Today, SEC Chair Gary Gensler took to X (Twitter) to commemorate the 15th anniversary of the Bitcoin white paper.
Gensler, who was nominated by President Biden to serve as SEC Chair in 2021, celebrated the publication of the original Bitcoin white paper by the pseudonymous creator Satoshi Nakamoto, along with a message that read, "If Satoshi Nakamoto went as Satoshi Nakamoto for Halloween, would we be able to tell? Happy 15th anniversary to Satoshi’s famous white paper that started crypto."
This unexpected celebration of the Bitcoin white paper by the head of the U.S. Securities and Exchange Commission has sparked intrigue and discussion among Bitcoin enthusiasts and investors, as the SEC has to make decisions on multiple spot Bitcoin ETF applications soon. Some of the worlds largest financial institutions, notably $10 trillion asset manager BlackRock, are hoping to become the first applicants in the country to get approval for this product.
The 15th anniversary of the Bitcoin white paper is significant as it marked the birth of a new era in finance and technology. Bitcoin has since challenged traditional financial systems and institutions, amassing over $670 billion in market cap as of today, and became a national currency.
More information on the U.S. spot Bitcoin ETF race can be found here.
Tether’s newest reserve attestation shows the highest-ever percentage of cash equivalents, with most reserves consisting of U.S. T-bills and repurchase agreements.
The reserves for stablecoin issuer Tether contained approximately 86% cash and cash equivalents as of September 30, according to a new attestation report from accounting firm BDO. This is the highest percentage of cash and cash equivalents that have ever made up Tether’s reserves.
Tether today releases its attestation for Q3 /2023.- cash & cash equivalent portion of reserves is all time high at 85.7%, yielding ~$1B
According to the report, $56.6 billion worth of reserves are in U.S. Treasury bills with a maturity date of less than 90 days. Meanwhile, another $8.8 billion was held in reverse repurchase agreements involving these bills. There was $8.2 billion in U.S. Money Market funds pegged to $1 per note and $292 million in cash and bank deposits. Another $65 million is held in the form of treasury bills from countries other than the U.S.. The total amount of cash and cash equivalents is approximately $74 billion, which is 85.73% of Tether’s total reserves of $86.4 billion.
The report also shows that Tether has reduced its reliance on secured loans as a means of raising revenue. Secured loans now make up only $5.1 billion worth of USDT reserves, which is approximately $336 million less than what the previous report showed. Tether was criticized in September for continuing to make secured loans after previously stating that it would wind these down.
In an accompanying blog post, Tether forecast a further reduction in loans by the close of day on October 31. An additional $1.1 billion in loans will be wound down by this date, at which point only $900 million in loans will remain as part of reserves.
BDO publishes attestations of Tether’s reserves every quarter, with a one-month lag between the end of the quarter and the publication of the report. Tether claims that it is working on a system to provide real-time audit reports in 2024.
Bankman-Fried pleaded not guilty to all seven counts of fraud charges related to the collapse of crypto exchange FTX.
The ongoing criminal trial involving FTX founder Sam Bankman-Fried (SBF) will move into closing arguments on November 1.
On Day 15 of the SBF trial, lead defense attorney Mark Cohen's request for acquittal was denied by presiding judge Lewis Kaplan. Instead, the case will move to closing arguments from both sides at 9:30 a.m. ET (1:30 p.m. UTC) on Nov. 1, with all evidence discovery concluded. Attornies from both sides declined to call any further witnesses.
SBF has pleaded not guilty to all seven fraud-related charges in his criminal case, but is expected to face five more counts in a second trial scheduled to start in March 2024, including the alleged $150 million bribe of a Chinese government official.
During discovery, prosecutor Danielle Sassoon presented documents, tweets, and corporate messages attesting that the crypto executive siphoned $8 billion worth of FTX customers' deposits to fund a series of risky trades at his hedge fund, Alameda Research. SBF, on the other hand, denied that such actions constituted fraud. In his defense, SBF claimed that taking customers' deposits was merely a "risk management" procedure necessary for Alameda's portfolio, and the said process was in line with company policies.
Key FTX personnel, such as Alameda CEO Caroline Ellison, FTX CTO Gary Wang, and former FTX head of engineering Nishad Singh, have all pled guilty to charges relating to the exchange's collapse last November and are currently cooperating with the U.S. government in their testimonies against SBF. If convicted, Bankman-Fried faces a maximum penalty of 115 years in prison.
There is no clear downward trend in crypto crime, but a quiet month is undoubtedly more than welcome in the Web3 community.
Web3 theft hit a low point for the year so far in October, CertiK reported. Losses to hacks, exploits and scams confirmed by the blockchain security firm amounted to $32.2 million for the month across 38 incidents, with no single incident leading to a loss of over $7 million.
Compared to the ten-month total of $1.4 billion, losses in October were approximately a quarter of the running monthly average. January showed the second-lowest losses at $33.7 million. The October statistics were not the result of a steady decline in losses but rather show a lack of major incidents that month. October’s 38 incidents were a quantitative low as well.
Major Web3 incidents in October. Source: CertiKAlert X account
Certik’s third-quarter report indicated the number of incidents in July was 79, falling to 66 in August and 39 in September. Only exit scams were up in October and were four times higher than the low they reached in September. That category reached its yearly high in May when users of a crypto project called Fintoch lost almost $32 million.
On the other hand, exploits saw a peak in September, mainly due to the $200 million loss suffered by the Mixin Network when its cloud service provider was breached. July saw the second-highest damage, most of which was attributable to losses by the Multichain MPC bridge.
Caution : Crypto Social Media Scams are on the rise. Many of the methods used have roots in history. The combination of social media's vast reach and cryptocurrency's decentralized, often opaque, nature creates an ideal environment for scammers.
There are some clear trends in crypto crime. CertiK recently noted the rise of scams using social media. It cited United States Federal Trade Commission data that indicated almost half the cryptocurrency scams in the last 18 months have been tied to social media, which offers a wide variety of opportunities for wrongdoing, from pumping and dumping to pig butchering.
CertiK stated in Q3 that the North Korean Lazarus Group remained the “dominant threat actor.”
Voltage Park will lease access to 24,000 clustered NVIDIA GPUs by the hour or month to help small startups and researchers model machine learning.
Ripple co-founder Jed McCaleb’s nonprofit Navigation Fund is helping to tackle the AI chip shortage by offering leasable capacity large machine learning models. A new cloud was officially launched on Oct. 29 that will be accessible on an hourly, monthly or long-term basis.
An organization called Voltage Park “currently offer[s] bare-metal access for large-scale users that need peak performance” and expects to expand its service by early 2024, according to a statement on its website. It has around 24,000 NVIDIA H100 graphics processing units (GPUs) grouped into interconnected clusters. Voltage Park is a subsidiary of Navigation Fund.
The hardware is worth $500 million. Clusters will be set up in Texas, Virginia and Washington, Voltage Park CEO Eric Park told Reuters. Park joined the organization in July.
Voltage Park is currently auctioning off contracts with lengths of one to three months on 1,560 GPUs. It said in its announcement:
“The market for cutting-edge ML compute is broken. Startups, researchers and even big AI labs are scrambling to buy or rent access to the latest chips for ML training. […] We’re on a mission to make machine learning infrastructure accessible to all.”
The Navigation Fund was founded in 2023 with plans to provide a small number of grants this year and expand its programs in early 2024. It plans to advance a number of causes in addition to “safe AI.”
Billionaire McCaleb created Mt. Gox to trade Magic: The Gathering cards, then repurposed it as a Bitcoin (BTC) exchange and sold it in 2011, three years before its collapse. He went on to become a co-founder of Ripple Labs, and after leaving Ripple on bad terms with the rest of the management, he co-founded the Stellar blockchain. He also created a space station startup in 2022 that has partnered with Elon Musk’s SpaceX.
“It’s not just a piece of artwork”: Mintable CEO Zach Burks argues that the United Kingdom government still hasn’t caught up on what NFTs are becoming.
The United Kingdom’s government is in danger of regulating nonfungible tokens (NFTs) in a way that doesn’t suit the true nature of the nascent technology, says Mintable CEO and founder Zach Burks.
