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March 10, 2023 19 mins

Legal battles, circling regulators and a troubled bank. It's all happening in crypto this week. 

Court is in session as Grayscale challenges the SEC over the prospects for a Bitcoin ETF, while themselves facing a lawsuit filed by FTX’s Alameda Research.

Voyager won a key court ruling that would a proposed sale to to Binance US to proceed despite the objections of multiple federal and state regulators.

And speaking of regulators: US officials showed up at Silvergate’s California headquarters as the troubled crypto-friendly bank tries to salvage what’s left of its business. 

Bloomberg reporters Justina Lee & Emily Nicolle join senior editor Anna Irrera to discuss the biggest stories in crypto this week. 

Subscribe to the Bloomberg Crypto Newsletter at https://bloom.bg/cryptonewsletter 

See omnystudio.com/listener for privacy information.

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Episode Transcript

Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:03):
This is Bloomberg Crypto, a daily Bloomberg I Hood podcast,
and I'm Annereira, senior editor for Bloomberg News. It's Friday,
March eleventh. Welcome to the wacky and wild world of

(00:28):
crypto legal battles, tough regulators, and a troubled bank. It's
all happening in the crypto markets this week, another major
crypto player is down because of FTX Silvergate, the troubled
crypto friendly bank plans to wind down operations and liquidate
itself after a long struggle with US regulators. But that's

(00:49):
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,

(01:18):
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,

(01:40):
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

(02:05):
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

(02:25):
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

(02:46):
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.

(03:07):
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.

(03:28):
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

(03:49):
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

(04:10):
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

(04:32):
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

(04:52):
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

(05:14):
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.

(05:36):
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

(05:57):
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

(06:17):
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

(06:40):
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

(07:00):
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

(07:23):
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.

(07:44):
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

(08:06):
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

(08:26):
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

(08:49):
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

(09:11):
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

(09:33):
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.

(09:58):
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

(10:18):
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

(10:39):
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

(11:00):
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

(11:22):
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

(11:43):
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

(12:05):
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

(12:26):
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

(12:52):
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

(13:13):
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

(13:33):
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

(13:54):
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,

(14:18):
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,

(14:40):
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

(15:02):
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

(15:23):
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

(15:44):
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

(16:06):
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

(16:28):
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

(16:49):
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,

(17:09):
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

(17:31):
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

(17:53):
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

(18:16):
out our twice weekly newsletter, Bloomberg Crypto. This is Bloomberg Crypto,
a daily podcast from Bloomberg and iHeartRadio. For more shows
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(18:37):
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The supervising producer of Bloomberg Crypto is Vicky Vergelina. Our
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(18:59):
Leo sid I'm Stacy, Marie Ishmael. Have a great weekend.
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