the agency’s slow-rolling is harmful and illegal. 

Meanwhile, the OCC has rebuffed applications from other crypto companies to receive federal banking charters that would entitle them to obtain FDIC insurance—ensuring that traditional financial institutions, not crypto ones, are the only ones that can engage in day-to-day banking.

The upshot is that the banking regulators are poised to achieve what they want—forcing stablecoins into the traditional banking regime—but without giving crypto companies a seat at the table.

“They’re going to just hand this to the big banks,” says one former Wall Street executive who now leads a crypto company. “It’s a total snow job by JP Morgan.”

Jaime Dimon is the CEO of JP Morgan
Jaime Dimon is the CEO of JP Morgan. Image: Wikipedia/Creative Commons

A recent speech by interim OCC head Michael Hsu cited a position paper by lobby group Bank Policy Institute that calls for restricting “rent-a-charter” arrangements. Those arrangements, which involve paying banks to share their regulatory umbrellas, have become increasingly common and are how many crypto and fintech companies are able to operate legally. If the OCC forces banks to cut off access to those charters, it could cripple stablecoin operators.

Hsu, who replaced his crypto-friendly predecessor Brian Brooks, is serving in an interim role but nonetheless appears to be wielding outsize influence in the Biden Administration. This is likely because he is a former staffer at the Federal Reserve, where he served alongside Yellen and Nellie Liang, the current Treasury undersecretary for domestic finance who has been vocal in calling for stablecoin regulation. Together, the three former Fed members appear to be driving the agenda that favors traditional banks they know well over upstart stablecoin issuers.

That campaign got a further boost from the FDIC, where progressives allied with Senator Warren took the unusual step in December of stripping the FDIC Chair, a Trump-appointee, of the power to set the agency’s agenda. The move, which defied decades of precedent and triggered the Chair’s resignation, was blasted by some Republicans as a “coup.” Meanwhile, Warren’s influence may also be on a recent class action lawsuit against PoolTogether, filed by a former Warren 2020 campaign staffer who had invested $10 in the crypto project.

Warren’s office did not reply to repeated requests for comment for this story. The Federal Reserve did not reply. The SEC declined to comment, while the OCC and FDIC responded by directing Decrypt to recent speeches by agency officials.

If the bigger picture here is accurate—that the banking agencies are colluding to kneecap an industry they dislike—it wouldn’t be the first time this has occurred. Under the previous Democratic administration, the FDIC, OCC, and others worked together to carry out “Operation Chokepoint,” a controversial initiative that saw the agencies stretch their regulatory powers to punish payday lenders and firearm sellers. Some in the crypto industry fear the agencies are reprising this behavior when it comes to crypto. 

Indeed, there are recent signs the banking agencies have already begun to quietly flex their power against the crypto industry. Last week, a former CFTC commissioner suggested a “shadow de-banking of crypto” is underway. He made the comment in reply to a tweet from the inventor of the Uniswap protocol, who said JP Morgan had abruptly closed his bank accounts.

In any case, there are signals that the banks are circling the stablecoin market. Those include the banking giant Barclays paying to promote research that a “hybrid” approach is best to stablecoins, where accounts would be managed and operated by licensed financial services providers such as commercial banks

The opportunity for banks could be enormous. Michael Saylor, the Bitcoin-pumping CEO of MicroStrategy, has predicted stablecoins will soon move out of their crypto niche and become the go-to tool for the likes of Amazon, Apple, and Exxon to manage their international treasuries. “If you’re a small crypto startup this is a bit scary,” Saylor said on a Bloomberg panel. “If you’re Jamie Dimon, you’re waiting for this. Which big bank will move first and which crypto companies will cross the chasm?”

Can anything stop the stablecoin takeover?

If Saylor and others are correct, federal regulators are in the process of serving up the stablecoin industry on a silver platter to big banks. It’s conceivable by year’s end that the likes of Circle and Paxos could become subsidiaries of JP Morgan and Bank of America, which have the money to acquire them and the paperwork to operate in the tightly regulated space.

Is this a foregone conclusion? Not necessarily. “It’s going to be a huge fight,” says an executive at one stablecoin operator, who acknowledged the banks have the upper hand for now.

The banking lobby has held sway in the capital for more than a century, so it’s unlikely the crypto industry—or anyone else—will dislodge them anytime soon. Nonetheless, the crypto world has begun to win allies in Congress in the last year thanks to the growing numbers of millionaires and billionaires in its ranks, and a sophisticated campaign waged by its primary lobbying group, the Blockchain Association.

Meanwhile, the last two years has seen the flourishing of algorithmic stablecoins—a technology like Bitcoin that offers $1 tokens akin to those of Circle or Tether, but without a centralized corporate issuer. It’s possible that these stablecoins may be able to stay a step ahead in the ongoing cat-and-mouse game between regulators and the crypto industry.

For now, the Biden Administration appears determined to push forward with its plan of taming the crypto industry by handing control of stablecoins to the banks. And the banks appear set to do their part: this month, the industry announced a consortium to help its members mint and use stablecoins.

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Can Circle Win the Stablecoin Wars?

by Decrypt

In brief

  • Circle wants USDC to challenge Tether as the dominant stablecoin.

  • There are questions over USDC’s reserves.

  • Circle is facing tough legal and business challenges.

Circle CEO Jeremy Allaire has big plans for his company and for USDC, the stablecoin it operates. In a blog post this week, Allaire wrote that Circle intends to become a federal bank and that he expects USDC to “grow into hundreds of billions of dollars in circulation.”

Allaire’s comments come at a time when stablecoins—digital tokens pegged to a national currency—are having a moment. Long popular among crypto traders as a way to get in and out of volatile positions, the traditional financial system has also begun to embrace stablecoins as a more efficient means of moving money around.

Right now, the market is still dominated by a stablecoin called Tether. But there are numerous competitors and Allaire sees an opportunity for USDC, currently number two by market cap, to take the lead at a time when U.S. regulators are scrutinizing Tether’s unusual accounting practices. Circle, however, has regulatory and business worries of its own—a situation that makes Allaire’s plans to make USDC the king of stablecoins more fraught than it appears.

How stable is Circle’s stablecoin?

Stablecoins are popular with users because they offer the same convenience as other blockchain-based currencies like Bitcoin but without the volatility. And for the dozens of companies that issue them, stablecoins offer an easy way to make money.

When people use their dollars to buy stablecoins, companies like Tether and Circle don’t pay any interest. Instead, they use those dollars to create reserves to back the stablecoins—reserves that can earn a profit for the companies. Circle, for instance, says it expects to make $40 million this year off its USDC operations.

But this opportunity comes with a dilemma: how aggressively should a stablecoin company invest those reserves? Putting the reserves in things like bonds or commercial paper means higher yields, but also means a stablecoin might be less stable than a company lets on.

When Circle disclosed last month that USDC was not backed by cash on a 1-to-1 basis, as the company has long promised, competitors pounced. Smaller rival Paxos published an illustrated blog post to claim USDC was not a true stablecoin:

As the graphic shows, Circle is partially backing its stablecoin with assets such as bonds and commercial paper that are not cash or cash equivalents.

“They are seeking the highest possible yield. The question is are they putting consumer assets at risk by pursuing that yield?” Paxos’ top lawyer, Dan Burnstein, told Decrypt.

Circle’s Chief Strategy Office, Dante Disparte, shot back. In an interview, Disparte blasted the Paxos claims as a meaningless “purity test,” and declared, “We’re not going to dignify the Paxos article with a response.”

According to Disparte, the entire stablecoin industry is poised to be regulated heavily and Circle will ensure USDC complies with any rules issued by the U.S. Treasury Department or other agencies. He declined to say, however, whether Circle plans to change its reserve mix.

This raises the question of whether Circle really is putting consumer assets at risk, as Burstein suggests. At first blush, it seems Burstein might be overstating the case: The non-cash assets Circle is using to back USDC are relatively safe—they’re not junk bonds, alt-coins or something that could blow up any minute.

But that doesn’t mean there is no risk. According to JP Koning, a former bank analyst who writes about stablecoins, the issue is what would happen in the case of a banking crisis like the ones in March 2020 or November 2008.

In such a crisis, consumers might rush to convert their USDC back to cash, and in turn force Circle to sell its assets to meet redemption requests. If that happened, says Koning, Circle could be forced to sell those assets below market value, or might not be able to sell them at all. This would cause the price of USDC to fall below $1—and cause Circle’s stablecoin to become unstable.

If there is a fresh crisis, it’s also likely that a run on stablecoins would be faster and more severe than in traditional markets. As a recent paper notes, this is because a rush to redemption in the case of stablecoins would take place in hours or minutes rather than over several days. Meanwhile, such a crisis could be triggered by broader events or by something particular to stablecoins—such as the discovery of a bug in a stablecoin’s protocol.

These are just theoretical concerns for now, but it’s telling that Circle’s partner Coinbase has quietly removed language from its website that stated each USDC was backed by “one US dollar, which is held in a bank account.” The word change is likely a move by Coinbase to stave off lawsuits, but also reflects that USDC is not the fail-safe investment Circle had promised.

Circle’s hard road ahead

Circle is in the process of going public, meaning that it must persuade investors that its USDC business is safe and growing. This is likely why the company declared its intentions to become a federally chartered bank—a status that would help allay potential investors’ fears about regulatory risk.

Right now, Circle operates by means of state-based money transmitter licenses, a model used by numerous other financial companies, including PayPal. Other stablecoin issuers have adopted different legal strategies: Paxos and Gemini, for instance, are relying on a stablecoin regime devised by New York state, while Tether has pursued a wildcat model that involves operating overseas.

What all of these models have in common is that they require the stablecoin issuers to carry little in the way of excess capital on top of their reserves. This is very different from traditional banks, which typically must carry a “capital cushion” of 8% and often even more. The idea of the cushion is that, in the event of a crisis, banks can take a loss on some of their assets but still have more than enough money on hand to meet redemption demands.

If Circle goes forth with its plans to become a national bank, it could well be forced to carry such a capital cushion too. This could be a tall order, especially if it is also forced to replace the commercial paper and bonds in its reserves with Treasury Bills that carry a near-zero return.

Where would Circle get the cash to create that 8% buffer? The company raised $440 million in outside investment this spring, a portion of which could be used to set up a capital cushion. But in the longer term, it’s not clear how Circle would make enough money from its stablecoin operations to maintain that cushion and pay for its day-to-day operations.

Disparte, the Circle executive, expressed confidence about the company’s future business prospects, pointing out that USDC is just one of its money makers—Circle also runs a “transaction and treasury” business that it expects to brings in $60 million this year, and also owns a profitable crowdfunding platform called Seed Invest. Disparte also noted that receiving a bank charter would give Circle access to the discount window at the Federal Reserve, providing it a reliable source of cheap liquidity.

Furthermore, Circle already enjoys partnerships with payment giants Visa and Mastercard, which shows how much traction the company has gotten in the mainstream financial world.

But uncertainty still looms over Circle, especially as its plan to be a bank is only that—a plan. The company has only declared its intentions; it has yet to file the paperwork. Meanwhile, the Federal Reserve is planning to drop a major report on stablecoins next month, which could dramatically change how Circle and other stablecoin issuers operate—perhaps by forcing them to change the structure of their reserves.

This doesn’t mean that Circle won’t succeed in its plans to win the stablecoin wars. Only that a lot of things will have to go right for that to happen.

