This Week in Crypto: Ukraine War, Marathon Digital, FTX

On this episode, we're going to talk a little bit about a pretty somber anniversary, the one year anniversary of Russia's invasion of Ukraine, and what, in addition to all of the devastation that that has meant for Ukraine's economy,

people and landmarks, has to do with crypto. We'll talk about Nashad Singh, an FTX lieutenant who pleaded guilty to various crimes in court in New York this week, and we'll talk a little bit about what's happening with Marathon, a bitcoin miner, and what if anything, accounting and the rising price of bitcoin have to do with the prospects for the sector. Emily, Dave, welcome back. To the podcast.

Great to be here. Before we go into what's been happening in Ukraine's Emily's point, Dave, I want to ask you about what has become one of our favorite topics on this podcast, which is the state of bitcoin mining. Yes, which varies from like very precarious to precarious. I think very precarious right now. This week we had a bit of news. Marathon Digital, one of the biggest miners out there, was supposed to report earnings this week and at the last minute they said, we're not. We have to restate

a bunch of our financials from prior quarters. Now that seems unusual and or bad, it could be on it. So it's the whole bitcoin industry, including the better known micro Strategy, have had an issue with how gains and losses are accounted for on their financials, and basically, the way the rules are set up, they can't account for any gains, but they have to write down losses their holdings. So it brings a lot of volatility to their numbers.

And there are proposals out there to make this a little more workable, but until then it kind of distorts the numbers a bit in terms of gains and losses that they have to report. But in the case of Marathon, it's how they recognized these adjustments and also revenue in regard to a mining pool. Even just as interesting in one aspect of this market is the stocks have taken

off this year. They've been some of the best performers out there, which has helped the distressed ones to buy or time for themselves, right because they're kind of the perception is that they're going to be able to get out of this particular crypto winter and survive that. And they have huge obligations they the lenders. For a while there they were giving back machines and if nobody wants to buy or mine or buy bitcoin, why do you want to mind it? But in this case they're able

to now have negotiating point with the equity steaks. So if we can give you a steak when the stocks rising, then you feel a little better about it. And so Dave to that point, you know you've had this appreciation in the share price. How much of that has to do with the fact that crypto prices themselves have been rallying a lot, and that does make there is the inner relationship there where if the price of bitcoin is going up, you're going to feel better about a minor.

But some people have also characterized these companies as narrative stocks on it. So if you're selling that narrative of that bitcoin is back, then you're gonna buy them. But in the end, these guys have to pay their bills in their public companies, and it's a little more complicated than just riding the highs and lows of bitcoin. At this point, I just want to share one of my favorite random facts about bitcoin miners, which is that there's a company called taro Wolf which has four reasons that

would never entirely clear to me. Two celebrities among its baccas, and they are Gwyneth Paltrow and Mindy Kaling. That is your random fact of the crypto day. Anybody know who's if Gwyneth Paltrow and Minnie Healing have buyos, remorse about taro Wolf, Like crypto at Bloomberg dot net's very interested

in in that follow up. Now, we just talked about two celebrities, But for a lot of people who are paying close attention to crypto, and even people who aren't paying that close attention to crypto, there are a few more names that now come to the four when we talk about the events of twenty twenty two, And obviously Sam Bankman, Freed and FTX were among the biggest. But certainly one of the developments we've been paying close attention to is what's been happening to the other members of

the so called FTX inner circle. And one of the folks on that list is Nishad Singh. He was the director of engineering at FTX. He was one of the folks who lived in the famous, infamous, depending on your perspective, Bahamas compound. And what happened this week is that he in a New York court, agreed to plead guilty to

various allegations against him. And that's a criminal court. And at the same time he was hit by, you know, effectively like lawsuits from the Securities and Exchange Commission and the sec Emily. What are the numbers that we're talking

about here when it relates to Nishad Singh. So to put this into perspective, you've got like FTX owing its customers roughly eight billion dollars in total, and we're not too sure you know how much SPF Funny made away with, but his bail, for example, was two hundred and fifty million dollars. That's what that was set up. Nis Sings bail is said at one one thousandth of that amount, closer to you know, the tens of thousands rather than

the millions of dollars. And the lawsuits against him accused saying of taking about six million dollars for personal use from FTX, and that's to pay for things like houses, to do things like donate to charity, and his top donations to charity actually went to a charity run by Sam Backmanfried's mum. And also there was a little bit of insight into exactly where he was spending some of