In an interview with Cointelegraph, Burks said he believes a recent report from a U.K. parliamentary committee significantly exaggerates the role NFTs play in copyright infringement and fails to recognize that they are more than just volatile digital pictures.
“NFTs are in a transition phase where they’re moving away from the speculative boom of PFPs, and now it’s going into utilities of brands implementing NFTs across a whole range of different things,” Burks explained.
In the Oct. 11 report, the Culture, Media and Sport Committee urged the government to take action to protect artists and content creators from copyright infringement associated with NFTs.
NFT marketplaces need to do more to address the scale of copyright infringement on their platforms.
We've published our report on "NFTs and the Blockchain: risks to sport and culture".
— Culture, Media and Sport Committee (@CommonsCMS) October 11, 2023
Burks acknowledged that copyright protections and intellectual property rights for artists are of paramount importance, pointing to Mintable’s own IP protection algorithm it uses to prevent plagiarism on its platform.
However, he explained that while these issues should be a top priority for all NFT platforms, they’re not exactly NFT-specific concerns.
“These are problems inherent to the internet, not to NFTs.”
“Regulators say, ‘Well now, NFTs are being used for copyright infringement.’ Well yeah, so is WordPress. So is YouTube. So is Spotify,” he said. “And how do you combat that? Well, you have some of the largest, most advanced companies in the world, like Google, working on this.”
“They’ve got hundreds of billions of dollars, and they can’t solve the problem of combating copyrighted material on YouTube. It’s not like this problem just came up out of thin air because NFTs were created.”
Burks, who personally corresponds with U.K. government officials on NFTs on a weekly basis, said that while NFT platforms should be doing their utmost to protect artists, it falls on regulators to embrace a more nuanced view of NFTs as a whole.
Was such a great time speaking at the 40th International Symposium on Economic Crimes at Cambridge University in the UK!
Learned so much, met some amazing people, and hopefully educated the people who listened to my many panels about NFTs and the blockchain space! pic.twitter.com/txExSVqTIb
“There are so many ways that you can utilize NFTs, whether it’s for your car records, for your property records, whether it’s a bank settlement document, whether it’s a backup layer, whether it’s a full supply chain system or a biofuels company,” he said.
“It’s not just a piece of artwork or a financial instrument. […] An NFT is effectively a website.”
“If my website is used to sell books, I’m governed by the laws that are used to sell books. If I sell drugs on my website, then you don’t need new laws. I’m still just selling drugs, right?” he said, laughing.
In Burks’ view, NFTs are an extremely broad technology capable of a vast array of different functions, and having a committee declare that they be regulated as pieces of digital art could be a significant setback to unveiling the true utility of the technology.
“The [committee] said the government should implement the EU 17 copyright directive on NFTs, which is bad in the sense that it’s a really broad umbrella,” he said.
In the report, the committee said the “most pressing issue” raised by NFTs was the risk to artists’ intellectual property rights arising from the ease and speed at which tokens can be minted. It suggested they be regulated under a relatively narrow copyright directive: Article 17 of the European Union Directive on Copyright.
The committee’s recommendations to the U.K. government. Source: U.K. Parliament
“When you say all NFTs need to have this one element of regulatory coverage, this is the equivalent of saying, ‘We need this one piece of legislation that covers this piece of technology,’ which might’ve started at the Edison light bulb but now we’re dealing with Teslas,” Burks said.
“So, we have to be very careful when it comes to these kinds of overarching regulatory frameworks that we apply to NFTs as a system, as opposed to looking at NFT for what they really are.”
Ultimately, Burks believes the U.K. government could take some notes from regulators in Singapore, where the government judges NFTs by their specific use cases.
“Regulators in Singapore look at what an NFT actually is, and then they go from there,” he explained. “Say you’ve got an NFT of a Tesla stock. Well then, that’s a security. Oh, this is an NFT of a bag of cocaine that’s facilitating the sale of drugs? Then they regulate the same way they would illicit drugs.”
VanEck joins the group of asset managers updating applications for a spot Bitcoin ETF in the United States.
Asset manager VanEck filed an amended application for a spot Bitcoin (BTC) exchange-traded fund (ETF) on Oct. 27 with the United States Securities and Exchange Commission (SEC), according to the regulator’s database.
The amended filing highlights that a seed capital investor purchased in October the Seed Creation Baskets — a block of 50,000 shares of the proposed ETF — with Bitcoin prices determined by MarketVector Bitcoin Benchmark Rate, an index used as a reference price of the cryptocurrency.
According to finance lawyer Scott Johnsson, the filing suggests the fund seeding will be carried out with Bitcoin, different from other spot Bitcoin ETF proposals with seeding in cash.
A spot Bitcoin ETF would directly invest in Bitcoin, as opposed to existing ETFs that invest in Bitcoin futures. The spot version of the product is expected to draw substantial investments from investors seeking Bitcoin exposure via traditional asset managers.
With this new filing, VanEck joins a growing list of asset managers updating their applications for a spot Bitcoin ETF. In September, Bitwise Asset Management also filed an amended application responding to the SEC’s objections to the product.
Early this month, ARK Invest and 21Shares amended their joint application as well, providing additional information about their proposed spot Bitcoin ETF, including practices for asset custody and valuation.
The wave of amended filings may indicate that negotiations between asset managers and regulators are progressing. Commenting on filings awaiting regulatory approval, ETF analyst Eric Balchunas recently noted the changes in ETF proposals may reflect SEC requests for issuers to address concerns.
“It means ARK got the SEC’s comments and has dealt with them all, and now put [the] ball back in [the] SEC’s court,” Balchunas explained on X (formerly Twitter). “[In my opinion] good sign, solid progress.”
The U. S. SEC has delayed its decision on several proposals for spot Bitcoin ETFs in the country, including from BlackRock, Invesco, Bitwise, VanEck and Valkyrie. Market participants and analysts predict that a decision should be made within weeks.
USDT has seen a significant surge in adoption in Brazil, accounting for 80% of all cryptocurrency transactions in the country so far in 2023.
Stablecoin Tether (USDT) has seen a significant surge in adoption in Brazil, accounting for 80% of all cryptocurrency transactions in the country, according to data from Brazil’s revenue service agency.
As of mid-October, USDT transactions in Brazil this year amounted to $271 billion Brazilian reais (~$55 billion), almost double the volume of Bitcoin (BTC) transactions in the country, which were $151 billion reais (~$30 billion). Stablecoins are cryptocurrencies designed to have a stable value, often pegged to the value of fiat currencies, like the U.S. dollar and the Brazilian real.
USDT transactions have been on the rise in Brazil since 2021, but crossed Bitcoin volume for the first time in July 2022, just at the peak of the crypto industry’s storm last year, when crypto lenders Three Arrows Capital and Voyager Capital collapsed.
Top six cryptocurrencies by volume in Brazilian Reais. Source: Receita Federal
The crypto winter slashed the volume of crypto transactions in the country by nearly 25% in 2022, ending at $154.4 billion reais, or ~$31 billion, the government reported.
The Brazilian tax agency tracks crypto-related activities of citizens using a sophisticated system that relies on artificial intelligence and network analysis. According to a blog post, the system is able to detect suspicious activity as well as trace the location of individuals trading cryptocurrencies.
The revenue agency is also targeting crypto investments held by the country’s citizens overseas. On Oct. 25, the local Congress passed legislation that recognizes cryptocurrencies as “financial assets” for tax purposes in foreign investments. Earnings overseas between 6,000 and 50,000 reais (~$10,000) will be subject to a 15% tax rate starting in January 2024. Above this threshold, taxes will be applied at 22.5%.
Since 2019, crypto exchanges operating in Brazil are required to disclose all user transactions to the government. Capital gains from crypto sales exceeding 35,000 reais (~7,000) per month are subject to a progressive tax bracket of 15% to 22.50%.
Global crypto exchanges such as Coinbase, Binance, Bitso, and Crypto.com operate in the country alongside local players such as Mercado Bitcoin and Foxbit.
VanEck strategy advisor Gabor Gurbacs expects a wave of new investment capital and immigration will push El Salvador’s economic growth in the coming years.
El Salvador can follow Singapore’s lead and become a financial center in the Americas, according to Gabor Gurbacs, strategy advisor of investment management firm VanEck.