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SEC vs Ripple: Inside the Case That Could Make or Break the Crypto Industry

by Decrypt

In brief

  • An investigation reveals Ripple is on a limb—but so is the SEC

  • A loss for Ripple could mean losing its XRP, while an SEC loss would erode its credibility

  • Most lawyers believe the SEC has the upper hand, but are not confident it will win

It was a bad start to Christmas. Brad Garlinghouse and Chris Larsen’s digital currency company Ripple had been riding high in 2020 amid the first crypto bull market in years. Then, on December 22, the lawsuit dropped.

In a scorching complaint, the Securities and Exchange Commission said that Ripple Labs—which Larsen and Garlinghouse tout as the future of banking—had broken the law by selling unregistered securities. The fallout came quickly. News of the SEC suit torched half of the $28 billion market value of XRP, the cryptocurrency closely tied to Ripple. Crypto exchanges rushed to boot XRP off their platforms. The SEC lawsuit also muddied Ripple’s reputation. 

“It was a rough holiday for sure,” says Garlinghouse. “I’ve always viewed myself as one of the good guys in Silicon Valley who does what’s right—only to have the U.S government assert in an inflammatory way you’re playing dirty.”

For years Ripple occupied the number three spot in the cryptocurrency market, right behind Bitcoin and Ethereum. The company had built relationships with major banks and amassed an army of devoted followers. Now, the SEC threatened to unravel those achievements with some uncomfortable questions: Was Ripple  no more than a glorified scam? Were Larsen and Garlinghouse’s lofty claims about XRP just a pretext to line their own pockets? 

The cryptocurrency world, including the thousands of small investors who hold XRP, will soon find out as the case barrels towards a trial.

Ripple, meanwhile, has adopted an unusual strategy—sparring publicly with the SEC rather than quietly settling, which is what most firms in its situation would do. The company has also hired elite legal talent, including the former head of the very agency it is battling. It pledges to fight the case right to the Supreme Court.

For the SEC, the Ripple case is a test of strength. If the agency wins, its victory will spell trouble for many other crypto companies. If it loses, the outcome will mean humiliation for America’s top financial cop and the erosion of its enforcement powers.

In more than a dozen interviews, people close to Ripple and experts in securities law described SEC v Ripple as a case that will not only decide the fate of the company, but shape the future of the crypto industry by determining whether cryptocurrencies should be treated like stocks. A judge could answer that question as soon as this fall. Billions of dollars are riding on the answer.

Born in the Bitcoin era 

Originally named OpenCoin, Ripple was founded by a group of programmers, including Jed McCaleb. A crypto pioneer, McCaleb also created the cryptocurrency Stellar and Mt. Gox, which grew into the world’s largest Bitcoin exchange before it collapsed amid a catastrophic hack under a subsequent owner. McCaleb’s team founded the precursor to Ripple in 2011 and Larsen, a wealthy entrepreneur, joined soon after.

In 2012, the team created a company called Ripple Labs, and bequeathed it a digital currency named XRP (originally “ripples”). Unlike Bitcoin and Ethereum, which are minted slowly over time, XRP doesn’t depend on miners to create and distribute its tokens. Instead, the Ripple founders created the entire supply of XRP—100 billion of them—in one fell swoop.

XRP has a blockchain ledger to track who owns the supply but no one has minted a new token since 2012. Shortly after the currency began trading, speculators came to view it as a potential rival to Bitcoin and began to bid up its value.

All of this presented the Ripple founders with a conundrum: How to persuade people of a real world need for the 100 billion XRP they spun into existence?

The two biggest cryptocurrencies have addressed this problem. In the case of Bitcoin, it enjoys a special place as the original crypto, and its relative scarcity—there will only ever be 21 million Bitcoins—has made it a store of value that its fans liken to “digital gold.” On Ethereum, meanwhile, millions of users pay to use its currency as “gas” to power smart contract transactions.

The purpose of XRP is less clear. Like other tokens, XRP is tracked on a blockchain ledger with software nodes around the world that validate its transactions. The ledger, which is versatile and built by top cryptographers, is highly regarded in the industry. Even XRP skeptics such as crypto analyst Ryan Selkis, who labelled the currency “toxic waste” in his widely-read annual report, praise the ledger itself.

The challenge for Ripple, which still owns the bulk of those 100 billion XRP, is to show that all those tokens are good for, well, something.

Ripple has tried for years to do just this. Its efforts include a 2015 push to persuade banks to pay XRP transaction fees while conducting money transfers on the XRP ledger. This proved a non-starter, though, as the banks made clear they liked the ledger but not XRP. Ripple responded by creating a new ledger product called xCurrent that was similar to the original one that let banks send messages and transfer money—but that did not require XRP.

Ironically, xCurrent may be Ripple’s most successful product to date, bringing in over $23 million, and positioning the company to succeed as a conventional SaaS (software-as-a-service) firm. But that did not solve the problem of creating a market for the billions of XRP sitting on Ripple’s digital shelves.

So the company shifted to a kitchen sink approach. After it failed to persuade banks to use XRP, a former employee recalls that Ripple began exploring a wide variety of possible use cases for the currency, including an XRP card customers could use at gas stations. Ripple denies the gas card anecdote but it’s clear the company at this time was trying to find some use for all that XRP.

This challenge facing Ripple—how to find a market for a novel product—is the sort of thing one might encounter in a business school case study. So the Ripple board turned to its then-COO, Brad Garlinghouse, to solve it.

Trim and energetic with a closely-cropped beard, Garlinghouse is a Harvard Business School grad and well-known Silicon Valley figure with a streak of eccentricity. He is famous in valley circles for “the peanut butter memo”—a document he wrote while an executive at Yahoo. The memo, which was leaked and shared widely in tech circles, used condiment metaphors to argue (correctly, it turns out) that the company had spread itself too thin.

Ripple CEO Brad Garlinghouse.

Upon being tapped for the top job at Ripple in late 2016, Garlinghouse made the same diagnosis as he had at Yahoo: Ripple needed one killer use case rather than dozens of experimental ones. The solution he landed upon was pitching XRP to banks and others as a “bridge currency” to facilitate global money transfers between smaller national currencies.

According to Garlinghouse’s “bridge” thesis, banks would embrace XRP for international transfers because it would eliminate the need to maintain reserves of minor currencies like the Philippine peso—reserves that tied up the banks’ capital. To carry out the plan, Ripple persuaded a network of money transmitters to deal in XRP, meaning the banks themselves would only need to hold the currency momentarily. All of this activity would, in theory, increase liquidity and drive up the price of XRP.

It was a complicated plan. To spur it along, Larsen and Garlinghouse negotiated deals with large global banks such as Santander and money transfer shops like MoneyGram. Ripple even bought a 10% stake in MoneyGram to encourage the company to use XRP in its operations.

The bridge currency initiative involved another new product named xRapid, later xVia, that behaved like xCurrent but also facilitated the transfer of XRP. (The distinction between the various “x” products has been an ongoing source of confusion for many outside the company).

Meanwhile, Ripple took on the trappings of a major financial company. It moved its headquarters to a stone building near the Bank of America pyramid in San Francisco’s financial district, and opened offices in global money centers, including London and Singapore. It sponsored swanky conferences and hired entertainers like Snoop Dogg. One evening in Toronto, hundreds of Ripple guests nibbled satays and sipped Scotch while aging rock legend Steve Miller grinded out “The Joker” and other hits.

All of this helped spur XRP to new heights. Whether due to Garlinghouse’s efforts or the broader 2017 crypto bubble (or most likely both), the price of XRP galloped from less than a penny in 2016 to $3 in January of 2018.

By this time, Ripple looked and acted like a big bank. Garlinghouse did his best to promote that image, appearing at serious finance events and on TV in elegant grey suits.  The company still struggled to make a viable case for XRP but it was trying hard. 

Unfortunately for Ripple, the SEC didn’t view the company this way at all. What the agency saw instead was a massive grift—a stock swindle that used fancy finance trappings to snooker suckers into buying XRP. The SEC sued on December 22, dropping the hammer on Ripple and taking the unusual step of naming Larsen and Garlinghouse as defendants. The agency alleged the two men and their company had made billions by unloading unlicensed securities onto the public.

The SEC complaint caused the price of XRP to tumble from around 58 cents to 21 cents in late December, though it has more than rebounded since amid a banner year for crypto overall.

The Case against Ripple: Execs talked up XRP while quietly selling billions of it

Larsen is pale and soft-spoken but projects a quiet intensity. After the SEC charges dropped right before Christmas, he took long walks in San Francisco’s sweeping Presidio district and brooded.

“It felt terrible, like a gut punch. I thought ‘come on guys we’re an American company’,” says Larsen, grimacing as he recalls telling his children that he was a defendant in a lawsuit splashed across the front pages of the business press.

Garlinghouse says the lawsuit left him dismayed but also puzzled. The SEC filed the allegations in the waning days of the Trump Administration and, days later, both the agency’s chairman, Jay Clayton and top enforcement official Marc Berger announced they would leave their jobs early. Garlinghouse recalls asking himself, “Is this personal in some way?”

Both Larsen and Garlinghouse convey a sense of bafflement and sorrow about the SEC lawsuit, but it can hardly have come as a major surprise. The agency had been investigating Ripple since 2017, and its executives were subject to a litigation hold—forcing them to preserve emails and other documents—for years. Legal experts believe the SEC’s decision to drop the lawsuit reflected less a bolt-out-of-the-blue decision than a refusal by Ripple to accept the terms of a settlement proposed by the agency.

As for Larsen and Garlinghouse, both men possess a pugnacious streak they conceal beneath a genial demeanor. Larsen, for instance, has paid to install surveillance cameras across his hometown of San Francisco—a move decried by civil liberties advocates, but applauded by those who say the city’s political class has failed to address rampant property crime. Garlinghouse, while always sunny in public, can flash a hot temper in private, employees say, and he has travelled with former U.S. Special Forces troops as bodyguards. (Such security precautions are not uncommon among crypto executives who have been the target of kidnapping plots).

Ripple Labs Chris Larsen
Ripple Labs co-founder Chris Larsen speaks at Fortune Brainstorm Tech on July 16, 2014. Image by Kevin Moloney. (CC BY-NC-ND 2.0)

The company they run has not been shy about protecting its interests. When executives leave Ripple, they receive fat severance packages but must sign fearsome NDAs in return. This tactic makes it difficult for reporters and others to divine what is actually happening inside Ripple.

The SEC, however, has made clear what it thinks Ripple is all about. Some of its allegations are damning. In a 70-page complaint filed in Manhattan federal court, the agency claims that Ripple’s corporate trappings serve as a façade for its real agenda: flogging highly speculative XRP tokens that, in the interests of the public, should have been registered as securities. 

In its complaint, the SEC suggests the only reason money transmitters are using XRP as a “bridge currency” is because Ripple paid them to do so. This applies to MoneyGram, the money transfer giant Ripple partially owned, and which was briefly a linchpin for its “bridge strategy”—though Garlinghouse told CNN no quid pro quo exists.

“When MoneyGram is moving money from U.S. dollar to Mexican peso, they’re buying [XRP] at market. There’s no special sweetheart deal there,” Garlinghouse told CNN. The SEC complaint says this is not true, noting that Ripple gave over 200 million XRPs to MoneyGram, most of which the company dumped on the day it received them. Ripple and MoneyGram severed ties in March. 