the money that was coming from FTX as well. For example, he donated about nine point three million dollars to Democratic candidates and committees since twenty twenty eight million of that was just in the last election cycle. And so you know, he knew about these things going on at Alameda and FTX for months. Supposedly, that's what he said in his

own statements. He says he was aware of everything that was happening and just turned a blind eye, willfully misstated revenue figures to auditors and all because that was the only way they could see FTX continuing to stay afloat. And to your point about the willfulness statement, he also said he apologized right. He quote said, I'm unbelievably sorry for my rule in this and the harm it caused, and giving some specifics and then you know, saying I knew my conduct was wrong, which is of course a

clear you know, he's admissing guilty, he's pleading guilty. Sam bankmun Freed has denied all of the charges and the accusations against him and has not pleaded guilty and is

currently out on bail. This marks the third member of the FTX SPF in a circle to plead guilty in an apparent cooperation agreement with prosecutors, the first two being Caroline Ellison, who was first the co CEO and then the CEO of Alimta Trading, and Gary Wang, who was, in addition to being a childhood friend of Sam bankmun Freed,

was the chief technology officer at FTX. Yeah, it's pretty obvious that the reason why US authorities are agreeing to do these plea deals with the likes of Nischad Singh and Gary Wang and Kyla Allison. It's because not only did FTX not really keep track of anything, so you really do only have the words of people to go on when trying to figure out what happened here. There's

no paper trail to look at. With SPF pleading not guilty and denying everything that's been thrown against him, it's going to take a very strong case to be able to carry out some of the lawsuits that have been put against Sam and put against the criminal charges that he's facing, and so basically getting all of his friends and closest employees to flip on him is the strongest

tool in the SEC's wheelhouse at the minute. After Russia invaded Ukraine, you had two conversations about crypto happening simultaneously. This idea that the philanthropic community in crypto could be rallied to donate funds not just too ordinary people in Ukraine, but also to the government, and the fear from various regulators and central banks that crypto could be used as a means for Russians who were facing sanctions to avoid

those sanctions. At the same time, so it's now twelve months on, we can do a little bit of a retrospective about how the year went. You know, how successful were crypto exchanges that limiting the access of sanctioned Russian individuals to trade on their exchanges. How successful were the attempts to help support the effort in Ukraine by crypto companies wanting to be on the other side of the equation, And some of the data that's comeback hasn't necessarily been

all that positive for the overall impact. But at the same time, efforts to stop Russian exchanges from being able to trade with international exchanges, to stop Russian individuals from being able to trade on international exchange, those weren't as successful. There was some data coming out at the end of February from the US based research group TRM Labs which said that Russian based exchange Grand Texts more than doubled its volumes between February twenty twenty two and February twenty

twenty three. And that's with it being sanctioned by the US in April, so, you know, ten out of the twelve months it was a sanctioned entity, and yet it's still more than doubled its volumes. While other crypto exchanges, as we know, have based a pretty dour environment over the last year. A lot of demand has fallen off

a cliff, so it's a pretty different picture. And overall as well, the amount of crypto that was going towards elicit activity in the last year, according to chain Analysis, another analytics company, rose for the first time since twenty nineteen, so it's more than doubled in the last year to

zero point two four percent. Obviously, that's still a tiny percentage if we think about the entire crypto market, but the fact that it's going up shows that Russia definitely still had access to what it needed to access in crypto when being cut off from the rest of the

international payment system. And there was even another report. Crypto companies love reports, but there was another report that also came out in February from an analytics room called Inca Digital, alleging that non Russian exchanges allowed people who had debit cards issued by sanctioned Russian banks to still participate in transactions on those exchanges. Yeah, it's worth noting that some of those exchanges, like Quobe, like Coucoin, like Finance, most

of them have denied those reports. If not, they didn't respond, but most of them said, you know, this isn't true. We don't accept users from Russia. We don't accept users with bank cards from those sanctioned banks. That reports are reports, and they usually based on data, And if it is true that these things have been going on, then it obviously provides more insight to just how much it is really a difficult job for regulators to be able to

see what's going on at crypto exchanges. That they are already concerns even before the war, that crypto exchanges can often be like a black box the regulators just don't get to see into. And so if this is still going on even with most of the world is shrink sanctions against Russia, it definitely proves their point. We'll be right back with more from Bloomberg's Dave Litka and Emmeline Nicole. Dave,

there's something I want your perspective on. As you know, a person who has been paying close attention to this asset class for such a long time, it still blows my mind how this industry is trying to simultaneously argue it is against government control, it is for freedom, it is for the ability of people to do their thing individually.

