The Scum Economy

Ed Zitron 10 min read

On May 17, 2023, Grumpy Cat Limited, the extremely litigious corporation that owns the rights to the famous memes “Nyan Cat” and “Grumpy Cat,” served a cease and desist demand letter to the makers of the “Grumpy Cat Coin” and “Nyan Meme Coin” tokens via two separate NFTs, which they transferred to the deployer address of both coins.

The attorney, Kia Kamron, represents both Nyanifi, Inc (and creator Christopher Orlando Torres) and Grumpy Cat Limited. The Grumpy Cat account then issued a formal statement about $GrumpyCat on the Grumpy Cat twitter account, warning holders and prospective buyers that they are “enriching scammers and intellectual property thieves.” This isn’t the first time that a legal document has been served on-chain. Holland & Knight served a restraining order via NFT last year to an unnamed defendant in a case related to a hacking, which was approved by the New York State Supreme Court.

In this case, this is not a motion, or restraining order, or anything requiring actual service — it’s a demand letter, effectively telling them to stop doing anything related to Nyan Cat and Grumpy Cat, or face the legal consequences. As of writing, the $grumpycat token has a market cap of $5.79 million, with a 24 hour volume of $595,000 and 2899 holders. Nyan Meme Coin is in its infancy, and isn’t even the only Nyan Cat token out there. In fact, this entire series of sentences took me 20 minutes to write as I painstakingly read through both cease and desist letters to make sure that I was addressing the correct Nyan Cat or Grumpy Cat token.

Cryptocurrency has become a monument to the absolute worst and most exploitative systems of the internet, where hucksters con rubes into joining get-rich-quick schemes using decades-old internet memes, only to be sued by a law firm representing the corporate entities that exist solely to protect their copyrights.

It is an industry where people mock other people for not owning pictures of monkeys valued at $100,000+, only to be conned out of their own monkey pictures months later. It is an industry where there are so many scams that a cursory glance at Google News shows at least three ranging from $10,000 to several million dollars have taken place in the last week. And those are just the few that attracted any media coverage. Crypto is a convenient vehicle for organized crime to con people at scale.

Since I last wrote about crypto, the industry has begun to collapse onto itself, with the SEC issuing a Wells Notice to Coinbase, effectively stating that they planned to sue them for offering unregistered securities. Coinbase responded by suing the SEC, claiming that the SEC should be forced to publish its answer to a petition from July 2022 on whether crypto could be regulated using existing SEC frameworks and also “take a series of discretionary actions to replace existing applicable securities laws and regulations with a comprehensive new regulatory regime for the trading of crypto assets that are securities.”

The SEC responded fairly simply: we do not have an answer yet, we do not have to answer on a specific timeline, and that this is consistent with how the SEC operates. They also added that the SEC regularly enforces legal requirements while considering amendments.

In plain English, Coinbase — like most cryptocurrency companies — has decided to operate in legally-murky waters for the best part of a decade, and is shocked that the law applies to them. They’re also shocked that the government hasn’t magically agreed to create an entirely new series of laws specifically for their industry, specifically on their schedule, and also responded in exactly the way that they wanted them to. They’re also shocked that the SEC didn’t back off when Coinbase published “Coinbase does not list securities. End of story,” a piece that mostly says “Coinbase has investigated, and Coinbase does not sell securities,” the latest in Coinbase’s staunch “nuh uh!” defense against things like rules, regulations and reality.

Coinbase then filed a Mandamus petition, effectively a demand that the government fulfills its duty or “correct an abuse of discretion,” and the filing appears to hinge heavily (I add that I am not a lawyer) on the belief that the SEC has “made up its mind” on Coinbase’s petition, and that the SEC does not intend to make rules regarding crypto, which Coinbase proves by saying the SEC is being vague, or that SEC chair Gary Gensler said that rules already exist — which is true, in the sense that there are current laws that Coinbase is being held accountable by.

Mandamus is an extraordinary remedy, meaning that it is the last resort when no other legal remedy is available. It’s also something that exists to compel governments to do something ministerial, meaning that the request of a Mandamus order must be something requiring no discretion.

In this specific case, Coinbase is asking the court to demand (via a writ of Mandamus) that the SEC responds to their petition within 7 days — which, from what I can tell, would require there to be a law around specific timing. They then limply suggest that in the event this petition fails, the courts should “monitor the SEC’s progress.” Their case also cites two separate Mandamus writs from 1984 and 1999. In both cases, Congress had set established timetables for things to be done that were ignored. This is not the case here.