“I say often to portfolio managers and asset allocators that El Salvador has the potential to become the Singapore of the Americas,” Gurbacs explained in an Oct. 28 X post.
Similar to what Singapore achieved in the late 1900s, Gurbacs expects new capital investment and immigration will be the main drivers behind El Salvador’s increased economic growth over the next few years.
His comments follow an Oct. 28 post by United States broadcaster and Bitcoiner Max Keiser, which was captioned “Move to #ElSalvador, The New Land of the Free.”
Keiser, who now lives in El Salvador, listed Bitcoin (BTC) and the U.S. dollar's legal tender status, a clean up in El Salvadoran crime, great beaches and great coffee as some of the main reasons why the Central American country should be on everyone’s radar.
I say often to portfolio managers and asset allocators that El Salvador has the potential to become the Singapore of the Americas. I expect continued increase in immigration to, capital investment in and overall growth in El Salvador. https://t.co/CmT554x12j
El Salvador’s sovereign bonds have outperformed many other emerging markets in 2023, yielding an eye-popping 70% return by August 2023 which caught the attention of JPMorgan, Eaton Vance and other investment management firms.
The FIAT guys at @jpmorgan say El Salvador is finally “getting some credit”.
They are just catching up.
It will soon be: “Salvadoran bonds are now Investment Grade”.
Bukele and the El Salvador government made Bitcoin legal tender in September 2021 in addition to rolling out a Bitcoin custodial wallet, Chivo Wallet for all El Salvadorans in the same week.
El Salvador is also tapping into its volcanic resources to power a Bitcoin mining operation startup, Volcano Energy, which launched in June on the back of a $1 billion investment. Keiser serves as the company’s executive chairman.
El Salvador appointed Dr. Saifedean Ammous, the author of “The Bitcoin Standard” as an economic advisor to the National Bitcoin Office in May. The country plans to accumulate Bitcoin as a strategy to clean out its debt within the next five years.
Sam Bankman-Fried testifies in court, searches for ‘buy Bitcoin’ surge, and Gemini sues Genesis over collateral.
Top Stories This Week
Sam Bankman-Fried takes the stand on FTXs collapse
Sam SBF Bankman-Fried testified this week in his ongoing criminal trial in the Southern District of New York, denying any wrongdoing between FTX and Alameda Research while acknowledging making big mistakes during the companies’ explosive growth. Highlights of his testimony include denying directing his inner circle to make significant political donations in 2021, as well as claims that FTX’s terms of use covered transactions between Alameda and the crypto exchange. Additionally, Bankman-Fried testified that he requested additional hedging strategies for Alameda in 2021 and 2022, but they were never implemented. The trial is expected to conclude within the next few days.
Buy Bitcoin search queries on Google surge 826% in the UK
Google searches for buy Bitcoin have surged worldwide amid a major crypto rally, with searches in the United Kingdom growing by more than 800% in the last week. According to research from Cryptogambling.tv, the search term buy Bitcoin spiked a staggering 826% in the U.K. over the course of seven days. In the United States, data from Google Trends shows that searches for should I buy Bitcoin now? increased by more than 250%, while more niche searches, including can I buy Bitcoin on Fidelity? increased by over 3,100% in the last week. Zooming out further, the search term is it a good time to buy Bitcoin? saw a 110% gain worldwide over the last week.
US court issues mandate for Grayscale ruling, paving way for SEC to review spot Bitcoin ETF
The United States Court of Appeals has issued a mandate following a decision requiring Grayscale Investments application for a spot Bitcoin exchange-traded fund (ETF) to be reviewed by the Securities and Exchange Commission (SEC). In an Oct. 23 filing, the formal mandate of the court took effect, paving the way for the SEC to review its decision on Grayscales spot Bitcoin ETF. The mandate followed the courts initial ruling on Aug. 29 and the SECs failure to present an appeal by Oct. 13. To date, the SEC has yet to approve a single spot crypto ETF for listing on U.S. exchanges but has given the green light to investment vehicles linked to Bitcoin and Ether futures.
Coinbase disputes SECs crypto authority in final bid to toss regulators suit
The U.S. Securities and Exchange Commission overstepped its authority when it classified Coinbase-listed cryptocurrencies as securities, the exchange has argued in its final bid to dismiss a lawsuit by the securities regulator. In an Oct. 24 filing in a New York District Court, Coinbase chastised the SEC, claiming its definition for what qualifies as a security was too wide, and contested that the cryptocurrencies the exchange lists are not under the regulators purview. The SEC sued Coinbase on June 6, claiming the exchange violated U.S. securities laws by listing several tokens it considers securities and not registering with the regulator.
Gemini sues Genesis over GBTC shares used as Earn collateral, now worth $1.6B
Cryptocurrency exchange Gemini filed a lawsuit against bankrupt crypto lender Genesis on Oct. 27. At issue is the fate of 62,086,586 shares of Grayscale Bitcoin Trust. They were used as collateral to secure loans made by 232,000 Gemini users to Genesis through the Gemini Earn Program. That collateral is currently worth close to $1.6 billion. According to the suit, Gemini has received $284.3 million from foreclosing on the collateral for the benefit of Earn users, but Genesis has disputed the action, preventing Gemini from distributing the proceeds. Genesis filed for bankruptcy in January. It had suspended withdrawals in November 2022, which impacted the Gemini Earn program.
Winners and Losers
At the end of the week, Bitcoin (BTC) is at $34,143, Ether (ETH) at $1,789 and XRP at $0.54. The total market cap is at $1.26 trillion, according to CoinMarketCap.
Among the biggest 100 cryptocurrencies, the top three altcoin gainers of the week are Pepe (PEPE) at 72.08%, Mina (MINA) at 55.47% and FLOKI (FLOKI) at 53.33%.
The top three altcoin losers of the week are Bitcoin SV (BSV) at -10.27%, Toncoin (TON) -3.14% and Trust Wallet Token (TWT) at -0.82%.
I should say, I am not a lawyer, I am just trying to answer based on my recollection. […] At the time [at] FTX, certain customers thought accounts would be sent to Alameda.
Without prejudging any one asset, the vast majority of crypto assets likely meet the investment contract test, making them subject to the securities laws.
Gary Gensler, chair of U.S. Securities and Exchange Commission
I do not believe there has been a single serious conversation regarding a settlement between Ripple […] and the SEC. The SEC is pissed and embarrassed and wants $770M worth of flesh.
He [Sam Bankman-Fried] thought he was going to take that money, and […] he would out-trade the market and put the money back and end up as a half-a-trillionaire, but it never works like that.
Bitcoin beats S&P 500 in October as $40K BTC price predictions flow in
Bitcoin surfed $34,000 at the end of the week as attention turned to BTC price performance against macro assets. Data from Cointelegraph Markets Pro and TradingView showed BTC/USD holding steady, preserving its early-week gains.
The largest cryptocurrency avoided significant volatility as the weekly and monthly closes a key moment for the October uptrend drew ever nearer.
I think Bitcoin will hang around this range for some time, popular pseudonymous trader Daan Crypto Trades told X subscribers in one of several posts on Oct. 27. Roughly $33-35K is what Im looking at as a range. Eyes on potential sweeps of any of these levels for a quick trade, he wrote.
FUD of the Week
UK passes bill to enable authorities to seize Bitcoin used for crime
Lawmakers in the United Kingdom have passed legislation allowing authorities to seize and freeze cryptocurrencies like Bitcoin if used for illicit purposes. Introduced in September 2022, the passed legislation aims to expand authorities ability to crack down on the use of cryptocurrency in crimes like cybercrime, scams and drug trafficking. One of the provisions of the bill permits the recovery of crypto assets used in crimes without conviction, as some individuals may avoid conviction by remaining remote.
Scammers create Blockworks clone site to drain crypto wallets
Phishing scammers have cloned the websites of crypto media outlet Blockworks and Ethereum blockchain scanner Etherscan to trick unsuspecting readers into connecting their wallets to a crypto drainer. A fake Blockworks site displayed a fake BREAKING news report of a supposed multimillion-dollar approvals exploit on the decentralized exchange Uniswap and encouraged users to visit a fake Etherscan website to rescind approvals. The fake Uniswap news article was posted on Reddit across several popular subreddits.