But also they're like, but also we definitely don't allow people on government lists to participate in this ecosystem whatsoever, Like, how are folks trying to walk that line between not getting completely shut down by the US government while appearing to espouse the libertarian ideals of bitcoin and the blockchain. That's the fine line that these exchanges and companies have been walking since roll at the beginning of this industry

on it. I think you're seeing the consequences of that now in the broader crackdown, whether it's sanctions here or just the regulation of products that people should or shouldn't be offered according to the government, which is basically there to serve the people. Yeah, and the point about, you know,

the difficulty of knowing who someone is. For some people, that's a feature, right, Like they don't want you to know who they are because they don't trust their governments, or they don't trust those banks, or they don't trust that exchange necessarily. But of course, if you are a government or a regulator, you're just going to look at that and say, well, exchange, then you're not being compliant with know your Customer rules. I mean it's literally in

the name know your customer. You're not being compliance with anti money launder and you know, for some folks, that's the argument for them for why they're like, well, okay, like let's do let's go to defy, Let's go to the really decentralized places where I don't have to tell somebody what my name is or provide my passport or

my county dantity or whatever those things are. Emily, are you seeing real evidence that's like a sustainable proposition for people to move to something that's much more technically complicated if they want to avoid more onerous data provision requirements. It's been a difficult thing to monitor over the last year because with crypto being down everywhere, it's hard to know whether decentralized exchanges are getting hit better or worse

than those that are centralized exchanges. And ultimately a lot of people do move their funds between lots of different exchanges at once, so you can't even necessarily say, Okay, you prefer this or you prefer that, because traders who are native to crypto will use multiple exchanges for one journey.

What we do know, however, those that decentralized is becoming a much harder ideal for firms to achieve, and in some ways it does look like companies are starting to think, well, maybe perhaps it's not possible to true decentralization, and perhaps

there's like a level that we can be comfortable with. So, for example, in the end of February, we saw a decentralized lending protocol called Oasis comply with a court order to use a backdoor in its code that would allow it to seize some funds that were stolen from a platform last year called Wormhole, and Oasis was very clear in the way that it spoke about it, because it wanted to make sure that users didn't think that it already knew about that backdoor and its code that would

allow to do that, because that's the opposite of decentralization, right, let alone complying with a court order. But there's an element now of like, well, surely it's a good thing, right that you were able to get funds back from a hacker, and surely it's a good thing that we were able to comply with regulations where we're able to.

And so now is more of a debate about, you know, what level are we comfortable with, how much decentralization is truly possible, and what will that look like going forward. Dave just as a kind of a closing thought, because

you know, it's this week in crypto. As we look forward into the last month of the first quarter of the year, are there any big top line numbers kind of metrics that people are looking at to try to see if they should be happy or sad about where we are sure it's it's an interesting time for the market. You had the January rally which crypto bounced almost forty percent and got everybody saying or enough people saying, Crypto's back,

and that kind of stalled in February. As going to the March period, now it's the big question is where we go. And we're looking at actually some of the positioning in the open interest options market on it, and the big number that stood out was thirty thousand, which this market loves around numbers. It's a good target. It's an easy target to put up there when you're trading

blow around twenty five thousand. But interesting we saw also that the to get technical, something called applied volatilities down for these options, which means that people are kind of losing interest on it. And what that means for the people who actually bought those call options is that the

value of the options have dropped since they purchased it. It. Well, it's kind of looking as the negative sign, but that's kind of been the sentiment for past eight months really, So if I were to summarize that for somebody who is either not a financial reports so it does not know what options are, it would be if things go above thirty thousand dollars, a lot of people will be happy. The problem is fewer and fewer people are actually buying

and selling right now. Exactly Well, on that extremely mixed note, thank you both for being here. I appreciate it as always pleasure, Thanks for having us. That was Bloomberg Senior Editor DA and Bloomberg reporta Emelina Cole. You can find more of their work on the Bloomberg Terminal and on Bloomberg dot com, and of course, check out our twice weekly newslesso, Bloomberg Crypto. This is Bloomberg Crypto, a daily

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