This Week in Crypto: Court is in Session

not all. The court gavels are knocking loud and clear as Gray Skille fights the SEC over the bitcoiny tf and ftx's Alameda over redemptions. Meanwhile, Voyager also one court approval to sell itself to Finance US. Joining me in the studio to help me make sense of this week's news are Bloomberg reporters Emily Nicole and Justina Lee. Another week,

another crypto failure. Now, actually it's reached traditional finance in a way, right, So Silvergate, which is like a crypto friendly bank based in California, has decided to sort of liquidate its bank. What's what's going on there? Just you know what happened. Yeah, I mean, there was a last dish effort to try to find investors to shore up Silvergate, but it appears that all of those efforts have fallen through, and so Silvergate has decided to wind down operations and

liquidate the bank. And it's kind of it's kind of interesting because Silvergate is entangled in the FTX collapse. You know, it famously was the bank for FTX slash Alameda, and I think early on they kind of identified avoid in the market, which is that a lot of big banks were simply too risk averse to bank for cryptoclients, and so by expanding aggressively into this space they could capture

a lot of that business. But things kind of turned last year with the cryptowinter because obviously, with crypto prices falling, a lot of their cryptoclients started to withdraw. But at the same time, it was a double whammy because they had invested a lot of that money into you know, fixed income securities, which were also depreciating because of US interest rate increases. I guess we can say those two

things in a way are tightly correlated. Given that US rate increases we're also hitting crypto prices, and so in the end it kind of became a bit of a classic bank run and a mismatch between assets and liabilities. So it was like a crypto collapse, but not really. I guess the reason why it was a crypto collapse was because they started losing deposits because of what was

going on in crypto naming the other failures. But it wasn't you know, like, in the end, it just did what banks do, but it didn't do it very well.

So one of the things that Silvergate had was a network called sen which was a network which allowed crypto companies to settle payments between each other as fast as like crypto trades, because obviously there's a mispatch between how fast trades settle on a blockchain or like how fast crypto trades can sort of be executed and how traditional payments work, especially in the US where they're very slow.

So that not running anywhere could potentially pose a problem for crypto firms because like, how are they going to do payments? Do they go back to sort of the dark ages of before. But then there's also like an ongoing question about you know, what happens to crypto firms looking for a bank because one of the reasons silver Gate exploded, it was also because it wasn't very easy for crypto firms to find other other people or other

firms to give to give them a bank account. So what are how is this banking sort of a problem for crypto in general. Well, suer Gate is gone now and the other alternative used to be a signature bank, you know, another American bank, but they've recently announced a decision to retreat from the crypto business, and we already seeing ramifications across the market. By Bit, a pretty major

derivatives exchange recently announced that they're stopping dollar transfers. I mean, Finance has done the same, and so I mean this has really left the industry searching for you know, banking partners, especially for dollars, and I don't think there's an obvious solution at all. I mean, one solution is just to kind of focus more on crypto transactions, you know, using

stable coin. Some people have talked about turning more to europairs, but I think ultimately, you know, it's still the same issue, which is that you know, for a lot of retail investors having a FIAT on and off ramp has been very convenient, and that is now severely lacking. But another long standing crypto issue which is even more sort of or not let's say, it's not not as as long as the banking problem, but also, like along saga has

been will the US ever get a bitcoin ETF? And we've had some developments this week with one of the biggest proponents of it, which is gray Scale, which is one of the companies which is part of DCG Group, who also on Genesis, who's which lending armament bankrupt. So they've been in the news a lot. But what's going on with Grayscale and the SEC. Well, there's currently a lawsuit, you know, with Grayscale kind of suing the SEC about their rejection to convert the Bitcoin Trust into an ETF.

And the basic the basis of their argument is that since the SEC did approve, you know, the Bitcoin future is ATF, there's no good reason for it not to do the same for a spot bitcoin ETF because essentially the two kind of move in the same direction. The other lawsuit, very much in focus today relates to Grayscale versus the SEC and oral arguments perhaps wearing more toward the gray scale under the spectrum then maybe was previously anticipated.

Traders are now betting on a higher probability of Grayscale actually winning going into the case Bloomberg Intelligence. And the reason does this is significant issue is because the Grayscale Bitcoin trust has been the bane of many crypto players existence and arguably kind of contributed to the downfall of

the crypto Hutch Fund Three Arrows Capital. And the reason that is is because you know, in the early days, when it was pretty hard for retail traders to access bitcoin in a regulated product, it was a pretty popular product that got to charge i would say higher than market management fees for kind of holding bitcoin and being

a liquid will not do liquid investment product. But kind of as the Bitcoin Futures etf came to be and then there were more retail products to buy bitcoin, that product kind of became increasingly unpopular and started trading at a discount to the bitcoin and actually held. And at the same time, the other issue is that once you buy into that trust, you can't just redeem it whatever

you want. And the reason why it kind of entrapped a lot of crypto players is because they had bard shares of this etf to kind of conduct this rather complicated arbitrat trade and they couldn't get their money out when they wanted to, which segues perfectly into another news of the week, which is someone who seems to be coming back from the dead. Right. I read the headline and it took me a minute to realize. But Alameda, which was sam Bank when Freed's hedge fund, is issuing Grayscale. Now,

so's what's going on. Yeah, so Alameda was FTX is trading outfit. We all used to say they were separate back in the day, and now we firmly know that not. Alameda is now trying to recover assets wherever it can. Right, it's supposedly the one part of the FTX and buy that probably lost the most money of the creditor assets it still owes, and one of those is in gray Scale.