Kraken to suspend trading for USDT, DAI, WBTC, WETH and WAXL in Canada
Kraken will suspend all transactions related to Tether, Dai, Wrapped Bitcoin, Wrapped Ether and Wrapped Axelar in Canada in November and December. The suspensions may not surprise many Canadian cryptocurrency users, as they come on the heels of several other notable exchanges taking similar actions throughout 2023. OKX ceased operations in Canada in June after Binance announced its intention to do so in May.
5,050 Bitcoin for $5 in 2009: Helsinkis claim to crypto fame
Sam Bankman-Fried testified in court this week, denying any wrongdoing between FTX and Alameda Research despite admitting “big mistakes."
Sam “SBF” Bankman-Fried took the stand this week to testify in his ongoing criminal trial in the Southern District of New York, denying any wrongdoing between FTX and Alameda Research, while acknowledging making "big mistakes" during the companies’ fast-paced growth.
His official testimony started on Oct. 27, after a hearing on the previous day without the jurors present. During the hearing, Bankman-Fried struggled to answer questions raised by government attorneys, whereas he appeared much better prepared the following day to face the jury.
A few highlights of Bankman-Fried’s testimony this week include denying directing his inner circle to make millionaire political donations in 2021, as well as claims that FTX's Term of Uses covered transactions between Alameda and the crypto exchange. Moreover, the former CEO stated that he had requested additional hedging strategies for Alameda throughout 2021 and 2022, but they were never implemented.
The defense is expected to conclude Bankman-Fried’s examination on Oct. 30, followed by the prosecution’s cross-examinations and closing arguments from both sides. Prosecutors also hinted about a possible rebuttal witness next week — someone who is called to prove that the testimony of another witness is false or inaccurate.
Bankman-Fried could be jailed for 115 years if found guilty of all fraud and conspiracy counts. Cointelegraph’s on-the-ground coverage of his testimony is summarized below.
SBF refutes claims over political donations
Bankman-Fried denied in court having directing Ryan Salame, former co-CEO of FTX Digital Markets, and Nishad Singh, former director of engineering, to funnel millions of dollars in contributions to political campaigns.
According to data available on OpenSecret, Singh gave $8 million to federal campaigns in the 2022 election cycle. Salame also donated $10 million to politicians via loans from Alameda Research.
Even though Bankman-Fried denied instructing both to make political contributions, he recognized that lobbying in Washington, D.C. played a key role in his efforts to push a regulatory framework for crypto firms in the United States during 2021.
"I came to believe that I could impact the world."
According to prosecutors, Bankman-Fried used funds from customers' deposits on FTX to make more than $100 million in political campaign contributions ahead of the 2022 midterm elections.
Bankman-Fried denied any wrongdoing during his testimony, asserting that FTX had more than $1 billion in revenue in 2021 and that political donations were made from the exchange’s own funds.
— Jordan Schachtel @ dossier.today (@JordanSchachtel) November 17, 2022
The New York Times test
Bankman-Fried had a guideline for employees' communication at FTX and Alameda Research: The New York Times test.
Based on the informal test, employees should not write anything they wouldn't be comfortable seeing on the front page of the newspaper. According to Bankman-Fried, even harmless things could "look pretty bad out of context," so employees should be sure to always provide sufficient context in written messages.
Bankman-Fried described the test as part of his explanation of why more than 200 channels on Signal had an autodelete policy that permanently deleted messages after a week.
Prosecutors used evidence of the autodelete feature in the previous days to suggest that any wrongdoing between the companies was being covered up. According to Bankman-Fried, official communications and regulatory paperwork were handled through other channels, such as Slack or email, but Signal was the choice for daily communication within the companies.
Alameda’s unique role on FTX
Bankman-Fried provided details about Alameda's billionaire line of credit with FTX. According to his testimony, Alameda served as FTX's payment provider for wire transactions while the exchange was unable to have its own account.
Besides being a payment processor, Alameda was also the primary liquidity provider, market maker and a client of FTX.
As liquidity provider and market maker, Alameda would have to step in and cover customer losses if FTX’s risk engine failed. During his testimony, Bankman-Fried provided an example of a failure of the risk engine that resulted in Alameda covering millions of dollars in losses in 2021.
The nature of Alameda's role in the exchange's operations prompted custom features in FTX's code, such as the ability to go negative via a line of credit without activating the risk engine. According to Bankman-Fried, the exemption was necessary to prevent Alameda's potential liquidation, which would negatively impact the crypto markets.
As a client of FTX, Alameda was also able to borrow funds by depositing collateral in the exchange. The terms of use of FTX allow borrowers to use funds for any purpose, which means Alameda could trade with the borrowed funds.
Alameda's line of credit with FTX grew along with the crypto industry during the bull market.
Scenes from outside Bankman-Fried’s trial location in New York. Source: Ana Paula Pereira/Cointelegraph
Alameda fails to hedge
Bankman-Fried discussed hedging strategies with Caroline Ellison, former CEO of Alameda Research, in 2021 and 2022 while seeking to shield the trading platform from a possible market downturn.
According to his testimony, Bankman-Fried asked Ellison to hedge $2 billion in Bitcoin (BTC) against a possible price decline in 2021. The strategy was never implemented, he told jurors.
Notes of Ellison shared as evidence by prosecutors reveal that Bankman-Fried was "freaking out" about hedging in early 2022. The defense used the evidence to illustrate that hedging was one of Bankman-Fried's highest concerns and discussed with Ellison frequently.
Without appropriate hedging in place, Alameda was significantly harmed by the Terra ecosystem collapse and decline in crypto prices. In September 2022, Bankman-Fried learned the liability between the companies had grown from $2 billion a year before to over $8 billion.
"I was very surprised,” he claimed in court, stating that he believed Alameda’s assets outweighed its liabilities by nearly $10 billion.
Clawback provision in Terms of Use
According to Bankman-Fried, FTX's terms of use include a clawback provision that would socialize losses among customers using margin trade and futures contracts in the event that the exchange's risk engine fails.
The document presented in court states that:
"[...] your account balance may be subject to clawback due to losses suffered by other users.”
If FTX could not cover losses related to spot margins and futures, damages would be shared among all customers. Defense lawyers used the provision to argue that customers trading on FTX were aware of the risks involved.
CryptoRobotics, a one-stop-shop trading platform, offers trading bots, autostrategies and signals while fostering a community-driven mission to outperform the market.
Crypto market charts can make traders feel exhausted just by looking at them, and chances are high that this contributed to the prolonged bear season. After experiencing historic lows for well over a year, both first-timers and experienced traders are looking for ways to stay afloat in the crypto market, and it might feel like a never-ending grind.
In times like these, when individual efforts and manual orders hardly yield results due to the unpredictability of the market, it’s crucial for traders to get together and learn from each other. Adding a social aspect to crypto trading might be the answer, and one project aims to do that.
CryptoRobotics offers automated trading on cryptocurrency exchanges, enabling users to implement popular strategies. Their cloud-based technology allows traders to execute trades simultaneously and benefit from each other’s successful trading strategies. With features like autostrategies, copy trading or crypto signals, CryptoRobotics aims to unite all traders and investors by developing a trading index that will bring its users into one large community with shared goals.
One of CryptoRobotics' key differentiators in the industry is its commitment to uniting traders and investors with a shared purpose. Unlike many projects that focus on driving commissions and fees, CryptoRobotics aims to create a trading index that fosters a community with common goals. Their profit-sharing model ensures fairness and equity among all participants within the community. Traders who provide successful strategies earn rebates, while investors who profit share with the strategy providers. This approach caters to both beginners and experienced traders, emphasizing community support and recognition for passionate traders.
Pro traders’ signals now open to all users
The auto-following CryptoRobotics feature combines trading robots with signals, first provided by analysts or experienced traders and then executed by robots. This feature simplifies continuous trading for newcomers with an uncomplicated setup.
Meanwhile, analysts and professional traders have the opportunity to monetize their trading strategies through automation.
CryptoRobotics’ dashboard is available with desktop and mobile interfaces. Source: CryptoRobotics
In addition, CryptoRobotics is integrated into 15 major crypto exchanges. Users can trade using its bots, which have a risk management system, for spot and futures exchanges. The CryptoRobotics team explained that the project combines the best practices from traditional asset markets, including user-created strategies, copy trades and risk management through multiple asset investments.