Twisting the knife, the SEC also paints Ripple’s overall bridge currency strategy as a flop, noting that only 15 money transmitters and no banks signed on, and that in the space of two years, “bridge” transactions never accounted for more than 1.6% of XRP’s total volume.

All this time, says the SEC, Ripple was force-feeding XRP into the market through quiet deals with large trading firms such as Jump Capital and Galaxy Capital. Under the terms of these deals, Ripple would sell XRP from its reserve at 4% to 30% discounts, allowing the buyers to promptly offload their purchases on the open market for a guaranteed profit. On some occasions, says the SEC, Ripple would ask a trading firm to time its XRP buy orders to coincide with its corporate announcements. 

Meanwhile, Ripple also tried to use direct cash payments to get other firms to use XRP. In an email to the Winklevoss twins, who founded the exchange Gemini, a Ripple executive, copying Garlinghouse, wrote “Does a $1M cash payment move the needle for a Q3 listing?” (Gemini declined the offer).

In response to whether the allegations are true, Ripple referred Decrypt to its reply in the SEC case. The reply includes broad-based denials but not specific ones concerning its campaigns to pay partners to use XRP.

The upshot is the SEC believes Ripple pursued a cynical plan to manufacture demand for the XRP on which the company depends almost entirely for its revenue. Then there are the allegations against Larsen and Garlinghouse, which are especially withering.

In the case of Larsen, the SEC notes he quietly unloaded $450 million worth of XRP and, in an additional swipe, observes that his previous company landed in hot water over the sale of unlicensed securities. The agency’s depiction of Garlinghouse is even less flattering.

“While he was selling millions of XRP, Garlinghouse frequently told investors that he was invested in XRP, and that he was bullish on the investment … he also encouraged investors to be patient and look at the price of XRP on a longer time horizon,” the complaints states.

It also cites a public declaration by Garlinghouse, who has pocketed $150 million by selling XRP, that he is “very, very, very long XRP … I’m on the HODL side.” (HODL is crypto slang for those who hold onto a favorite cryptocurrency, come what may.)

Decrypt asked Garlinghouse how he could justify telling the public he was “very, very, very long XRP” even as he sold large amounts of it.  He replied that being “long” doesn’t preclude a person from selling a portion of their holdings, and that CEOs regularly sell shares of the companies they run. Garlinghouse added he had sold only a “very small percentage” of his XRP stash.

Whatever you think of Garlinghouse’s explanation, or of Ripple’s behavior, the SEC complaint makes a forceful case that the company and its executives have been less than forthcoming about their dealings with XRP.

But Garlinghouse and Larsen aren’t the only ones who face hard questions. The agency pursuing them also has explaining to do.

The Case Against the SEC: Revolving doors and “on the fly” legal tests at the SEC

The SEC is one of the most sophisticated agencies in Washington, tasked with regulating a financial sector of staggering complexity. Even though many of the companies it oversees possess wealth and technology that far exceed what a government agency can muster, it has mostly held its own.

The SEC relies on a team of securities lawyers, economists and, increasingly, software experts who help it track the activities of high frequency traders, pump-and-dump schemers and hustlers of all stripes. But when it came to crypto, the SEC was late to the game.

Until mid-2017, the SEC stood on the sidelines as so-called initial coin offerings (ICOs) fueled one of the largest financial bubbles in history. ICOs let companies raise funds, much as they would from an IPO, but instead of distributing shares, they distribute digital tokens to their backers instead.

In theory, people who buy tokens distributed in an ICO can use them to participate in a future blockchain project. And indeed that’s what occurred in some ICOs, including the one for Ethereum which lets users employ its tokens as “gas” to carry out various tasks. But in the case of most other ICOs, the blockchains have yet to be finished due to technical difficulties or poor leadership. Or because they were outright scams in the first place.

By 2017, scams—or projects that bordered on scams—had sucked up billions of dollars from ordinary investors hoping to get in on the “next Bitcoin.” In August of that year, the SEC finally took action by issuing a report that concluded a 2015 blockchain-based investment project known as the DAO was a securities offering. While the report stated the SEC would take no action against the DAO organizers, the document was a warning shot to the broader crypto industry, saying in essence “knock off this ICO stuff or we’ll come after you.”

And that’s what the SEC did. In early 2018, the agency announced settlements against two minor league crypto projects. Then it moved up the food chain. In 2019, the SEC forced two popular messaging platforms, Kik and Telegram, to disgorge money they earned from ICO projects, and laid out its reasons in court-approved settlements.

According to Peter Fox, a securities lawyer versed in crypto cases, the Kik and Telegram settlements served as ammunition for an even bigger target: Ripple. Fox says it’s no coincidence the SEC chose the same court and team of attorneys for all three cases. 

Preston Byrne, a partner at the crypto law firm Anderson Kill, agrees with the assessment that the Kik and Telegram cases were just a warm-up for the SEC. “This explains why the SEC waited to go after Ripple,” he says. “The case was so big they needed other rulings from the Southern District of New York to solidify their legal position.”

By 2019, the SEC believed it had the legal precedent to force Ripple into a settlement. But still the company refused—a stance Ripple’s defenders view as principled and courageous, and its detractors claim is a stunt to keep selling XRP for a while longer.

Whatever Ripple’s motivations, the SEC finally sued on December 22—a date that’s notable not only for its proximity to Christmas, but because the SEC chair and other key decision makers at the agency were on the way out.

“When it takes that long to figure out a case, you shouldn’t be bringing it. It’s not something I would do walking out the door,” says former SEC Chair Mary Jo White.

Small and charismatic with a mop of short grey hair, White is a formidable figure in U.S. legal circles. In addition to a successful tenure at the SEC, she was the U.S. Attorney for the Southern District of New York—a job that entailed prosecuting high profile cases involving terrorism and white collar crime, and made famous by Paul Giamatti in the HBO Series Billions.

Mary Jo White as SEC Chair in 2013

Today, White is just one of many gold-plated lawyers working for Ripple. According to American Banker, Ripple has retained more than two dozen prominent lawyers for its defense while Larsen and Garlinghouse have retained at least six each from white shoe firms where top attorneys can charge $2,000 an hour. As for the SEC, it has seven lawyers on the Ripple case.

It’s unclear for now how much all this legal firepower will help Ripple. Steven Palley, a crypto attorney with Anderson Kill is skeptical.

“Hiring Mary Jo White is meaningless—it just means they have a lot of money,” says Palley. “You can hire fancy law firms, and you can leak things from hearings … but the law is the law.”

White’s role as Ripple’s counsel means her views of the case are hardly objective, but her comments about the timing of the SEC’s lawsuit are on point. Unlike Kik or Telegram, which sold tokens in 2017 and 2018, Ripple conducted its initial sale in 2012—well before the SEC’s DAO report warning shot, and before Ethereum (which the agency says is not a security) even existed.

Josh Mitts, a securities law professor at Columbia university who is unaffiliated with either side, questions the SEC’s judgment in waiting so long to sue.

“This is a huge drag on innovation. If you’re trying to invent something and seven years from now it could lead to a prosecution, that will create a huge chilling effect,” he says.

The SEC’s eight-year delay in suing Ripple raises questions of fairness, but the agency has justified the delay by framing the company’s behavior as a rolling ICO—treating its recent XRP sales as part of an ongoing decision to violate securities law. According to White, this legal theory “doesn’t fit” and “sticks in your craw.”

The agency, meanwhile, is in an uncomfortable position over its inconsistency in handling other high profile blockchain offerings. Those include EOS, which raised a mind-boggling $4 billion in an ICO that ran from 2017 to 2018 and whose marketing included billboards on Times Square. The project has since been dogged by controversy, including over its centralized attributes, but the SEC nonetheless let EOS off the hook in return for a $24 million fine—a paltry amount given its size, and one that left many lawyers incredulous.

The agency has also raised eyebrows over its dealings with Ethereum. In 2018, a senior official at the agency gave a speech saying the sale of ETH tokens did not constitute a securities violation because the project had become “sufficiently decentralized.” In other words, those who launched Ethereum violated securities law until they didn’t—raising the question of why other projects, including Ripple, can’t do the same. Meanwhile, the SEC has failed to provide guidance on how or when something crosses the “decentralization” bar.

The SEC’s Ethereum decision received cheers in crypto circles. But it puzzled many lawyers since the decision glossed over a 1946 Supreme Court test known as Howey that is the bedrock of modern securities law, and has been applied in business transactions involving everything from orange groves to animal breeding. 

In his Ethereum speech, the SEC official, Bill Hinman, invoked Howey but then all but ignored it in favor of the novel decentralization test. 

“The ‘sufficiently decentralized’ test is the worst piece of on-the-fly legal making up I’ve ever seen. The real test that’s simple and known to everyone is the Howey test,” says Byrne, the Anderson Kill lawyer.

The SEC’s novel test for Ethereum was even more incongruous given that the agency set up a fake ICO website in 2018 called Howey Coins, pictured below, to warn gullible investors about too-good-to-true token offerings. The site was an inspired piece of trolling but its name underscored how the Howey test remains the north star of securities law.

Meanwhile, Hinman had a potential conflict of interest at the time of the Ethereum speech. Even as he served as the SEC’s Director of Corporate Finance, Hinman was drawing a pension worth $1.6 million from his former law firm Simpson Thatcher. The firm’s client list includes the Ethereum Enterprise Alliance, a consortium that promotes the use of the Ethereum blockchain in the corporate world.

Mitts, the Columbia law professor, says it’s a “real stretch” to imagine a regulator’s judgment would be impaired as a result of receiving a pension from a law firm, but adds that “the revolving door is a fair topic of criticism.” 

Hinman returned to Simpson Thatcher in 2020. Neither he nor the law firm responded to requests for comment. The SEC declined to comment on the potential conflict of interest involving Hinman, or on its Ripple deliberations in general.

Ripple, however, has not been subtle in calling attention to the potential conflict of interest, asking the federal judge overseeing the SEC lawsuit to let the company conduct a deposition of Hinman. In July, the judge agreed to do so, over the agency’s strenuous objectives. 

All of this is part of a larger campaign to battle the SEC in the court of public opinion—an unusual gambit given that most companies embroiled in regulatory troubles stay mum or issue terse polite statements about how they are cooperating with regulators.

Ripple’s unconventional strategy became apparent in December when it went to the press a day before the SEC announced the case. Doing so let the company—at least temporarily—frame the lawsuit in the most favorable light, portraying Ripple and XRP victims as the victim of a clueless, overbearing government agency. 

To drum up further sympathy from the public and from political figures, Garlinghouse began suggesting that Ripple might decamp to Europe to escape stifling regulation. All the while, the “XRP army”—a Twitter hoard of Ripple loyalists (and XRP bagholders) that includes more than a few bots—dutifully amplified the company’s outrage.

Ripple won’t say as much but its aggressive PR tactics appear driven in part by a hope that the SEC, under different leadership, will fold its cards amid political pressure. The agency’s new chairman, Gary Gensler, taught blockchain courses at MIT, leading many in the crypto industry, including Ripple, to predict he would adopt policies more favorable to crypto.

The strategy is not crazy. The SEC is already under scrutiny from lawmakers on Capitol Hill over its response to a series of technical meltdowns in the stock market, and how it will address amateur investors frantically trading so-called “meme stocks” like GameStop. In this context, it might make sense for the SEC to quietly capitulate in the Ripple case and use its resources to patrol other areas of the financial market.