Alamida says it has about two hundred and ninety million dollars worth of shares in the various crypto trust that gray Scale offered, and you know, depending on whether or not gray Scale was to honor those shares at the current price of the cryptocurrency, because, as Justina said, it's at a discount at the minute, that could actually be about five hundred and forty million dollars worth of stuff to come back to Alameter if they won the case.

It's an argument that has been made by quite a few people who own gray Scale trust, Like a lot of the crypto community used to love gray Scale because it offered this liquid route to bitcoin owning, and now everybody is it's a little bit on the other side of the coin because they can't get their money out while bitcoin's down, and Alameter is one of those basically piping up in a courtroom saying like, this is the

argument that we're putting forward. This is the argument that everybody else also says, which is that it's not fair to be able to be withholding this amount when Bitcoin is trading so much higher than what the price of gray Scale shares are. And just because there's difficulties going on elsewhere doesn't mean we should be able to shouldn't be able to cash out those shares as well. But while this spot ECF decision is going on, it also

makes everything extremely complicated for gray Scale. Yeah, I mean, it just feel like in the ballmarket days, the high crypto prices were covering a lot of the underlying issues. I mean, we're talking about these gray Scale lawsuits and there are actually two more from as A managers that say that you know, you know, one of them said gray Scale misled them about the chances of an ETF conversion. And now that you know, we're in a bit of a crypto winter, we're definitely kind of starting to see

these lawsuits coming up. One thing I do think was interesting this week is we saw the regulators get the brunt of the legal fight. So we had three cases going on this week. We had gray Scale against the SEC for the spot at TWENTYTF. We had Ripple versus the SEC to its first arguments for that case which has been ongoing for ages. And we also had a judge approve the sale of Voyage's assets to Binance Us.

Those are three cases where regulators have come out and said, you know, like we disagree with this, whether it's like grace Gus shouldn't have a spot bitcoinetia for you know, in the case of Ripple, that they think that x XRP should be considered security. And so far, actually it hasn't really all been going the regulators way. Obviously, we're still at the early stages of these cases, and we're still yet to hear some other arguments as well, but

Ripple was very confident talking about it. It's hearing yesterday that it had quite a bit of a strong argument against the SEC who had two of the experts they were speaking they were using in the case struck from the record. And then like a lot of regulators all over the US, protested about Binance buying Voyager and that's when I returned too, it's going to it's going to get to be able to do that. So, yeah, not

been a good week for them in court. Emily, do you want to maybe explain a bit more what's going on with Voyager and on what's happened there maybe like taken a little step back, like who's going to buy Voyager when it collapse? And then why didn't they? Yeah, So Voyager is one of the crypto unders the collapse

last year. There were quite a few of them, but the Voyager was one of them, and it was one of the ones that was more high profile, I think because they had previously kind of given the the indication that maybe some of their customer assets would have had insurance, and so when it went when it went bankrupt. That everybody was pretty shocked to find out that actually nothing was covered. And originally the company that was going to

buy Voyager out last summer was FDx. They had already extended quite a lot of credit to Voyager in the form of loans. Alameda had given it something like close to five hundred million in dollar five hundred million dollars,

and so FDx was all set to buy Voyager. Then FDx went bus so that deal went and put Voyager then also, you know, was owed quite a lot of money that they may or may not have to go back to the FCX estate because of those loans that accepted before, and so it had to go through the

auction process again. And Binance US, the US exchange that is separate from the big Binance International entity UM put its hand up said oh, we want to buy Voye and it won that bid with about I think it was about a billion was the bid for Voyager, compared to one point four billion that FTX of previously bids, so a bit of a discount in those few months. But a lot of regulators put their hands up and said, we don't think this is a good idea. We can't

see you know everything about Finance and its financials. They're all pretty obscure. We don't fully understand the separation between Binance and Binance US. Can we really trust this company to be owning another US entity like Voyager, which has a very large amount of assets under management that needs to go back to creditors or be remanaged as under in terms of this deal. So that was the issues at stake. We'll be right back with more from Bloomberg

as Justina Lee and Emily Nicole. So just just to get a bit of context on Binance, because Binance has also been in the news. There was a story recently which wasn't our story, but the Journal did a story about sort of finances history, specifically in the US and the separation between the two entities that Emily mentioned. She mentioned US and Binance dot Com, So can you discuss that. So in twenty nineteen, Finance started a US arm that

they call Binance dot US. And the reason they did that is because with a US entity that is more compliant with US law, they were trying to insulate the global cash cow, which is their international website, Binance dot Com, from potential US regulatory actions and US lawsuits. But the problem with this is that obviously it depends a lot on the two entities actually being separate, and this has always been something that has divided a lot of people.