“CryptoRobotics is a platform for beginners and experienced traders, but most importantly, for enthusiastic traders who need community support and recognition,” a CryptoRobotics spokesperson said. “Those who love the market and stay awake for weeks anticipating a big win or after a fatal mistake.”
Cointelegraph Accelerator picked CryptoRobotics as the latest addition to the program’s growing roster of promising Web3 and crypto startups. The CryptoRobotics team has already built a product generating revenue in a tough crypto-investing market. CryptoRobotics’ social approach to trading picked up the pace, generating over 55,000 registered users, 20 trading robots and over 50 popular strategies since its launch. The platform saw over $1 billion in trading volume in 2022. The head office of the startup is in Estonia, and most of its team is based in Bali.
As the final witness in his defense case, the former FTX CEO placed some of the blame for the crypto exchange’s failure on Gary Wang and Nishad Singh.
The jury overseeing the criminal trial of Sam “SBF” Bankman-Fried listened to the former FTX CEO’s testimony for the first time, which involved largely denying knowledge of fraudulent activities at the crypto exchange.
According to reports from the New York courtroom on Oct. 27, Bankman-Fried suggested Wang, the former chief technology officer at FTX, had been partly responsible for creating the “allow negative” button for Alameda Research. The feature gave the crypto hedge fund the ability to trade more funds than it had available.
“At the time, I wasn’t entirely sure what was happened,” Bankman-Fried reportedly said regarding Alameda’s line of credit. “I thought the funds were being held in a bank account, or sent to FTX in stablecoins. If Alameda was keeping it, I figured it would be reflected as a negative number on FTX.”
On former Alameda co-CEOs Caroline Ellison and Sam Trabucco, Bankman-Fried reportedly said they were “a good team” but criticized Ellison’s experience:
“Caroline was a good manager, empathetic. She was not a software developer. She was good at doing research. She had not focused on risk management.”
This is a developing story, and further information will be added as it becomes available.
Debasement refers to the action or process of reducing the quality or value of something. In relation to money, it traditionally refers to the practice of reducing the precious metal content in coins while keeping their nominal value the same, thereby diluting the coin’s intrinsic worth. In a modern context, debasement has evolved to mean the reduction in the value or purchasing power of a currency — such as when central banks increase the supply of money, thereby lowering the nominal value of each unit.
Understanding Debasement
Before paper money, currency consisted of coins made of precious metals like gold and silver. Debasement was a common practice to save on precious metals and use them in a mix of lower-value metals instead.
This practice of mixing the precious metals with a lower-quality metal means authorities could create additional coins with the same face value, expanding the money supply for a fraction of the cost compared to coins with more gold and silver content.
Precious metals are no longer used for daily money exchanges and have been largely replaced by paper money, which goes through a process of debasement when the money supply increases. Debasement went through different processes and methods over time; therefore, we can define old and new methods.
Traditional method
Coin clipping, sweating and plugging were the most common types of debasement processes used until the introduction of paper money. Such methods were employed both by malicious actors that counterfeited coins and by authorities that increased the number of coins in circulation.
Sweating involves shaking coins vigorously in a bag until the edges of the coins come off and lay at the bottom of the bag. They were then collected to be used in the making of other coins.
Clipping would involve “shaving” the coins’ edges to remove some of the metal. As with sweating, the resulting clipped bits would be collected and used to make new counterfeit coins.
Plugging was a way of punching a hole out of the coin’s middle area with the rest of the coin hammered together to close the gap. It could also be sawn in half with a plug of metal extracted from the interior. The two halves would be fused again after filling the hole with a cheaper metal.
Modern-day methods
Money supply increase is the modern method used by governments to debase the currency. By printing more money, governments get more funds to spend but it results in inflation for its citizens. Currency can be debased by increasing the money supply, lowering interest rates or implementing other measures that encourage inflation; they’re all “good” ways of reducing the value of a currency.
Why is Money Debased?
Governments debase their currency so that they can spend without raising further taxes. Debasing money to fund wars was an effective way of increasing the money supply to engage in expensive conflicts without affecting people’s finances — or so it is believed.
Whether by traditional debasement or modern money printing, money supply increases have short-sighted benefits in boosting the economy. But in the long term it leads to inflation and financial crises, the effects of which are felt most acutely by those in society who do not own hard assets that might counter the loss in the currency’s value.
Currency debasement could also occur by malicious actors who introduce counterfeit coins to an economy, but the consequence of being caught can in some countries lead to a death sentence.
“Inflation is legal counterfeiting, Counterfeiting is illegal inflation.” - Robert Breedlove
Governments can take some measures to mitigate risks associated with money debasement and prevent unstable and weak economies, for example by controlling the money supply and interest rates within a specific range, managing spending and avoiding excessive borrowing.
Any economic reform that promotes productivity and attracts foreign investments helps maintain confidence in the currency and prevent money debasement.
Real-World Examples
The Roman Empire
The first example of currency debasement dates back to the Roman Empire under emperor Nero around 60 A.D. Nero reduced the silver content in the denarius coins from 100% to 90% during his tenure.
Emperor Vespasian and his son Titus had enormous expenditures via post-civil war reconstruction projects like the building of the Colosseum, compensation to the victims of the Vesuvius eruption and the Great Fire of Rome in 64 A.D. The chosen means to survive the financial crisis was to reduce the silver content of the “denarius” from 94% to 90%.
Titus’ brother and successor, Domitian, saw enough value in “hard money” and the stability of a credible money supply that he increased the silver content of the denarius back to 98% — a decision he had to revert when another war broke out, and inflation was looming again across the empire.
This process gradually continued to the point that the silver content measured just 5% in the following centuries. The Empire began to experience severe financial crises and inflation as the money continued to be devalued — particularly during the 3rd century A.D., which is sometimes referred to as the “Crisis of the Third Century.” During this period, spanning from about A.D. 235 to A.D. 284, Romans demanded higher wages and an increase in the price of the goods they were selling to face currency depreciation. The era was marked by political instability, external pressures from barbarian invasions and internal issues such as economic decline and plague.
It was only when Emperor Diocletian and later Constantine took various measures, including introducing new coinage and implementing price controls, that the Roman economy began to stabilize. However, these events highlighted the vulnerabilities of the once-mighty Roman economic system.
During the Ottoman Empire, the Ottoman official monetary unit, the akçe, was a silver coin that went through consistent debasement from 0.85 grams contained in a coin in the 15th century down to 0.048 grams in the 19th century. The measure to lower the intrinsic value of the coinage was taken to make more coins and increase the money supply. New currencies, the kuruş in 1688 and then the lira in 1844, gradually replaced the original official akçe due to its continuous debasement.
Henry VIII
Under Henry VIII, England needed more money, so his chancellor started to debase the coins using cheaper metals like copper in the mix to make more coins for a more affordable cost. At the end of his reign, the silver content of the coins went down from 92.5% to only 25% as a way to make more money and fund the heavy military expenses the current European war was demanding.
Weimar Republic
During the Weimar Republic of the 1920s, the German government met its war and post-war financial obligations by printing more money. The measure reduced the mark’s value from around eight marks per dollar to 184. By 1922, the mark had depreciated to 7,350, eventually collapsing in a painful hyperinflation when it reached 4.2 trillion marks per USD.
History offers us poignant reminders of the perils of monetary expansion. These once-powerful empires all serve as cautionary tales for the modern fiat system. As these empires expanded their money supply, devaluing their currencies, they were, in many ways, like the proverbial lobster in boiling water. The temperature — or in this case, the rate of monetary debasement — increased so gradually that they failed to recognize the impending danger until it was too late. Just as a lobster doesn't appear to realize it’s being boiled alive if the water’s temperature rises slowly, these empires didn’t grasp the full extent of their economic vulnerabilities until their systems became untenable.
The gradual erosion of their monetary value was not just an economic issue; it was a symptom of deeper systemic problems, signaling the waning strength of once-mighty empires.
Debasement in the modern era
The dissolution of the Bretton Woods system in the 1970s marked a pivotal moment in global economic history. Established in the mid-20th century, the Bretton Woods system had loosely tethered major world currencies to the U.S. dollar, which itself was backed by gold, ensuring a degree of economic stability and predictability.