While I am — as I have said before — not a lawyer, I believe Coinbase will lose here, and they are desperate because they realize that the SEC is thoroughly done with the cryptocurrency industry. Coinbase, like every crypto company, has chosen to operate on the fringes of the law, refusing to wait for any regulation or legislation to actually exist and then acting surprised when their actions were considered illegal.

Coinbase could have pushed — and then waited for — reasonable rules and regulations in the digital asset space, but decided that profit was more important. Brian Armstrong and his cronies have profited handsomely off of selling unregistered securities, and likely won’t face any kind of punishment beyond Coinbase being regulated into the ground.

Despite its vocal protestations to the contrary, Coinbase could have found ways to operate within the existing rulebook, as with crypto startup Prometheum Ember Capital, which just obtained the industry’s first special purpose broker license that would allow it to lawfully act as a custodian for digital assets.

This arrangement isn’t perfect — it excludes non-security crypto assets like Bitcoin, which are regulated as commodities under the CFTC — but it’s a step towards formalization. Although Prometheum is the first crypto company to register as a broker under SEC rules, the pathway itself isn’t new. The Commission detailed how it works as early as 2020.

Their whining about the SEC “regulating by enforcement” — as in regulating by enforcing the law — is just a tacit admission that they knew they were on the wrong side of history, and had simply decided that they were special snowflakes that deserved even more special treatment.

These people don’t deserve your pity.  They deserve your disgust, and in a just world would have their unimaginable riches torn from them as a punishment for leading so many regular customers into the loser’s casino of crypto.

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Meanwhile, the US wing of major crypto exchange Bittrex has filed for bankruptcy after the SEC charged it with operating an unregistered securities exchange. Bittrex Global, the branch based in the tax haven of Liechtenstein, remains operational.

Moving on, the CFTC charged Binance and founder CZ with illegally selling derivatives, not long after Binance US — the “separate” US-based arm of Binance — was revealed by the Wall Street Journal to be entirely entwined with the rest of the operation. Binance US also walked away from acquiring the remaining assets of collapsed ponzi scheme Voyager, citing the “hostile and uncertain regulatory climate in the United States,” which is code for “you asked to see my bank accounts and that is not okay.” Oh, and the SEC has said that Binance US is an unregistered securities exchange.

Binance also entirely withdrew from Canada — where CZ grew up and holds citizenship — due to rules that include separating customers’ money from operating funds and removing leveraged trading, things that should not be a problem to a business operating in a lawful manner.

To be clear, Binance is the world’s largest cryptocurrency exchange, transacting hundreds of billions of dollars a month (though volume fell almost 50% in April). The largest entity in this industry is unquestionably corrupt, arbitrarily halting withdrawals at random and cutting off access to entire countries’ fiat systems without warning as the walls  closed in.

And this week Reuters revealed that Binance commingled customer funds with company revenues in 2020 and 2021, with sums in the billions of dollars appearing in their accounts with now-dead US bank Silvergate. Binance’s explanation is not exactly helpful:

In a statement to Reuters, Binance denied mixing customer deposits and company funds. “These accounts were not used to accept user deposits; they were used to facilitate user purchases” of crypto, said spokesperson Brad Jaffe. “There was no commingling at any time because these are 100% corporate funds.” When users sent money to the account, he said, they were not depositing funds but buying the exchange’s bespoke dollar-linked crypto-token, BUSD. This process was “exactly the same thing as buying a product from Amazon,” Jaffe said.

There are a few problems with this paragraph, the most notable of which is that whatever business Binance is running is not remotely the same thing as Amazon, a store for buying stuff. Reuters themselves took issue with the concept of “selling” a token, as users were previously told these were “deposits,” which heavily suggests you would be depositing money and receiving a token of said money in exchange for the money you deposited.

The reason that commingling funds is so bad is that it’s exactly the thing that sank FTX (and more worryingly, a Forbes report in February showed Binance using customer funds for its own purposes in exactly the same way that FTX did).

When customer funds are commingled with those owned by the firm, it becomes hard to tell what belongs to the company and what belongs to the customer. Specifically this becomes a problem when it comes to deciding what the money in your account means. How do you know that you’ve withdrawn corporate funds or customer funds?