Most lawyers, however, are skeptical that Ripple will be able to browbeat the SEC into changing course.

“Acting like an asshole is usually not a good way to endear yourself to the government,” says Byrne, the crypto attorney.

Ripple’s PR campaign has, though, already won it some key allies. Those include the Wall Street Journal, which published an April editorial titled “The SEC’s Crypto Confusion” that excoriated the agency’s handling of the Ripple case.

But sympathetic media coverage and procedural victories in court only mean that Ripple is winning some battles. It’s a far cry from winning its larger war against the SEC.

The coming court clash

The ultimate answer to whether XRP is a security will probably come this fall when the parties—barring an unlikely settlement—step foot in New York federal court. A judge in California is also confronting the same question, but that case involves a class action brought by investors, and so the judge will likely wait until New York weighs in. In the meantime, Ripple and the SEC continue to spar over procedural issues, including a demand by the SEC that the company produce evidence in the form of over 1 million Slack messages.

The eventual court hearing will determine the fate of Ripple. If the company loses, Ripple along with Garlinghouse and Larsen could be ordered to pay major penalties. Worse, the court could order Ripple to register every XRP as a security or even to destroy the XRP it holds—measures that would cripple the company.

Most lawyers interviewed for this story believe the SEC has the upper hand in the case, though a number were far from confident the agency would prevail. These include Aaron Wright, a law professor and blockchain scholar, who suggested that some attorneys critical of XRP have, as part of a bid to drum up business, adopted a “schtick that everything’s a security.”

Mitts, the Columbia securities law professor, is also cautious about predicting the outcome of SEC v Ripple. The set of facts involving Ripple and XRP, he notes, is different from those in the earlier cases of Kik and Telegram, which the SEC is relying on as a precedent. 

Mitts adds that the legal issue is not cut and dry when it comes to the fourth part of the Supreme Court’s Howey test for when something is a security. That part of the test looks at whether there is an expectation that the profits of an endeavor will be “derived from the efforts of others.” 

The difficulty says Mitts is that, at the outset, a cryptocurrency will depend on a group of founders for its success—but that this situation can change over time if the currency begins to circulate broadly. For this reason, he adds, there is “something compelling” about Hinman’s “sufficiently decentralized” test—even if the SEC appears to have made it up on the fly.

All of this means Ripple has openings to persuade a judge that XRP is not a security. But the company still faces an uphill battle given that the SEC—like any other big agency—has the luxury of time, and will not be fazed by a drawn out legal battle. And then there is the SEC’s highly successful track record in court.

“The SEC doesn’t bring actions unless they feel it’s likely they’re going to win,” Wright notes.

But if the SEC has misplayed its legal hand, the consequences will be severe. A win for Ripple would not only humiliate the agency, but embolden the crypto industry, which has long accused the SEC of failing to develop a coherent way to regulate blockchain technology.  And according to White, the Ripple lawyer and former SEC Chair, losing in court would “erode” the agency’s earlier crypto jurisprudence and make it more difficult to bring new cases.  

In recent months, the stakes in the case have grown even higher for both sides. 

For Ripple, the lawsuit led its flagship partner, MoneyGram, to cut ties with the company and to stop using XRP. And its main investor, Tetragon, which led a $200 fundraising round in Ripple in 2019, cited the SEC’s  actions as the basis for suing to get out of its funding commitment. A judge sided with Ripple in that dispute but the lawsuit reflects the finance world’s growing skittishness over XRP, which remains at the core of the company’s business strategy.

For the SEC, the Ripple case will be critical for the agenda of its new Chair. Far from taking a more lenient approach—as many in the industry had predicted—Gensler has indicated he will double down on the SEC’s get-tough approach on crypto. He suggested this month the SEC is coming for other corners of crypto, including stablecoins and decentralized finance (DeFi). But the legal basis for such an agenda may be shaky—already, Gensler’s remarks have sparked pushback from a rival agency, the CFTC, and from one of the SEC’s commissioners who say he is overreaching. The influential Bloomberg columnist Matt Levine made a similar point this week. Given this uncertainty, the SEC’s defeating Ripple in court would firm up Gensler’s agenda while a loss would totally undermine it.

The best outcome, according to many lawyers and policy makers, would be for Congress to devise a new system of rules to supplement the Howie test, and that take account of the unique properties of crypto. But Congress moves slowly and crypto is not high on its agenda. This means that the regulatory clarity the crypto industry has long sought is most likely to come in the form of a decision in SEC v. Ripple.

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Where Is Catherine Coley? Crypto World Puzzled By Disappearance of Former Binance U.S. Chief

by Decrypt

In brief

  • The former CEO of Binance US, ousted in April, has not been heard from since then and her social media accounts list her old title.

  • A Decrypt investigation reveals some clues of what became of Catherine Coley.

What happened to Catherine Coley?

The whereabouts of the 30-something former CEO of Binance US is a mystery gripping the crypto world.

Until April of this year, Coley was active on social media and a fixture on the crypto social circuit. She was popular with others in the industry—”call me Coley,” she would tell those who first met her—and always quick to respond to event invitations and questions from members of the media.

That all changed when she was abruptly replaced at Binance US in April.

Since that time, Coley has effectively vanished.

No one has reported seeing her in San Francisco where she worked, and her once-lively Twitter account has been silent since April 19. A former colleague tells Decrypt Coley did not acknowledge recent birthday greetings from friends. Perhaps strangest of all, Coley’s LinkedIn and Twitter accounts still describe her as “CEO of Binance US.”

All of this has led the more conspiracy-minded corners of crypto to ask whether she is still alive.

Coley has communicated via intermediaries

The answer to that question is yes, as two people tell Decrypt of having recent communications with her. Those include a text message exchange, and communications with Binance that occurred through an intermediary.

While her current whereabouts are unknown, few doubt that her disappearance from the public sphere is a direct result of her ousting from Binance US. The firm is a subsidiary of Binance, the world’s largest crypto exchange, whose maverick CEO Changpeng “CZ” Zhao tapped Coley to run U.S. operations in July 2019. By all appearances, Binance approved of Coley’s performance, celebrating her appearance on the Fortune 40 Under 40 list on its official Instagram account last year.

But on April 20, the Wall Street Journal reported that Binance had hired Brian Brooks, a former top lawyer at Coinbase and acting head of the Office of the Comptroller of the Currency (OCC), to be its new CEO.

The move made strategic sense for the company. Coley had an impressive resume, with a five-year stint as a trader at Morgan Stanley and experience at crypto company Ripple, but she did not have pull in Washington—a place where Binance is scrambling to gain traction as regulators breathe down its neck over its loose approach to consumer safeguards. (A 2020 Forbes exposé reported on how Binance uses elaborate fronts to bamboozle American regulators; Binance responded by suing Forbes.) Brooks, by contrast, had just finished a stint leading the agency that oversees the country’s banks, and had years of experience dealing with regulators.

Nonetheless, Binance handled Brooks’s hiring in clumsy fashion.

In the ordinary course of business, a firm will treat the replacement of a CEO, even one who has botched things (which Coley did not), with a flurry of press releases thanking them for their service and, in many cases, appointing them a cushy new role with an impressive title.

Binance, CZ, and Brooks said nothing at all about Coley. Nor have they since. Binance declined to comment for this story. Coley did not respond to two direct messages sent to an account from which she has replied in the past.

“They exited her stage left without so much as a mention”

The unceremonious ousting reflected poorly on Binance, not least because Coley was one of a small handful of women who occupied a senior position in an industry dominated by men.

“They exited her stage left without so much as a mention, and given how much work she did, I found it disgraceful and distasteful,” says Meltem Demirors, an executive with the company Coinshares and a vocal figure in the crypto world.

So, what actually happened between Binance and Coley?

Sources who spoke on the condition of anonymity say CZ had hoped Coley would remain at Binance after the hiring of Brooks, but that she no longer wished to stay, and that Brooks, who has a hard-nosed reputation, did little to encourage her to do so.

Now Coley and Binance are most likely in litigation over her ouster, a situation that typically obliges participants to remain tight-lipped. If this the case, Coley may also be using her silence as leverage for a potential settlement in which she agrees not to disparage her former employer.

Whatever the explanation of her current vanishing act, the upshot is that the crypto world has lost a rising star female executive—for now.

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Is Seneca Lake Being Warmed By Bitcoin Mining? Not Quite.

by Decrypt

In brief

  • Recent reports claim Seneca Lake is getting warmer, and that a nearby Bitcoin mining facility is to blame.

  • Data shows that Keuka Outlet, a smaller body of water that feeds into the larger lake, has gotten much warmer since the start of 2021.

Greenidge Generation has made millions of dollars mining somewhere between 3.8 to 4 Bitcoin per day at its Dresden, NY facility. Critics have argued the facility damages the local environment, and even undermines New York State’s climate goals.

Last week brought further controversy for Greenidge, after NBC News reported on claims that Seneca Lake—which is located close to the Greenidge facility—is seeing an increase in water temperature.

“The lake is so warm you feel like you’re in a hot tub,” Dresden resident Abi Buddington told NBC News.

Bitcoin’s defenders came to Greenidge’s defense, claiming that there was no way one single facility could cause a 38-mile wide and 188-meter deep lake to feel like a hot tub.

But not so fast.

Is Seneca Lake really getting warmer?

Abi Buddington’s frequently cited “hot tub” quote has now been reported in many places without full context.

First off, according to yearly water temperature data collected by the Seneca Lake Water Quality Buoy website, the lake as a whole isn’t warming up. For the last four available years of 2021, 2019, 2018, and 2017 (2020 is not available), the highest and lowest average temperatures of Seneca Lake have not changed dramatically.

In 2017, the average highest and lowest temperatures in Seneca Lake were 88.6 degrees Fahrenheit and 43.3 degrees Fahrenheit, respectively. Fast forward to 2021, and those figures have both decreased to 81.0 and 34.9 Fahrenheit.

But Buddington tells Decrypt that she wasn’t talking about the whole lake getting hotter. She explains that the Keuka Outlet—a stream that feeds directly into Seneca Lake—feels like it’s getting warmer.

“When kayaking in the outlet, especially during the summer months, when you dip your hand in the water, it feels unnaturally warm,” Buddington tells Decrypt.

The buoy that monitors water temperatures in Seneca Lake is located far away from the Keuka Outlet, and so it is relatively useless when it comes to analyzing the temperature of the outlet itself. But according to data seen by Decrypt, the Keuka Outlet is in fact seeing an increase in water temperature.

The Committee to Preserve the Finger Lakes (CTPFL), formed in 2010, has measured the changing temperature of the outlet itself. According to the CTPFL, which uses temperature loggers in Keuka Outlet to gather its data, the water temperature in the Keuka Outlet has increased from roughly 50 to roughly 85 degrees Fahrenheit since the start of this year.

Keuka Outlet temperature data
Keuka Outlet temperature data. Source: CTPFL

The New York State Department of Environmental Conservation (DEC) has also required Greenidge to conduct a thermal study of the Keuka Outlet since 2018. To date, that study has not been completed. (Decrypt has reached out to Greenidge and will update this article should we receive a response.)

Why does a warmer Keuka Outlet matter?

Rising temperatures in the Keuka Outlet have several ramifications for Seneca Lake and the wider community.