However, its dissolution effectively untethered money from its golden roots. This shift granted central bankers and politicians greater flexibility and discretion in monetary policy, allowing for more aggressive interventions in economies. While this newfound freedom offered tools to address short-term economic challenges, it also opened the door to misuse and a gradual weakening of the economy.
In the wake of this monumental change, the US has experienced significant alterations in its monetary policy and money supply. By 2023, the monetary base had surged to 5.6 trillion dollars, representing an approximate 69-fold growth from its level of 81.2 billion dollars in 1971.
As we reflect on the modern era and the significant changes in U.S. monetary policy, it’s crucial to heed these historical lessons. Continuous debasement and unchecked monetary expansion can only go on for so long before the system reaches a breaking point.
Effects of Debasement
Currency debasement can have several significant effects on an economy, varying in magnitude depending on the extent of debasement and the underlying economic conditions.
Here are some of the most impactful consequences that currency debasement can generate over the long term.
Higher inflation rates are the most immediate and impactful effects of currency debasement. As the currency’s value decreases, it takes more units to purchase the same goods and services, eroding the purchasing power of money.
Central banks may respond to currency debasement and rising inflation by increasing interest rates, which can impact borrowing costs, business investments and consumer spending patterns.
Currency debasement can deteriorate the value of savings held in the domestic currency. This is particularly detrimental to individuals with fixed-income assets, such as retirees who rely on pensions or interest income.
A debased currency can make imports more expensive, potentially leading to higher costs for businesses and consumers reliant on foreign goods. However, it may also make exports more competitive internationally, as foreign buyers can purchase domestic goods at a lower price.
Continuous currency debasement can undermine public confidence in the domestic currency and the government’s ability to manage the economy effectively. This loss of trust may further exacerbate economic instability and even hyperinflation.
Solution to Debasement
The solution to debasement lies in the reintroduction of sound money — money whose supply cannot be easily manipulated. While many nostalgically yearn for a return to the gold standard, which was arguably superior to contemporary systems, it is not the ultimate solution. The reason lies in the centralization of gold by central banks. Should we revert to a gold standard, history would likely repeat itself, leading to confiscation and the debasement of currencies once again. Put simply, if a currency can be debased, it will be debased.
Bitcoin offers a permanent solution to this issue. Its supply is capped at 21 million, a number that is hard-coded and safeguarded by proof-of-work mining and a decentralized network of nodes. Thanks to its decentralized nature, no single entity or government can control Bitcoin’s issuance or governance. Furthermore, its inherent scarcity makes it resilient to the inflationary pressures that are typically seen with traditional fiat currencies.
In times of economic uncertainty, or when central banks engage in extensive money printing, investors often turn to assets like gold and bitcoin for their store-of-value properties. As time progresses, there’s potential for people to recognize bitcoin not just as a store of value, but as the next evolution of money.
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When I started out as an entrepreneur, I never thought armed men would one day barricade themselves in my office or that my staff would resign because they feared for their lives. But that’s exactly what happened this past January when my co-founder and former COO, Artur Schaback, stormed into our Estonian office with a friend and four armed thugs to demand money.
The first thing Schaback did when he arrived at the office was to demand that our chief of information security (CISO) give company access to Schaback’s friend, a shady character recently released from prison after being convicted of violent and financial crimes, including racketeering. Our CISO would not grant access because the person was not an employee. Schaback then produced a document which identified the man as Schaback’s “business advisor”. Artur demanded all the petty cash in the office (approximately 10,000 euros), and forced one of our accountants to sign a document stating that she gave it to him willingly. He then attempted to steal the personal laptops of some of Paxful’s senior employees, including the CISO and CTO. When they refused, he held them hostage in a room with four armed goons for hours, continually berating them for not relinquishing their personal property. He also tried to gain access to customer funds.
In the aftermath, the office was evacuated, two senior executives quit immediately, and many other staff subsequently resigned because they feared for their safety. A federal court judge in the United States, when made aware of the incident, banned Schaback from entering any Paxful office unless he was supervised. How did all this happen? Why did the mild-mannered Estonian guy I first met in 2015 go “full thug”, as one of our staff described his actions on that day. Why was his access denied in the first place? It’s a story that has to be told. Though it pains me to share these private details, it’s important that the whole truth is out there so those who have done the right thing for Paxful’s customers are protected.
My best guess is that Schaback’s only interest in life is to make money. When we first met he fooled me into thinking we held the same beliefs. That Bitcoin and peer-to-peer was a way to help the little guy and end financial apartheid. I now know this was complete bullshit, because various investigations and audits revealed that he stole about $25 million from the company. There is concrete evidence that he embezzled almost $7 million before his position as COO was terminated, and he stole hundreds of thousands of dollars more from the company after that. However, his big scam was taking 600 BTC out of the company accounts which, at today’s price, would be worth about $18 million. All up, he siphoned off about $25 million from Paxful. Artur has a Ferrari, two other luxury sports cars, and a yacht. It is quite clear how he acquired those assets.
Although I didn’t know it at the time, he began to steal money after I was arrested in Estonia. Schaback has already mentioned my arrest in the media, so I don’t mind telling the story, but I’ll include the details he conveniently forgot to mention. The truth is that Schaback had a flat in Estonia where I was crashing at the time. It was his flat, rented in his name, but he wasn’t home when the police arrived and asked to search the flat. They found some testosterone powder — which was mine — and a whole bunch of other drugs, which were not mine. I still don’t know why the police decided to knock on the door and search the flat that day, but, as I later discovered during a company audit a few years later, that was around the time Artur began taking money out of the company. The Estonian authorities kept me detained for three months and tested me for drugs, but found nothing. When I was released, I returned to an office full of incompetent new hires and a massively ballooned monthly spend. To this day, I still wonder why I was the one arrested for drugs found in his home and why the raid even happened. I recently found out that Schaback’s father is a former policeman, so maybe that had something to do with it. I don’t know. This was one of many fires I had to put out thanks to Schaback. One of the worst was in 2016 when he and his friend decided to wave around an AR-15 in broad daylight, prompting the Miami Beach SWAT team to pay us a visit. I had to keep us from being killed, get us bailed out of jail, and then restore our reputation.
It took a while for me to piece together everything that had been going on because part of my job as Paxful CEO was to travel around the world and spread the word about our mission. While I brought in the business, Schaback’s job as COO was to run our offices and make sure our products served our customers. It was only when COVID-19 hit and I was forced to come off the road that I realized the extent of his greed, deceit, and incompetence.
The court filings surrounding Schaback’s lawsuit are now public record so people know part of the story, but they need to know the full story. They should be aware of the series of events that led to Schaback’s dismissal as COO and his stubborn refusal to act in the best interests of the company; an attitude that led to the suspension of the Paxful marketplace and the company being placed into the hands of a custodian.
After I got off the road, Schaback continually tried to convince me to move into De-Fi, to play around with tokens, NFTs and “shitcoins”—this was long before the collapse of FTX. All his proposed strategies focused on maximizing profits rather than helping our customers because he saw Paxful as another crypto exchange profiting from speculation rather than a peer-to-peer platform designed for real use cases. In short, he wanted to take Paxful in a direction that opposed our mission. That didn’t mean our relationship was terminal—many partners disagree over strategy or philosophy. The issue was that the deeper I dug, the more I realized we weren’t simply having a disagreement over strategy or philosophy. Schaback cared only about making money for himself and he didn’t care how he made it. I also discovered that he wasn’t a very nice human being.
In addition to my constant struggle to keep Paxful aligned with our mission, I realized that product development was stalling and that inefficiencies and incompetence were widespread. While I was on the road bringing in business, we went from one million to twelve million customers, but Schaback and the product team — his personal hires — were not doing their jobs. Nothing illustrates this better than the fact that our conversions dropped by 90%. Stop a minute and think about that. This guy oversaw a 90% drop, a miracle of stupidity that would be hard to emulate even if you tried. Schaback was able to hide the conversion data from me because revenue continued to rise on the back of the more than ten times the additional traffic my boots-on-the-ground led initiatives brought in. We should have been making ten times more than what we were previously making. KYC cannot be blamed as we saw the same drop in the West as the Global South. A 10% drop would have been ground for dismissal but a 90% drop is beyond anyone's comprehension. And it got worse.