And this week we had a story from the Wall Street Journal kind of detailing the contact between the two exchanges and it used some text messages among the key executives to show that all along the Binance dot Com executives were quite heavily involved with the running of dot us. You know, for instance, the dot Us teams would report a lot of their work to the dot Com executives. Or for instance, when dot Us started trading, it was

actually triggered by an engineer in Shanghai. And that is because, you know, according to the Journal article, the software code that operates Finance dot us is actually done out of Shanghai. And now Finance's defense for all of this has always been that, you know, dot Us does have a licensing

agreement with the Global Exchange. But I think putting all of this together, it does kind of raise questions over exactly how separate they are, because you know, after all, the same person CZ is the largest shareholder in both dot Com and dot us, and I think you know, especially with the rising regulatory scrutiny into finance dot com.

I mean, I think there is even more attention on this question now and if the two entities are actually not that separate, and that it kind of raises a question of what US regulators might do with dot com. We should be clear though, that the text the Wall Street Journal said they had seen were from twenty eighteen to twenty twenties, so they're not like recent ones. Moving on, you mentioned Emily that you know, it's not been a great week for regulators, but the global regulatory cracktone on

crypto has continued. We had some action in India, of all places, which was already pretty tough on crypto. These sort of like the markets kind of semi dead there now. And then also the UK. Do you want to like quickly run down what's happened in India and then we could talk about the UK, which is mine And maybe I wasn't being fat I should say the US regulators of a bit of a tough week. But in India they announced some changes to anti money laundering laws to

bring crypto companies under that. So they had already made it pretty tough for crypto exchanges to operate in the country last year with changes they made there then some you know, some punitive tax measures and things like that for users, and now it's like officially under that umbrella that if cryptocompanies see fraud on their platform, if they see something that doesn't look quite right, they have to

report that to the authorities. Previously it was a bit of a like if you want to find but I mean, really it's up to you. And now it's like, you know, like any other financial company, you're going to have to submit those kinds of reports. And then in the UK the Financial Conduct Authority made some changes last year that meant that bitcoin ATMs is like calling like cash points where you can withdraw bitcoin rather than cash, need just

be register registered with the regulator. And since then there are still ATMs operating all across the country, but none of them are registered with the regulator. Nobody has yet come forward to register their cash machines or bitcoin cash regiser to say. And in East London this week a bunch of bitcoin ATMs were found in the back of some shops by the Metropolitan Police and the FSA went along to do a little bit of an investigation. Inspection, see what's going on, and mostly, you know, just re

up the warning to everybody. The bitcoin ATMs are currently not regulated unless they're registered, and none of them have been registered yet. So if you're hanging around in shortage and the SWAT team arrived and took down then ATM, that that's what was going on. If you think it was funny, I wonder if they arrived all masked. But it did make it seem as it was like in my head it was like an Essex thing. I don't know, you know it's shortage bitcoin ATMs or maybe you know Hackney,

this is too niche for this podcast. Yes, but I just imagine them arriving like throwing down the door, kicking down the you're under arrest. The suits follow behind with the little clipboard exactly. Yeah. It'd be curious because we've done stories before about how volumes had dropped on bitcoin ATMs, so I wonder if there's actually any money flowing through them. The final blows basically we had India give the final blow to crypto there and then they here the ATMs

are finally knocked out. I guess, yeah, but they're still very popular in developing countries like El Salvador and in Latin America. They are one of the ways that the government in El Salvadore has been trying to get people to use more bitcoin, so they do still exist. Cool. So on this great positive note about bit quinn ATMs in developing countries, I think we can wrap it up. Thank you so much for joining me. Thanks, thank you.

That was Bloomberg reporters Emil Nicole and Justina Lee. You can find more of their work on the Bloomberg terminal on Bloomberg dot com. For more, be sure to check out our twice weekly newsletter, Bloomberg Crypto. This is Bloomberg Crypto, a daily podcast from Bloomberg and iHeartRadio. For more shows from iHeartRadio, visit the iHeartRadio app, Apple Podcasts, or wherever you get your podcasts. Send us your comments, questions or suggestions for the show to Crypto at Bloomberg dot net.

The supervising producer of Bloomberg Crypto is Vicky Vergelina. Our senior producer is Janet Babin. Our producers are Mohammed Faroup and Sharon Barrero. Our associate producers are Ty Butler and Moses on Desto wanderad is our engineer. Original music by Leo sid I'm Stacy, Marie Ishmael. Have a great weekend.