According to Yvonne Taylor, vice president of the NGO Seneca Lake Guardian, increased water temperatures are a “contributing factor” to harmful algae blooms—a form of bacteria that is harmful to humans as well as animals. “We’re seeing this as a growing problem on our lake, which is a drinking water resource for over 100,000 people,” Taylor tells Decrypt.

“Once you get those blooms in your pipes, you are no longer able to cook, clean, or provide water for your animals,” she adds.

It’s important to point out that the Keuka Outlet has been classified by New York’s Department of Environmental Conservation (DEC) as a trout stream, meaning algae blooms also harm existing wildlife in the region.

Typically, the DEC places a 70 degrees Fahrenheit maximum on water discharge entering streams classified for trout—streams like the Keuka Outlet.

The CTPFL’s data indicates that Greenidge has well exceeded this limit for much of 2021. But according to a DEC Discharge Permit seen by Decrypt, Greenidge is able to discharge up to 134 gallons of water into the Keuka Outlet every day at a maximum temperature of 108 degrees Fahrenheit.

“Greenidge consistently points out that they’re not exceeding their permit limits, but this doesn’t help Seneca’s aquatic life,” Taylor says, adding that if Governor Cuomo’s DEC had “done their job,” this problem “wouldn’t exist.”

It’s not just the environmental impact of the Greenidge facility that concerns Taylor, but the impact the company’s mining operation has on the wider community’s economy.

“This is the heart of Finger Lakes wine country,” Taylor says. “We are now currently supporting 50,000 jobs, and generating over $3 billion worth of annual income into New York State’s economy. All that is 100% dependent on our clean water and clean air.

What Greenidge brings to the table in return, Taylor argues, is simply not worth it. “Great, Greenidge is contributing a couple of jobs to the area, and they’re relatively high paying jobs, kudos to them for that,” she says. “But what’s at stake?”

Jason Deane, Bitcoin analyst at market firm Quantum Economics, sees the situation as troubling. “It’s clear that profit is the primary driver here, not the local community or environment,” Deane tells Decrypt. “That is always concerning in any industry, not just mining.”

Bitcoin’s defense

In an interview with Decrypt last month, Greenidge Generation CEO Dale Irwin defended the company’s Bitcoin mining by arguing, among other points, that Greenidge is helping to boost New York’s economy by employing 35 people and paying them an average annual salary of $77,000, more than double the local average. Irwin also said Greenidge plans to move the facility away from natural gas in the future.

Bitcoiners have also rushed to point out that the entirety of Seneca Lake has not been warmed by Greenidge’s Bitcoin mining facility.

While that is quite obviously true, it also misrepresents the concerns of the locals. The Keuka Outlet and the entirety of Seneca Lake are two very differently sized bodies of water, and the former feeds the latter.

The bigger Bitcoin mining picture

The controversy surrounding Greendige Generation’s facility comes amidst a wider debate regarding the environmental impact of the Bitcoin mining industry.

On the one hand, Bitcoin’s advocates cite the Bitcoin Mining Council—a group of Bitcoin miners dedicated to “transparency”—which recently published a report claiming that 56% of Bitcoin’s energy is clean.

The council, which does not require members to disclose their energy consumption data, relied solely on its own analysis for the 56% figure. The survey itself was also voluntary, so those miners guzzling fossil fuels were free to steer clear.

On the other hand, data from Cambridge University suggests that only 39% of the Bitcoin network runs on renewable energy, meaning that many mining facilities—just like Greenidge—use fossil fuels to mine Bitcoin.

Greenidge Generation has committed to carbon neutrality, but to date uses natural gas—a fossil fuel—to mine Bitcoin. To fulfil its carbon neutrality commitment, the firm has launched a carbon offsetting regime that involves investing a portion of its mining profits into renewable energy projects.

In addition, Greenidge committed its continued participation in the Regional Greenhouse Gas Initiative (RGGI), which involves participating states selling CO2 allowances through auctions, and investing proceeds in renewable energy projects.

But for all the company’s carbon offsetting intentions, Seneca Lake’s inhabitants remain unconvinced.

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El Salvador’s U.S. Bitcoin Partner Lacks Key Licenses

by Decrypt

The President of El Salvador, Nayib Bukele, caused a stir this month when he declared his country would become the first in the world to accept Bitcoin as legal tender. To carry out this plan, the country will rely on partners like Chicago-based Zap Solutions Inc., whose digital wallet Strike is already being used by Salvadorans in a coastal town the crypto community has dubbed Bitcoin Beach.

Strike has the technology to help El Salvador embrace Bitcoin, but one thing it appears not to have are certain licenses to operate as a money transmitter.

An investigation by Decrypt discovered that Zap lacks licenses to operate in most US states. Experts suggest this means many cash and crypto transfers to El Salvador using Strike are potentially illegal—a situation that could further cloud the Central American country’s already controversial Bitcoin plans.

Strike CEO Jack Mallers and others at the company did not respond to repeated requests for comment.

A new face on the Bitcoin scene

Strike CEO Jack Mallers is all in on the promise of Bitcoin.

The son of a man who founded a prominent Chicago brokerage firm and a woman who calls herself “Bitcoin Mom,” Mallers is a hoodie-loving 20-something whose Twitter profile sports the laser eyes of Bitcoin believers. At a recent conference in Miami, a crypto crowd hailed Mallers as a hero for helping Bukele bring Bitcoin to El Salvador.

Mallers introduced Bukele to the Miami crowd and suggested Strike, a Venmo-like payment platform, will be integral to El Salvador’s embrace of Bitcoin. The company boasts its digital wallet technology, which lets users move quickly between crypto and fiat currency, will also help Salvadoran merchants comply with Bukele’s decree to accept Bitcoin as payment.

“My focus is embracing the properties that is Bitcoin, and what makes it the most powerful monetary network on the planet,” Mallers said during a CNBC interview earlier this month.

Founded in 2019, the company behind Strike, Zap Solutions, has raised over $18 million for its main product, which lets people make rapid transactions via Lightning, a recent extension to the Bitcoin network. 

Describing his latest initiative, Mallers told CNBC he is “helping El Salvador build the most inclusive financial infrastructure any country has ever seen in human history.” 

Got a license for that?

Zap may be a buzzy Bitcoin startup but it’s also something else: a registered “money transmitter,” a term that carries a special legal significance.

Companies that fall under this umbrella—everything from check-cashing outfits to Bitcoin startups—must register with FinCEN, an agency that polices money laundering and terrorist financing. 

According to FinCEN’s website and the site of Zap’s Strike product, the wallet is available in El Salvador and everywhere in the U.S. except New York and Hawaii. But even though Zap has registered with FinCEN, that is only the first step in a tangled process.

To do business in the U.S., money transmitters must also get a license in every state where they operate (Montana is the only exception). And it appears Zap has failed to do this.

A search of NMLS, a government portal that lets companies view the legal status of money transmitters and other companies, reveals Zap only has a license in one state—Washington. This is likely because the Evergreen State has been given the lead role in a new multi-state process intended to streamline a state-by-state licensing process that is slow and expensive, especially for startups. But regulators told Decrypt a license from Washington is only the first step in asking other states to grant a license of their own—and records show none have done so.

Decrypt has spoken to several attorneys about these findings, and all expressed surprise that a money transmitter appears to be operating in states without the requisite licenses.

“They say they’re active everywhere except for two states and then you go to try to confirm that they in fact are registered [in every state] and you can’t find it, that seems suspicious,” Peter Fox, partner at Scoolidge Peters Russotti & Fox LLP, told Decrypt.

According to Hailey Lennon, a corporate attorney at Anderson Kill, there are possible reasons why a money transmitter may not require state licenses for money transmission activity. For instance, firms can construct their services in such a way that a license is not needed or so that they benefit from a state’s exemptions, or else they can apply for a license as a bank. However, Decrypt was unable to find any evidence that Strike or Zap Solutions have pursued any of these avenues. 

There is also a common interpretation of money transmitter license law that suggests companies can appoint an “authorized delegate”—a third party that can act on behalf of the money transmitter itself. However, Stan Koppel, Of Counsel at Bryan Cave Leighton Paisner, told Decrypt that authorized delegates can only be appointed by a licensed entity, or an entity that is exempt from licensing under state laws.

Lucinda Fazio, director of consumer services at the Department of Financial Institutions (DFI)—the agency charged with regulating financial institutions in the state of Washington—also spoke to Decrypt, and closed the book on the existence of any other potential loopholes that may exist in the multi-state pact described above. “One of the main tenets of the program is no company gets to do business in any state without that state’s specific license,” Fazio said.

The upshot is that Strike may be cutting corners when it comes to licensing, which would reflect a pattern of behavior not uncommon in the world of startups.

“I know in crypto and in tech, there is this kind of move fast and break everything and you know it’s easier to ask forgiveness than to ask permission, but my recollection is that it’s a pretty big deal to violate some of these money transmission laws,” Shawn Westrick, founder of Westrick Law Firm, told Decrypt. Fazio added that she “could not think of a colorable argument why a company should not know” of its licensing obligations. 

If Strike is indeed operating without the requisite licenses, the company could face a series of consequences.

“I think there’s a wide variety of remedies on the table, including fines, including certain injunctive relief, which would entail stopping the business from operating in the state,” Fox added. 

Silence from Mallers 

Mallers was on stage in Miami and has made recent TV appearances, but he has been silent when it comes to responding to Decrypt. 

So far, Mallers—and Strike—have repeatedly ignored Decrypt’s numerous requests for comment via email and social media on what licenses Strike has, or should have. 

Zap’s lack of state licenses across the U.S. carries with it several important regulatory implications. 

First and foremost, getting a state money transmitter license demonstrates that a firm has a sufficient anti-money laundering program in place, a minimum net worth threshold, conducts background checks and, ultimately, has permission to run its business.  

Without a license, a consumer cannot be sure that a company meets any regulatory standards required to legally conduct business as a money transmitter. 

“While regulations at the Federal level are primarily designed to ensure financial security and prevent money laundering, the money transmission licensing at the state-level is directed towards protecting consumers, and ensuring safety, soundness, and solvency of the applicants,” reads a report published by consultancy firm Sia Partners. 

This is problematic for any would-be money transmitter operating in any jurisdiction, but when we look at Zap’s frontline role in El Salvador, the lack of appropriate licenses raises more significant concerns than usual. This is especially true considering El Salvador’s legacy issues with corruption. 

“This is amateur hour, these people have never done a currency reform, they don’t know much about currencies,” Steve Hanke, professor of applied economics at John Hopkins University, told Decrypt, adding, “They might know a lot about crypto, but the [Bitcoin law] itself is an amateur job, a complete disaster.”

How does this impact El Salvador’s crypto ambitions?

It is clear that without the proper licenses, users cannot be sure that a company has satisfied its anti-money laundering obligations. But for El Salvador, whose economy is heavily dependent on American remittances (as Mallers himself has noted), the reliance on an apparently unlicensed app like Strike could further complicate its Bitcoin ambitions.

The country is already under scrutiny for financial malfeasance. According to the Corruption Perceptions Index (2020), El Salvador scored a total of 36/100 in its approach to corruption. This places the country’s mishandling of corruption below countries like Brazil, China, and Colombia, while placing it only two spots above Panama. Meanwhile, El Salvador has also raised the ire of former President Trump and U.S. lawmakers for exporting elements of the vicious gang known as M13.