Aside from the conversion disaster, he destroyed our gift card business in Africa, almost cost us our money transmitter licenses, and made such a mess of compliance — even after I had allocated him an unlimited budget — that people resigned en masse. I and other executives saw; everything he touched turned to shit. The one common element in every Paxful disaster was Artur Schaback. Despite all of that, despite many of our top guys telling me that he was incompetent and out of his depth, I was loyal to him. He was my co-founder and, at least until I knew better, I thought he genuinely had the company’s best interests at heart. I did everything I could to accommodate and help him — even firing him as COO would have made him more money because he still owned 50% of the company and we would have been more profitable with him out of the way. But he rejected everything I tried to do to help him. I had to remove him as Chief Product Officer to save the company and the only thing he would accept was COO, thinking he would cause less damage. As Chief Operating Officer he was even less qualified and he spread toxicity at an even greater rate. My performance review for him was one out of five stars and, compared to what everyone else thought, I was being generous. However, instead of taking the feedback, he rejected each and every point and accused me of plotting against him even though I was the only one defending him.
We conducted two simultaneous investigations, including an audit initiated by Schaback that looked into the finances of all the directors, including me. The results of the investigations were alarming. They revealed the misallocation or mislabeling of money, overspending, faulty product strategies, overpayments to consulting engineers, and the misuse of funds due to nepotism, lack of oversight, and, in some cases, embezzlement. The company administration was shambolic. Legal issues were mishandled and some compliance questions raised by the DOJ were not being adequately addressed. Products were sabotaged due to incompetence and greed. People were hired into positions with no job description, nor any clear reporting lines. Many were Schaback’s friends, relatives, or associates and other “consultants” who worked on De-Fi or NFT projects at a cost of around $1 million each month. It is no small irony that one of the findings of the audit report — initiated by Schaback himself — showed I was being short-changed. He had taken so much cash out of the company that Paxful owed me money.
Perhaps the most damning evidence of his greed and treachery is what one of the financial audits uncovered. Schaback had misappropriated more than $6.5 million from Paxful by submitting dummy invoices for work allegedly performed by his Estonian company, Kaizern, now facing multiple civil claims for underpaying taxes. In reality, the work billed by Kaizern had been performed by Paxful employees. Kaizern, through Schaback, lifted verbatim descriptions of work performed by Paxful’s internal teams and digitally cut-and-pasted those descriptions into Kaizern’s dummy invoices. I also suspect that Schaback accessed customer funds directly from the Company’s BitGo cryptocurrency hot wallets and used them for personal benefit.
One of the first things I did when I realized the extent of our problems was to talk to Schaback. His wife was having a baby, so I told him to take some paternity leave and allow Ame to try to resurrect the company. I had to do that because so many staff told me they were going to quit if he remained COO. Some people had already left because of him. No one in the company respected him. He was just a party boy who had destroyed the product department when the best people could not put up with him and left the company. The word often used about the products Schaback developed was “garbage”. I heard that so many times. More importantly, some of the work he was doing placed the security of the company and of our customer funds at grave risk. One of the executive testimonials called one of Schaback’s plans “borderline suicidal” for the company. I convinced him to take some leave and tried to put everything back together. We needed a new engineering team, a new CTO, a new CPO, and I knew it was going to be a huge turnaround operation. Many of the failures had been hidden, and because our conversions had fallen so much our valuation plummeted; it dropped so far that the company almost didn’t survive. At one meeting, the VP of Finance said we would go bankrupt within six months and then immediately resigned.
There were some good people in the company, but they were being stunted by lack of opportunity and — as I soon discovered — they’d had to work in an environment so toxic I contacted the company’s legal counsel, McDermott, Will & Emery (MWE), one of the most respected law firms in the United States. They advised me to conduct a full investigation to examine the complaints made by staff. I didn’t know where the investigation would lead, but when the reports started to come in, I realized that covering for Schaback’s incompetence was one thing, but dealing with his abusive and disgusting behavior was impossible.
I couldn’t protect Schaback after the reports were delivered by the investigator. The guy hired to examine the complaints was an ex-federal prosecutor and he went around talking to people in our office, asking questions, and taking testimonials. What our staff told him was shocking. So many good people in the office had left or were thinking of leaving because of the toxic culture. Schaback’s nepotism had utterly destroyed our engineering department. Many were quitting in disgust over the outright fraud committed by him and his cohorts. Under Schaback’s protection, people were siphoning off company money by claiming an insane amount of overtime pay – basically doubling their salaries. In every signed testimonial, employees told the investigator they would resign if Schaback came back. Aside from being treated badly, staff saw company money wasted on lavish parties, expensive gifts, drugs, and sex workers, and some of the real work we had to do was being neglected or done haphazardly by people who did not have the competence to do their jobs. And the biggest problem with our workplace culture was Schaback. The investigator called his behavior “gross misconduct”. At a baby shower for him and his wife, for example, one of Paxful’s senior executives (who has a child with Down syndrome) offered his congratulations to Schaback and asked if he was excited at the prospect of being a father. Schaback replied, “I know it’s not going to be a retard. It’s not retarded”. There were reports that he groped two very young girls who had fallen asleep after becoming drunk at a nightclub, offered Paxful staff sex workers he had hired to attend a party, and offered another executive cocaine to “fix” his headache. At a London dinner with Paxful employees and other industry people, he openly ordered sex workers from the table after dinner. When he left, he said, “Don’t worry. I’ll use protection”. All these details have been written in signed testimonials made by Paxful employees, but none would be a surprise to anyone who worked in the Estonian office. It was common knowledge that Schaback liked cocaine and sex workers. He was a party boy who thought he was untouchable. Unsurprisingly, Schaback refused to cooperate with the investigation, and MWE advised the board that his employment should be terminated before we lost all the good people in the company. He was my co-founder and it was hard to take such drastic action, but after reading about the abusive behavior detailed in the testimonials and the findings from the financial audit, there was no other option.
I offered Schaback $87 million and 5% of the company if he’d step down as COO and give me complete control. I told him it was the only chance to save the company, but he turned me down. It was a surreal meeting as I looked him right in the eyes and told him that if he did not take the deal he would go down in history as “the stupidest motherfucker who ever lived”. He looked me in the eyes and said “I know”. By that stage, all he seemed interested in doing was accessing the hot wallets, often putting pressure on the other executives.
The deterioration of my relationship with Schaback caused me a lot of pain, but he wasn’t doing what he should have been doing as COO — and worst of all he seemed to have abandoned all of his principles. I tried everything, offering him new titles after each failure. He went from CTO, to CPO to COO but he refused to take any non-chief position, even at the same salary. All my efforts to minimize the damage he was causing failed. Schaback knew he was not measuring up as an equal co-founder and despite his promises to step down and rebalance things, he broke his word every time. Looking back, I see clearly that he was stalling for an exit, thinking he would be “the richest man in Estonia.” He was also happy to continue spending money he did not earn and to help enrich his cousin and his cronies with ill-gotten gains.
Even after we removed him there was a lot of work to do and my team did an amazing job because we were racing from one emergency and fire to the next just to keep Paxful together. In some ways it was a miracle that we got the company back on the right footing. However, Schaback was still a director and he still owned half of the company, and he continued to cause problems. This culminated in a lawsuit he brought against Paxful and me that ultimately forced us to suspend our marketplace in order to protect our customers’ funds. As a director of the company, the court granted him authority to review and approve payments over $50,000, and this sounded the death knell of the company. He played this stupid game of chicken, withholding payments to suppliers with no regard for the company or our customers. At one board meeting, he said all our engineers and compliance people were “bogus”, and that I was robbing the company. The reality was our engineering staff level was 20% smaller than under him and we stabilized the platform, yet this reality was disregarded in all of his claims. He refused payments to service providers and harassed and berated staff to such an extent that service providers refused to work with us and the entire executive team resigned.
It’s easy to understand the way he thinks if you understand what he’d been doing to the company for years. He basically accused me of doing what he’d been doing to feather his own nest and maintain his lavish lifestyle. In one meeting I pleaded with him for three hours. I told him that it was not safe to run a fintech company without engineers, compliance, security, or operational staff. It was a no-brainer, but he didn’t want to pay them. He said, “It will be fine. Just promote people…” It was a surreal board meeting; even my attorney said he couldn’t understand what was going on. I was screaming common sense at Schaback and he completely dismissed everything.