The easiest — and most legal! — way would be to have two separate accounts, especially when you have a business that’s somewhat predicated on holding customer deposits. In the event that Binance had any kind of economic crisis, or got shut down by authorities, or some other event that would cease business operations, there would be a clear delineation of what was a customer’s and what was Binance’s.

The Binance situation is actually significantly more complicated than I can explain in the confines of a newsletter. It operates vast webs of shell companies and banking partners to ferry client deposits between accounts and partners, commingling funds across different entities and geographies. This includes (but isn’t limited to) mixing funds from Binance’s US operations with their international operations — something that Mike from Dirty Bubble Media has been reporting since last year.

And as with every one of these stories, the real victims are the customers that were conned into believing their deposits would be treated with the same care as regular banks.

The stewards of this industry are corrupt charlatans that don’t care about their customers, as evidenced by the continuing saga of Gemini Earn, a program that promised Gemini as much as an 8% “interest” return on their deposited crypto — except all $900 million of customer funds ended up getting tied up in the messy collapse of crypto lender Genesis Digital, owned by Barry Silbert’s Digital Currency Group.

When I wrote about this in January, I made the clear point that the money was gone, and that both the identical river boat twins the Winklevosses (co-brothers and owners of Gemini) and Barry Silbert were misleading customers..

To explain what happened here in as little time as possible, Gemini Earn was an interest-generating program for Gemini’s customers run by Genesis Digital, a cryptocurrency loan company. Genesis became insolvent as a result of the FTX fallout, which you can read about here.

Last November, it became obvious that Gemini Earn customers would be tied up in the Genesis mess, and customers would not be able to withdraw their money. A long, boring and messy public fight would happen between the river twins and Barry Silbert, and then in February, a deal would be made between Digital Currency Group and Gemini to make customers whole, as part of a larger deal between Genesis and its creditors and the overall bankruptcy process.

The deal fell apart in April when a group of Genesis’ creditors decided to raise their demands, which threw a wrench in the bankruptcy proceedings andled to the very bizarre statement from Digital Currency Group — the company that owns Genesis — that they were both in mediation with Genesis (the company they own) and that they were “in discussions with capital providers for growth capital and to refinance its outstanding intercompany obligations with Genesis.”

In plain English, this means that they do not have enough money to pay themselves back for the loan that they took out from themselves to themselves.

This became particularly obvious when Gemini announced a few days ago that Digital Currency Group had failed to make a $630 million payment on a loan owed to Genesis. Gemini continues to tapdance, saying that they intended to now file a bankruptcy claim for over $1.1 billion in assets from over 200,000 (wasn’t it 340,000?) Gemini Earn users.

Eagle-eyed readers may remember that it was apparently $900 million trapped in Earn, and at this point, I am honest to god not sure how much is actually trapped in Genesis.

What I can tell you is that I believe Cameron and Tyler Winklevoss are misleading their customers, and that every cent of that money is gone. Digital Currency Group doesn’t have enough money to pay itself back for the loan it gave itself. The bankruptcy courts move at a speed rivaled only by drying paint and the noble tortoise, particularly when there’s any structural or fiscal complexity involved. Illustrating this point, Lehman Brothers — the bank whose collapse triggered the 2008 financial crisis — only exited liquidation last year. Put simply, Gemini’s responses exist only to attempt to provide air cover for the fact that they acted recklessly with customer funds.

The best case scenario for Earn customers is they’ll receive 80 cents on the dollar in a year or so. More than likely, two multi-billionaires will tussle with another billionaire for several years to come to a non-agreement, which will spill into years more of litigation, leaving over a billion dollars of regular people’s money hanging in limbo, likely never to be recovered.

To be abundantly clear: Genesis owes billions of dollars in loans, and Digital Currency Group, the company that owns it, does not have enough money, at a minimum, to meet the obligations of its own portfolio company. Gemini and its dishonest boat brothers loaned out $1.1 billion of customer funds and dressed it up as an interest-bearing account, which is why the SEC charged them with an unregistered offer and sale of securities.

This is what the crypto industry is — a nakedly exploitative, cravenly dishonest and inherently cruel enterprise built so that extremely rich freaks can flaunt the law and outright abuse retail investors. If there was any justice in the world, every single one of these executives would be left penniless and banned from touching financial instruments any more complex than a credit card. The Winklevosses are arguably the worst of them, willingly gambling with customer funds under the veneer of being a “respectable” American company.

I hope the government burns them to the ground.

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