As recently as May of this year, Congress released lists of current and former politicians in El Salvador (as well as Honduras and Guatemala) that the State Department had found to be corrupt. Of the 16 named, five of Bukele’s aides were credibly alleged to be corrupt. 

“We cannot expect the people of El Salvador, Guatemala and Honduras to thrive at home while their elected officials are more focused on self-enrichment than serving the public,” said Rep. Norma J. Torres (D-California) at the time. 

And given El Salvador’s recent decision to pull out of an anti-corruption agreement, lawmakers are only going to apply greater scrutiny to Bukele’s arrangement with Strike. 

Those supporting Bukele’s decision to adopt the cryptocurrency as legal tender view it as a game-changer, a watershed moment in the pursuit of financial inclusion and transparency. But skeptics, including the executive director of the avowedly pro-crypto group Coin Center, fear Bukele will implement the decree in a coercive fashion:

And of course, Mallers’ own refusal to provide details about Strike’s legal compliance fails to bolster confidence that mandated Bitcoin usage will improve financial transparency in El Salvador. The upshot is that Bukele’s bold Bitcoin gambit is likely to trigger greater scrutiny of both El Salvador and Bitcoin in the near future.

“I would anticipate that there will be much more thorough going over of the Bukele administration going forward than in the past, let’s put it that way,” Hanke added.

Source

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U.S. Bitcoin Partner for El Salvador Lacks Key Licenses

by Decrypt

The President of El Salvador, Nayib Bukele, caused a stir this month when he declared his country would become the first in the world to accept Bitcoin as legal tender. To carry out this plan, the country will rely on partners like Chicago-based Zap Solutions Inc., whose digital wallet Strike is already being used by Salvadorans in a coastal town the crypto community has dubbed Bitcoin Beach.

Strike has the technology to help El Salvador embrace Bitcoin, but one thing it appears not to have are certain licenses to operate as a money transmitter.

An investigation by Decrypt discovered that Zap lacks licenses to operate in most US states. Experts suggest this means many cash and crypto transfers to El Salvador using Strike are potentially illegal—a situation that could further cloud the Central American country’s already controversial Bitcoin plans.

Strike CEO Jack Mallers and others at the company did not respond to repeated requests for comment.

A new face on the Bitcoin scene

Strike CEO Jack Mallers is all in on the promise of Bitcoin.

The son of a man who founded a prominent Chicago brokerage firm and a woman who calls herself “Bitcoin Mom,” Mallers is a hoodie-loving 20-something whose Twitter profile sports the laser eyes of Bitcoin believers. At a recent conference in Miami, a crypto crowd hailed Mallers as a hero for helping Bukele bring Bitcoin to El Salvador.

Mallers introduced Bukele to the Miami crowd and suggested Strike, a Venmo-like payment platform, will be integral to El Salvador’s embrace of Bitcoin. The company boasts its digital wallet technology, which lets users move quickly between crypto and fiat currency, will also help Salvadoran merchants comply with Bukele’s decree to accept Bitcoin as payment.

“My focus is embracing the properties that is Bitcoin, and what makes it the most powerful monetary network on the planet,” Mallers said during a CNBC interview earlier this month.

Founded in 2019, the company behind Strike, Zap Solutions, has raised over $18 million for its main product, which lets people make rapid transactions via Lightning, a recent extension to the Bitcoin network. 

Describing his latest initiative, Mallers told CNBC he is “helping El Salvador build the most inclusive financial infrastructure any country has ever seen in human history.” 

Got a license for that?

Zap may be a buzzy Bitcoin startup but it’s also something else: a registered “money transmitter,” a term that carries a special legal significance.

Companies that fall under this umbrella—everything from check-cashing outfits to Bitcoin startups—must register with FinCEN, an agency that polices money laundering and terrorist financing. 

According to FinCEN’s website and the site of Zap’s Strike product, the wallet is available in El Salvador and everywhere in the U.S. except New York and Hawaii. But even though Zap has registered with FinCEN, that is only the first step in a tangled process.

To do business in the U.S., money transmitters must also get a license in every state where they operate (Montana is the only exception). And it appears Zap has failed to do this.

A search of NMLS, a government portal that lets companies view the legal status of money transmitters and other companies, reveals Zap only has a license in one state—Washington. This is likely because the Evergreen State has been given the lead role in a new multi-state process intended to streamline a state-by-state licensing process that is slow and expensive, especially for startups. But regulators told Decrypt a license from Washington is only the first step in asking other states to grant a license of their own—and records show none have done so.

Decrypt has spoken to several attorneys about these findings, and all expressed surprise that a money transmitter appears to be operating in states without the requisite licenses.

“They say they’re active everywhere except for two states and then you go to try to confirm that they in fact are registered [in every state] and you can’t find it, that seems suspicious,” Peter Fox, partner at Scoolidge Peters Russotti & Fox LLP, told Decrypt.

According to Hailey Lennon, a corporate attorney at Anderson Kill, there are possible reasons why a money transmitter may not require state licenses for money transmission activity. For instance, firms can construct their services in such a way that a license is not needed or so that they benefit from a state’s exemptions, or else they can apply for a license as a bank. However, Decrypt was unable to find any evidence that Strike or Zap Solutions have pursued any of these avenues. 

There is also a common interpretation of money transmitter license law that suggests companies can appoint an “authorized delegate”—a third party that can act on behalf of the money transmitter itself. However, Stan Koppel, Of Counsel at Bryan Cave Leighton Paisner, told Decrypt that authorized delegates can only be appointed by a licensed entity, or an entity that is exempt from licensing under state laws.

Lucinda Fazio, director of consumer services at the Department of Financial Institutions (DFI)—the agency charged with regulating financial institutions in the state of Washington—also spoke to Decrypt, and closed the book on the existence of any other potential loopholes that may exist in the multi-state pact described above. “One of the main tenants of the program is no company gets to do business in any state without that state’s specific license,” Fazio said.

The upshot is that Strike may be cutting corners when it comes to licensing, which would reflect a pattern of behavior not uncommon in the world of startups.

“I know in crypto and in tech, there is this kind of move fast and break everything and you know it’s easier to ask forgiveness than to ask permission, but my recollection is that it’s a pretty big deal to violate some of these money transmission laws,” Shawn Westrick, founder of Westrick Law Firm, told Decrypt. Fazio added that she “could not think of a colorable argument why a company should not know” of its licensing obligations. 

If Strike is indeed operating without the requisite licenses, the company could face a series of consequences.

“I think there’s a wide variety of remedies on the table, including fines, including certain injunctive relief, which would entail stopping the business from operating in the state,” Fox added. 

Silence from Mallers 

Mallers was on stage in Miami and has made recent TV appearances, but he has been silent when it comes to responding to Decrypt. 

So far, Mallers—and Strike—have repeatedly ignored Decrypt’s numerous requests for comment via email and social media on what licenses Strike has, or should have. 

Zap’s lack of state licenses across the U.S. carries with it several important regulatory implications. 

First and foremost, getting a state money transmitter license demonstrates that a firm has a sufficient anti-money laundering program in place, a minimum net worth threshold, conducts background checks and, ultimately, has permission to run its business.  

Without a license, a consumer cannot be sure that a company meets any regulatory standards required to legally conduct business as a money transmitter. 

“While regulations at the Federal level are primarily designed to ensure financial security and prevent money laundering, the money transmission licensing at the state-level is directed towards protecting consumers, and ensuring safety, soundness, and solvency of the applicants,” reads a report published by consultancy firm Sia Partners. 

This is problematic for any would-be money transmitter operating in any jurisdiction, but when we look at Zap’s frontline role in El Salvador, the lack of appropriate licenses raises more significant concerns than usual. This is especially true considering El Salvador’s legacy issues with corruption. 

“This is amateur hour, these people have never done a currency reform, they don’t know much about currencies,” Steve Hanke, professor of applied economics at John Hopkins University, told Decrypt, adding, “They might know a lot about crypto, but the [Bitcoin law] itself is an amateur job, a complete disaster.”

How does this impact El Salvador’s crypto ambitions?

It is clear that without the proper licenses, users cannot be sure that a company has satisfied its anti-money laundering obligations. But for El Salvador, whose economy is heavily dependent on American remittances (as Mallers himself has noted), the reliance on an apparently unlicensed app like Strike could further complicate its Bitcoin ambitions.

The country is already under scrutiny for financial malfeasance. According to the Corruption Perceptions Index (2020), El Salvador scored a total of 36/100 in its approach to corruption. This places the country’s mishandling of corruption below countries like Brazil, China, and Colombia, while placing it only two spots above Panama. Meanwhile, El Salvador has also raised the ire of former President Trump and U.S. lawmakers for exporting elements of the vicious gang known as M13.

As recently as May of this year, Congress released lists of current and former politicians in El Salvador (as well as Honduras and Guatemala) that the State Department had found to be corrupt. Of the 16 named, five of Bukele’s aides were credibly alleged to be corrupt. 

“We cannot expect the people of El Salvador, Guatemala and Honduras to thrive at home while their elected officials are more focused on self-enrichment than serving the public,” said Rep. Norma J. Torres (D-California) at the time. 

And given El Salvador’s recent decision to pull out of an anti-corruption agreement, lawmakers are only going to apply greater scrutiny to Bukele’s arrangement with Strike. 

Those supporting Bukele’s decision to adopt the cryptocurrency as legal tender view it as a game-changer, a watershed moment in the pursuit of financial inclusion and transparency. But skeptics, including the executive director of the avowedly pro-crypto group Coin Center, fear Bukele will implement the decree in a coercive fashion:

And of course, Mallers’ own refusal to provide details about Strike’s legal compliance fails to bolster confidence that mandated Bitcoin usage will improve financial transparency in El Salvador. The upshot is that Bukele’s bold Bitcoin gambit is likely to trigger greater scrutiny of both El Salvador and Bitcoin in the near future.

“I would anticipate that there will be much more thorough going over of the Bukele administration going forward than in the past, let’s put it that way,” Hanke added.

Source

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Bitcoin Mining Showdown Puts New York on Front Lines of a Green Fight

by Decrypt

In brief

  • Energy company Greenidge Generation has pivoted to Bitcoin mining using a coal-fired power plant in Dresden, New York.

  • Environmentalists fear that these plants herald the start of a new business model that threatens New York’s climate goals.

The Finger Lakes region is one of New York state’s most picturesque, but the natural beauty helps conceal the pain of a region hard hit by industrial decline.

Now, some are introducing a new type of industry to the area—Bitcoin mining, which offers an opportunity for digital wealth, but which has also generated a flurry of opposition from environmentalists determined to stop it.

Greenidge Generation is at the center of the fight. The company began as a coal-fired power plant in 1937, but recently pivoted to Bitcoin mining under cleaner natural gas, and argues it is complying with all of New York state’s environmental regulations. That’s not good enough for green activists who claim Greenidge’s facility not only harms the planet, but could pose a fatal blow to New York’s climate change ambitions.

Bitcoin and the environment
Bitcoin’s energy consumption and carbon footprint has drawn the ire of environmentalists. Image: Shutterstock

The conflict has drawn media attention not just in New York but around the world. While Greenidge currently mines just four Bitcoin per day, it has become a symbol for those who say Bitcoin is a needless waste of power in a world struggling to reduce energy use.