Less than 24 hours later, our wallet started collapsing and I had no choice. Customers were screaming about their money and everything was ready to blow up, so I called an emergency board meeting and showed Schaback irrefutable evidence that Paxful would collapse unless he approved payments to crucial service providers for engineering and compliance support. He finally agreed to take the engineering team’s advice. The engineers said all services other than the wallet should be suspended. We kept the wallet open so people could access their funds. The game of chicken only came to an end when Schaback realized that Paxful did not have the 53 engineers he kept mentioning in his court filings. Despite my best efforts, the only thing I could salvage from the carnage that followed was our customers’ funds. The damage to Paxful’s reputation was irreversible. Schaback had dragged everyone’s name through the mud. Then he came out in the media and accused me of unilaterally closing down the company despite it being his insane game of chicken that left us with no engineers – even after three hours of my pleading with him. His court filings were full of ad hominem attacks against me. His legal tactics were scorched earth chaos and he even dragged my fiancée and our General Counsel (GC) into it. Our GC resigned in disgust and my engagement was called off because I had to protect her. I don’t blame her for being afraid. Schaback’s ex-convict “advisor” Dennis was calling me continually, demanding money and my location, asking me to meet him in person. This guy is on record as having told someone, when explaining his racketeering conviction, that he went to prison for “the same thing the mob go to prison for”. With such a reputation, in addition to his role in the $10K Estonian office shakedown, there was no way I was going to risk my fiancée’s safety or allow her reputation to be dragged through the mud—so we separated.
Schaback’s tactics included forcing me to obtain new legal counsel for myself and the company — thereby hoping that new company counsel would be sympathetic to his cause — spreading lies and misinformation online and to the media, and accusing me of having plotted against him. He wanted to remove the law firm that conducted the investigation in order to cover his tracks. The truth is that my intentions have always been to ensure that Paxful fulfilled its mission by serving our customers and remaining loyal to Bitcoin. Removing Schaback was a result of his performance as COO and its detrimental effect on the company. He was still a shareholder. I didn’t take him to court, even when I saw how much money he was stealing from the company. And let’s be clear — the company was Schaback and me, so he was, in effect, stealing from me. The irony of all this is that he sued me when I was just trying to manage a process. I was just trying to keep a sinking ship afloat and Schaback was continually firing missiles at the ship.
If I had not removed Schaback as COO, it is doubtful Paxful would have continued for as long as it did because the toxic environment he created in our office forced good people out and threatened the viability of the company. In the same way, I thwarted his attempts to get into “shitcoins” and NFTs because it was in the best interests of the company and our customers. I have always been a Bitcoin champion, and recent history has proven that my unwillingness to follow Schaback’s preference for speculative strategies probably gave Paxful another two years of life and definitely saved our customers some money.
The bottom line is that Schaback was happy to rob people blind while taking Paxful down the same shithole FTX went down. He worried only about one thing: money. All his schemes were designed to help him fund his lifestyle. He accessed user funds and used company cards because our director salaries were aligned with the other executives and were not enough to cover his expenses. He admitted as much by telling people that, “I need the company card. I don’t live on my salary”. Before I took it away from him, Schaback had access and control of Paxful wallets (including users and earnings, which were the same wallets) so he was able to withdraw funds directly. He controlled a finance team who were not segregated in their duties, so no one knew how financial statements were generated or how withdrawals were accounted for, which is how he funded his lavish lifestyle. It was he who bought a Porsche and a Ferrari, not me. He also bought two yachts. I drive a Mini Cooper and have never owned a yacht in my life.
In the end, I saw Schaback for who he is — a scheming, greedy individual who surrounded himself with shady characters inclined to help him get what he wanted. The former Paxful employee he calls a “whistleblower” in the media was not fired because she “blew the whistle” on my spending. This is just one of the many verifiably false accusations in his court filings. The truth is she was fired because she used the authority given her by Schaback to take $60,000 from the company while she was on maternity leave, contrary to Estonian labor laws. That’s why she was fired. Another former employee who has spoken out against me in the media, Brian McCabe, was fired by Paxful HR because of a sexual harassment complaint against him. This disturbed individual has tweeted that he “will never stop chasing me,” and he has even tried to extort money from me. He tormented the three women he sexually harassed in order to prevent them from testifying in court against him—and he also stole 18 bitcoin in customer funds.These are the people who support Schaback, in addition to the thugs and goons he often drags around in his Mercedes-Maybach.
The sad part about all of this is that Schaback caused the downfall of something I truly believed in. He wiped away everything that made Paxful special, that made us different, that made us good. He doesn’t care about people and that was the big difference between what he wanted and what I wanted. Far worse has been done than I can say right now. Schaback did things that could have forced the entire company to be shut down, and the only reason Paxful’s financial situation isn’t worse is because I did not withdraw the “directors fees” he did. The sheer stupidity of initiating a lawsuit despite the trail of destruction he left behind is mind-numbing. The past four months of litigation has been like playing chess with a monkey who has a bazooka. The bazooka is the outright criminality he committed and that could bring the weight of the government down on us and hurt our customers. No one on our legal team has ever seen anything like it. One described the case as a “divorce from hell”, with the other side refusing to accept anything reasonable. Every relationship with our providers, engineering and compliance especially, has been utterly destroyed. Even my engagement was not spared.
No one understands what the fight has been about since Schaback and I mutually resolved in a November 2022 board meeting to dissolve the company, having agreed it would not remain profitable if we were to exit markets deemed risky under American compliance laws.
The plan was to do the necessary work to unlock the $4.5 million in funds still suspended by compliance. Artur again went back on his word and sued to overturn what he’d agreed to, claiming in court documents that a dissolution would prevent a “9-figure exit”. His lawsuit bankrupted the company and destroyed any chance of us being able to free-up those suspended user funds. It also took down the wallet when he refused to pay our engineers. I had the hardest two weeks of my life, sleeping less than two hours a day, as I struggled to get our wallet back up amidst death threats and massive user pain. I offered to give him all my shares for one satoshi if he would commit to the compliance work needed to unfreeze user funds, but he refused. If he saw no value in the company, what was the point of the lawsuit? We were all left shocked. It defied logic. Why continue to fight and try to reopen the marketplace if he doesn’t see value in the company? Why endanger user funds on a platform that has only a skeleton crew of engineers and no compliance? I resigned as CEO and now have no control over Paxful. All I could do at the time was to put my shares into a trust to make users whole. Even that is being blocked and we are again left fighting for nothing. The old saying “better to have a smart enemy than a stupid friend” hits home here.
Paxful is now unable or unwilling to pay its suppliers, service providers, and some staff who have been terminated. I know this because many of the people affected have reached out to me to try to get their money. I can’t help them and that hurts me. I’ve always tried to stand up for the little guy and these people are hardworking decent people who did work with the expectation of being paid. They are not investors or banks who loaned money to Paxful. In fact, I’ve never owed money, bought goods on credit, or taken on debt in my life. I’ve never had a mortgage. It hurts to see the company I built go down this path while I can’t do anything because of all the legal shit Artur has brought down on me. It all could have been avoided if Artur had stuck to the plan we agreed in November last year. Had he not been greedy about getting his “9-figure exit deal,” the suppliers would have been paid, staff would have received their severance packages in full, and all our users would have been made whole.
Meanwhile, I’m in limbo, spending most of my days dealing with lawyers. And even though I was forced to resign as CEO, it seems that Artur wants to remain attached to me no matter what I do in the future – that’s what I hear from his lawyers. They even asked questions about whether the Civ Kit white paper I co-wrote belongs to Paxful. When you realize that the Civ Kit is a non-profit, open-source project, you get some idea of the level this guy will stoop – and how stupid he is. All I want is to be free of this guy, but he seems to think we have a 50-50 partnership for life. I guess when you’re an asshole without talent your options are limited.
Whatever the courts decide, my conscience is clear and my mission continues.
I know that God will always replace what you have lost with far more. I put everything into Paxful and walk out with nothing, yet I consider myself the richest man alive as I have the trust of the people who are helping me with my mission.
The next chapter will be world changing, God willing.