‘Burning Natural Gas 24/7’

Greenidge Generation describes itself as a Bitcoin mining facility with an in-house power plant, drawing on a supply of natural gas to create the electricity necessary to mine Bitcoin around the clock.

While natural gas is a fossil fuel—a power source many countries are trying to eliminate altogether—it’s cleaner than other fossil fuels like coal. According to the U.S. Energy Information Administration, natural gas emits about 117 pounds of carbon dioxide per million British thermal units (MMBtu)—a figure that is more than 40% lower than coal’s 200 MMBtu.

But the carbon impact of natural gas still far exceeds renewable alternatives like solar or wind power. And environmentalists are up in arms over the fact Greenidge Generation is using natural gas to mine Bitcoin.

“It’s not environmentally friendly,” Mandy DeRoche, deputy managing attorney at Earth Justice, told Decrypt, adding, “I don’t think burning natural gas 24/7 at a power plant that was previously closed, except for a couple of days in the summer or winter, is compliant with GHG emission reduction targets anywhere.”

Some New York lawmakers share DeRoche’s concern.

In response, State Senator Kevin Parker (D) introduced a bill in the body’s Environmental Conservation Committee earlier this month. If it’s approved, Bitcoin mining centers will only be able to operate after a full review of the industry’s impact on the environment—a process that could take as long as three years.

“The continued and expanded operation of cryptocurrency mining centers will greatly increase the amount of energy usage in the State of New York,” the bill reads, while also stating that mining activity could cause the state to miss greenhouse gas targets required by law.

The bill threatens not only Greenidge but other Bitcoin mining operations popping up in the state, and could serve as a model for other U.S. states and countries looking to curb crypto operations. In China, meanwhile, the government of Inner Mongolia has already come down hard on mining due to its impact on the environment.

Bitcoin mining: a dirty business?

Greenidge Generation, unsurprisingly, believes the proposed New York law is misguided. In pushing back against the measure, the company points out that it already requires special permission to run its facility in the town of Dresden, NY.

That permission comes in the form of a Title V permit, which compels a facility to monitor and control the amount of greenhouse gas emissions a facility can produce every year. Greenidge obtained its last Title V permit in 2016, and is hoping to get a renewal this September.

Greenidge
Greenidge’s data center in Dresden, New York. Image: Greenidge

On March 25, Greenidge submitted a package of documents in support of its renewed application to the Department of Environmental Conservation in New York. That package contained a letter, seen by Decrypt, that specifies the legal maximum emissions the Greenidge facility can produce under its current Title V permit.

The company’s Dresden facility has permission to emit up to 641,000 tons of carbon dioxide equivalents per year. Decrypt has asked the company for the actual emissions produced by the facility, but to date it has not provided this data. To put that 641,000 figure into context, the Environmental Protection Agency’s own carbon emissions calculator suggests the company’s maximum legal emissions would amount to about 708 million pounds of burned coal, 116 thousand homes’ average electricity consumption for the year, or 1.6 billion miles driven by a passenger vehicle.

The environmental impact of the Greenidge plant can also be assessed in light of Bitcoin’s overall carbon footprint. Decrypt has previously reported that the output from Bitcoin’s non-renewable energy sources—including natural gas like Greenidge uses—is approximately 80 terawatt-hours of power per year. If the Greenidge facility emits its upper maximum of carbon dioxide per year, that would translate to about 1% of the overall carbon footprint generated by all Bitcoin miners that rely on non-renewable energy—a hefty slice of the pie for just one facility.

Despite this potential impact, DeRoche of Earth Justice told Decrypt that she fears Greenidge’s air emissions permit will be renewed without any real scrutiny. “As a general matter, these permits are renewed as business as usual. The same thing is going to happen here, they’re going to be operating within their permits, and no one can take a look at their operations,” said DeRoche.

In response, DeRoche and Earth Justice sent a letter to New York’s environmental regulator warning that Greenidge’s activities are part of a growing trend in the state of retired power plants launching Bitcoin mining operations.

That trend includes Fortistar North Tonawanda, another New York-based power plant that the blockchain firm Digihost Technology Inc. intends to use to mine Bitcoin.

Environmentalists fear that these plants represent the start of a new business model that threatens New York’s climate goals. Those goals, set out in state law, oblige the state to generate 70% of its electricity from clean energy sources by 2030, and 100% by 2040.

“If other plants like Greenidge are converted to Bitcoin mining, then I don’t see how we can meet our emissions goals.”

Mandy DeRoche

“If Greenidge ramps up, expands, or if other plants like Greenidge are converted to Bitcoin mining, then I don’t see how we can meet our emissions goals,” said DeRoche, adding, “They’re supposed to be dead power plants, they were retired for a reason.”

Greenidge pushes back

In conversation with Decrypt, Greenidge Generation CEO Dale Irwin pushed back against some of the criticism his company—and the wider Bitcoin mining industry—has received. For one, Irwin rejected the argument that Greenidge, a former coal-powered plant, was simply resurrected to mine Bitcoin.

“You have got to make sure you do not represent this as a retired coal facility that was re-energized for the sake of Bitcoin,” he said. Greenidge ran test pilots for mining in 2019, two years after it reopened as a natural gas facility.

He also said that Greenidge’s business model does not provide—as Mandy DeRoche of Earth Justice claims—a blueprint for other retired power plants to follow suit. “They say … ‘Oh, they’re going to bring back 30 plants,’ no, no they’re not,” he said.

Irwin also pointed to the fact that Greenidge helps upstate New York grow its economy. “Currently we have about 35 employees, and when we expand we’re going to push that number up to the high 40s to 50,” he said, adding, “And it’s really important to realize that our average wage per employee here at the facility is twice the average of our surrounding community.”

According to Town Charts—which uses economic analysis from the 2020 Census Bureau—median wages in Dresden are $38,214 per year. Meanwhile, Irwin says the average wage at the Greenidge facility is $77,000.

Bitcoin and the environment
Critics say Bitcoin harms the planet, but advocates claim it promotes economic growth. Image: Shutterstock

Whether Greenidge does or does not set a precedent for other would-be miners in the state, Irwin told Decrypt he plans to move the facility away from natural gas in the future, anyway—a plan spurred in part by the impending legal requirement that 70% of New York’s electricity must be sourced by renewable energy by 2030. When asked specifically if he was committed to moving away from natural gas, Irwin said, “We are committed, and at the end of the day, we have no choice.”

“We are committed [to moving away from natural gas], and at the end of the day, we have no choice.”

Dale Irwin

Until then, the company plans to offset 100% of its carbon emissions through a “voluntary purchase” or greenhouse gas reduction projects. “We hope to offset 100% of our emissions of our mining operation,” Irwin said.

Where does Bitcoin mining in New York go next?

Greenidge’s mining operation is a controversial business but also a lucrative one. Today, the facility mines about 3.8 to 4 Bitcoins per day, meaning it now makes around $150,000 per day based on recent prices—a big increase from the $50,000 figure it disclosed to media outlets back in March 2020.

Irwin believes the company is providing a valuable service not only to the surrounding area, but to individuals around the world that use Bitcoin as an economic lifeline. “People see the benefits in Argentina where they wake up to 5,000% inflation. People see the benefits in Nigeria, where 32% of the population is utilizing Bitcoin, 100 million people around the world are utilizing Bitcoin,” Irwin said.

This argument doesn’t persuade environmentalists like DeRoche, who argue that abstract benefits like the ones touted by Greenidge don’t outweigh the harm caused by the greenhouse gases the company is pouring into the atmosphere.

And this debate is coming to a head. The Senate bill proposing a three-year moratorium on the mining industry appears to have momentum, though its chances of passing are unclear. New York Governor Andrew Cuomo has yet to weigh in, but he has previously described ignoring climate change as gross negligence—suggesting he would be open to signing it.

Some, however, are marshaling to kill this bill. “There’s very strong opposition to this bill from a variety of groups in New York,” Irwin said, specifically mentioning the International Brotherhood of Electrical Workers (IBEW). “Those groups believe that a moratorium, or something that is already covered by the state’s environmental regulations and producing enormous benefits, would be a mistake,” he added.

Meanwhile, New York and Greenidge are also players in a wider geopolitical game. Namely, China still holds about two-thirds of the world’s Bitcoin mining industry, which has led some to warn the United States is ceding control of a key strategic asset to its biggest rival.

In the U.S., Bitcoin mining has ticked up of late, growing to almost 8% of the global share compared to the 4% it was mining in September 2019. Meanwhile, in March of this year, UK-based firm Argo Blockchain bought land in Texas to launch a Bitcoin mining operation while US firm Riot Blockchain also dropped over $600 million on a massive Bitcoin mining site in the state. Those investments could translate into political capital and help American miners stave off broader regulation.

As for Greenidge, Irwin claims Bitcoin mining is here to stay, and we’d all be better off if it flourished in New York—where regulations are clear—than in China, where many mining operations operate with coal and without clear rules.

“It’s always better to have environmental regulations that are known, measured, and communicated is definitely better than someplace that it’s not known, it’s not communicated, it’s not measured and it’s all estimated,” he concluded.

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Can BlockFi Be Trusted with Your Bitcoin?

by Decrypt

In brief

  • BlockFi promises eye-popping interest rates on your crypto deposits.

  • The deposits are not insured, and the rates rely on the crypto market, so BlockFi has dropped its flashy rates on BTC and ETH twice since March.

  • A botched giveaway this month in which BlockFi accidentally handed out large amounts of free BTC has raised alarms for some customers.

On May 17, some customers of cryptocurrency lender BlockFi noticed something unusual: huge Bitcoin deposits in their accounts. These deposits—in one case more than 700 BTC according to a Reddit user (worth $29 million at the time)—were expensive mistakes that BlockFi later owned up to. In a promotional campaign gone wrong, the company had sent rewards denominated in Bitcoin, rather than in GUSD, a $1-pegged stablecoin created by the crypto exchange Gemini. 

Because of its error, BlockFi has had to chase after customers who received the extra Bitcoin and has offered rewards of up to $1,000 for the return of its funds. As of May 19, BlockFi’s remaining exposure from the mistake was about 200 BTC, or $7.3 million.

BlockFi wrote in a statement that it accidentally credited “fewer than 100 users” with crypto “associated with a promotional payout.” Though BlockFi says the incident “does not affect any of BlockFi’s ongoing operations,” it raised serious concerns among customers about the safety of their assets held with the company. 

“I’m so relieved I pulled out everything at the beginning of the month,” one Twitter user wrote. “Wouldn’t be surprised if everything is being managed in an Excel spreadsheet,” wrote another.

In spite of this embarrassing mishap, many still see BlockFi as a respected player in the crypto market—particularly (and unsurprisingly) the investors who’ve sunk money into it. BlockFi declined to comment for this story.

Founded in 2017 by Zac Prince and Flori Marquez, BlockFi offers several services to its customers: crypto investing, trading, and borrowing cash on their crypto assets. The company has raised $450 million and boasts a $3 billion valuation. It has attracted 265,000 retail clients and more than 200 institutional clients, TechCrunch reported in March, putting a mistake that affected fewer than 100 customers in perspective.  

BlockFi’s biggest allure is its promise of high yield rates. Customers can deposit as little as they want and can get up to 9.3% APY (annual percentage yield) on certain cryptocurrencies. Stablecoins come with the highest APY (9.3% for USDT, 8.6% for USDC, GUSD, and PAX), while APY starts at 5% for deposits of up to 0.5 Bitcoin, and goes down to 2% for holders of 0.5 to 20 BTC. 

This is roughly on par with similar crypto lenders in the DeFi (decentralized finance) space, which has recently exploded. Celsius Network, Nexo, Eco, Cred, and Gemini Earn all use a similar model—deliver high yield on your crypto by lending it out to other firms—and tout much higher yields than traditional banks and “high-yield savings accounts” like Ally and Marcus By Goldman Sachs, both of which offer just 0.5% APY these days. (Eco, the newest of the bunch, attempts to assuage concerns with a page on its web site that starts by asking, “How is this not too good to be true?”)

BlockFi uses third-party custodians like Gemini, BitGo, and Coinbase, which held 43% of its customers’ assets as of the first quarter of 2021, the company reported on its website. The rest is in liquid investments or loans. 

Naturally, the eye-popping yields come with heavy risks. 

BlockFi does not insure your investments. If it loses customers’ cryptocurrency due to “cyber attacks” or “technical difficulties,” it owes those customers nothing. And its seductively high rates are subject to change based on the unpredictable crypto market. As a result, BlockFi’s rates on Bitcoin and Ethereum deposits have dropped twice since March. In a CNBC “Squawk on The Street” segment last year, co-host Sara Eisen asked Zac Prince, “How do I know that the money is safe?” He answered, in part, “There is more risk here versus a savings account with FDIC insurance or a traditional brokerage account with SIPC insurance. But you’re compensated for it with the high yields.”

BlockFi’s lack of insurance is particularly problematic in light of its history, which includes other lapses that date back before its May 17 payout fiasco. In May 2020, BlockFi experienced a data breach caused by a SIM swap attack against a BlockFi employee. It affected fewer than half of the company’s retail clients, according to The Block, by exposing their account activity and contact information, but no customer funds were lost.

This past March, BlockFi came under attack again, this time by someone who “spammed” the platform, according to CoinDesk, with false sign-ups using racist language. The attacker registered accounts using real email addresses of BlockFi users but again, it did not affect customers’ funds.

So how can consumers trust a four-year-old entity operating in a famously volatile market, knowing that their assets aren’t insured, especially after its most recent display of fallibility? 

“If you’re getting that type of return, there’s all types of risk”

As with any speculative investment, it’s a risk vs. reward calculation. Whether the reward is worth it depends on whom you ask. Traditional stock analysts advise extreme caution, professional crypto investors see a future for BlockFi in their space, and customers are just trying to make the best decisions for their money. 

Financial consultant Tyrone Ross Jr., CEO of Onramp Invest, first heard about BlockFi in 2018, after a few clients asked him about its astoundingly high yields. Their questions prompted him to visit the company’s Manhattan office. There, he met CEO Zac Prince, whom Ross describes as “even keel” and who answered all of his questions about BlockFi’s business directly. Ross left with some BlockFi swag and confidence in the company.

Today, Ross admits he’s biased when talking about BlockFi. He and Prince have become friends, and he’s had “preliminary conversations” about possibly working with BlockFi in the future. But he still advises caution to potential retail investors.

“Nothing in life is free,” he says. “So if you’re getting that type of return, there’s all types of risk—smart contract risk, counterparty risk, systemic risk… that’s just the way it is.”

Big names in both crypto and traditional finance have lent BlockFi credibility. J. Christopher Giancarlo, the former CFTC (Commodity Futures Trading Commission) chairman, joined BlockFi’s board in April. Other board members include investor Anthony Pompliano and Galaxy Digital investments chief Chris Ferraro.

Endorsements go a long way in building consumer confidence—maybe even more so in crypto, where a handful of big names wield outsized influence. As BlockFi customer Michael Elliott, 34, in Santa Rosa, Calif., wrote to Decrypt over Twitter DM, “I trusted Blockfi because of the ties to Gemini and the Winklevoss twins.” (They’ve invested, and Gemini custodies some BlockFi assets.) BlockFi customer Bo Biddle, 40, in Nashville, says he bought in after he heard crypto YouTube influencers Lark Davis and Crypto News Alerts endorse BlockFi.

Though the company doesn’t offer insurance on user investments, it is transparent about its backing. As of March, BlockFi reported holding about $14.7 billion client assets on its platform, a 3.3x increase from December 2020. 

The counterparties for BlockFi’s loans, though not made explicit on the company’s website, impressed Ross when he first learned of them in 2018 (he declined to name specifics). BlockFi says their institutional clients include “proprietary trading firms and hedge funds,” and lists their equity investors to show “the type of institutions we work with,” which include Consensys (which funds the editorially independent Decrypt), Coinbase Ventures, and Winklevoss Capital.

Another reason some can stomach the risk is the crypto market’s upside potential. With Bitcoin having tripled in value from December to March, cryptocurrency investing is more mainstream than it’s ever been. 

Scott Stornetta, chief scientist at blockchain venture capital firm Yugen Partners (whose work is cited in the Bitcoin whitepaper) points out that the crypto space has undergone major changes in the past six months that have helped “integrate Bitcoin,” he says, “into the world’s institutional and traditional financial systems.”

For instance, the U.S. Federal Reserve is looking into regulations for stablecoins while taking its time to consider central bank digital currencies (which Stornetta sees as “close to being an endorsement” of stablecoins). In the past year, PayPal said it would let users begin paying with cryptocurrency, while Square and Tesla both loaded up on Bitcoin for their corporate balance sheets. Notable Wall Street hedge fund titans from Stan Druckenmiller to Paul Tudor Jones have changed their tune on Bitcoin. These changes all bode well for any company offering bank-like services to crypto holders.

Stornetta declined to comment specifically on BlockFi because Yugen Partners is involved “in certain dialogue that precludes me from commenting in any institutional way on individual players.” In other words, BlockFi’s connections in the crypto space are rapidly multiplying.

“Do you really need to jump out the window for another six percent?”

Many BlockFi users are comfortable with a higher risk level than your average investor. After all, they’re already invested in a volatile asset. One of the most pronounced concerns among BlockFi users so far has been the company’s two recent rate decreases. They make customers’ risk-to-reward ratios a little lighter on the reward side.

BlockFi customer Calvin Saunders, a 25-year-old chiropractic student, first put his Bitcoin in BlockFi when the company offered 5% APY on his holdings. Since then, that APY has decreased to 2%. “I call it kind of sketchy, because essentially they’re trying to not be like banks,” Saunders says, “but now they’re trying to fluctuate their APY while you already have your assets in there.” The adjustment prompted him to start looking at alternative crypto investment platforms. Since we first spoke in early May, he’s moved all of his crypto out of BlockFi and into competitor Nexo, which he says allows him to invest a wider variety of crypto assets.

And while Saunders did like that he could trade between different coins on BlockFi “pretty instantaneously,” exchanging USD for crypto on BlockFi took longer. “I missed out on a massive Bitcoin run because it took five days for the funds to reach my account,” he says. He could have gained between $6,000 and $8,000, he says, if it hadn’t taken that long for BlockFi to process his funds.

If Bitcoin and other tokens provide such great returns already, why take the additional risks that BlockFi presents? “If you look at how Bitcoin has performed, if you look at how ETH is performing now,” Ross says, “do you really need to jump out the window for another six percent?”

If you ask David Trainer, CEO of stock research firm New Constructs, the whole point of blockchain technology precludes needing intermediaries like BlockFi. “That’s what smart contracts [and] automated market makers are for, to execute the transaction of assets without the risk and conflict of interest of having humans involved,” he says. For companies like BlockFi, he adds, “their survival is entirely dependent upon people not really understanding yet what blockchain is aiming to do.”

But BlockFi has big plans that go beyond its current investing services. The company has opened up the waitlist for its upcoming credit card, and based on Decrypt’s interviews with investment experts, it has more partnerships or projects in the works. From that perspective, BlockFi’s survival depends less on people understanding blockchain, and more on the wider public growing far more comfortable with crypto investing and its risks.

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Who Gets the Crypto? Divorces Take New Turn in the Bitcoin Era

by Decrypt

When a couple gets divorced, spouses are supposed to divide up the assets—but some choose to hide them instead. Asset hiding is an age-old problem, but lately it’s taken on a new twist as spouses (typically husbands) try to dodge divorce bills by stashing money in secret cryptocurrency wallets.

It’s a problem that Sandra Radna knows well. The Long Island divorce attorney is currently representing several clients whose once-rich partners are inexplicably pleading poverty.

“In one case, the husband was a high-wage earner who made over $1 million as an investment manager but claimed all he had was a retirement account with $200,000. The wife knew he had assets but didn’t know where they were,” says Radna.

The missing money, it turned out, was parked in crypto accounts, which Radna was able to find it by means of forensic investigations and court orders.

Her success in tracking down the funds is notable because it reflects how the legal and accounting professions are getting wise to crypto. While stories about divorce and crypto are not new—headlines about Bitcoin and marriage began popping up in 2018—more ex-spouses are now getting their hands on crypto stashes that they and their lawyers once assumed were out of reach.

A big reason for this is people like Mark DiMichael. A forensic specialist with the accounting firm Citrin Cooperman, DiMichael helps companies root out fraud, but also helps divorce lawyers locate assets. In the past, he says, greedy spouses hid their money in Swiss bank accounts or even secret piles of cash but, as crypto grew in popularity, more have turned to digital wallets instead—not least because they can whisk away money without even leaving their home.

But while crypto transactions can be highly anonymous, DiMichael says many would-be divorce cheats fail to take the steps required to cover their tracks. Instead, they will use a service like Coinbase, which must record customers’ identities to comply with federal banking laws, and must respond to court-ordered subpoenas.

Even spouses who take more care to conceal their crypto transactions are not in the clear. According to Radna, the Long Island divorce lawyer, she has obtained court orders in order to seize computers and conduct forensic audits to search for crypto-related activity—including for mentions of privacy-centered currencies like Dash or Monero.

Meanwhile, DiMichael says he has built his own software to parse various blockchains, meaning that discovering even a single transaction can be enough to locate a spouse’s hidden crypto fortune.

“As long as you have a wallet address you have somewhere to start,” says DiMichael, adding that he advises spouses who are still in the marital home to be on the lookout for hardware wallets or paper wallets containing Bitcoin keys that might be lying around the house.

He adds, though, that it will not always be possible to trace crypto assets, especially if a spouse has managed to move them directly to an overseas exchange such as Binance, which typically ignore U.S. subpoenas.

Not everyone is so careful, however. DiMichael, who says he’s received more than two dozen calls about tracing crypto in divorce cases, notes that husbands’ asset-hiding schemes can come undone because they can’t help boasting about their activities.

“A woman called me to say her husband has been telling all his friends he’s a crypto whale and has been in it for years,” said DiMichael, who added the husband was a former professional athlete, and that the case is ongoing.

And just as lawyers and judges are catching up to crypto-stashing schemes in divorce cases, so too are judges. While five years ago, many judges might have been befuddled by Bitcoin, Radna says the New York judiciary in particular—which has long been au authority when it comes to complex financial cases—is now fluent in crypto.

The bottom line is that, when a marriage goes south, there’s now a good chance that one partner will own cryptocurrency they are obliged to share with their ex—and that, unlike in the past, divorce lawyers now know that they have a good chance of tracking it down.

“The big misconception in divorce cases is that if a person has invested in crypto that their spouse will never find it,” says Radna.

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