13 December

“The demise of FTX is a story as old as financial markets and does not reflect a failure of blockchain technology, but the lack of regulation around the “point of trust” – where money is exchanged on the promise of a future return, Goldman Sachs (GS) said in a research report Friday.

Despite the crises of 2022, Goldman says cryptocurrencies are likely to flourish, and the key to their success depends on rulemakers correctly identifying what to regulate. In crypto, it’s “the point of trust, not the trustless blockchains themselves,” Goldman said. Once the financial features of digital assets are sorted out, regulators should not interfere with the blockchains themselves, the bank added.

Goldman notes that decentralized financial (DeFi) lending systems, in which financial applications are carried out on a blockchain, don’t pose the same counterparty risk as traditional banks. In DeFi lending, collateral is visible to all members of the pool and is automatically liquidated if the value approaches the value of the loan. Collateral can be retrieved without the need for court proceedings or at a discount to the loan, by using smart contracts.

This resolves the question of trust, the very thing regulation to safeguard investors would be intended for.”

See Also: SEC Chair Gary Gensler Must Testify Before Congress, Says Rep. Tom Emmer
See Also: How Crypto Can Repair Its Reputation in Washington

U.S prosecutors are considering criminal charges against crypto exchange Binance and individual executives, including founder and CEO Changpeng Zhao, Reuters reported, citing two people. Other prosecutors believe that more evidence needs to be gathered before a criminal case can be filed, causing a split within the Department of Justice.

The Department of Justice has also discussed possible plea deals with Binance’s lawyers, the report added. Binance refuted the Reuters article in a statement.

Prosecutors in the U.S. Attorney’s Office in Seattle began investigating Binance in 2018 after a spate of cases that saw criminals use Binance to transfer illicit funds.”

See Also: Former SEC Regulator: Binance’s Proof of Reserves Audit ‘How I Define Red Flag’

FTX’s new leadership is “working around the clock” to find and secure the defunct crypto exchange’s assets, its new CEO will tell U.S. lawmakers on Tuesday, according to published remarks released Monday.

In his remarks, Ray again denounced FTX’s former leadership as being inexperienced, repeating comments from FTX’s bankruptcy filings that he had never seen anything quite like the company’s recordkeeping and asset management failings.

Although our investigation is ongoing and detailed findings will have to await its conclusion, the FTX Group’s collapse appears to stem from the absolute concentration of control in the hands of a very small group of grossly inexperienced and unsophisticated individuals who failed to implement virtually any of the systems or controls that are necessary for a company that is entrusted with other people’s money or assets.

In the document, Ray said FTX’s lack of security controls, allowing Alameda to borrow FTX’s funds “without any effective limits,” commingling of assets and the lack of documentation, “reliable financial statements” and independent governance are just some of the issues he identified.

A substantial portion of FTX’s assets remain missing, misappropriated or not readily available. In the absence of cooperation from responsible parties or any appropriate system to track and protect crypto assets, we are continuing our painstaking forensic efforts to account for all of the assets.

For the first time, Ray provided some explanation as to why FTX US filed for bankruptcy alongside the rest of the company.

Questions have been raised as to why all of the FTX Group companies were included in the Chapter 11 filing, particularly FTX US. The answer is because FTX US was not operated independently of FTX.com.”

See Also: 10 Questions for FTX CEO John J. Ray III From a Securities Lawyer

“There has been huge anxiety, particularly among crypto types, about when and whether Bankman-Fried will be brought to justice. Despite clear signs of fraud, he does not seem to have been detained by law enforcement. He remains in the Bahamas, giving interviews intended to obfuscate his actions and distract from the continuing drumbeat of grisly financial discoveries.

The most paranoid observers (and the seemingly delusional Bankman-Fried himself) might suspect this to be light treatment, the fruit of his years of currying favor with U.S. leaders. But it’s more likely the delay is just part of the slow-grinding legal process. The U.S. Department of Justice has requested an independent probe of the case, and former federal prosecutor Renato Mariotti told CNBC that “it sure looks like there’s a chargeable fraud case here.”

And Bankman-Fried’s potential punishment is no small potatoes. He could be sentenced to life in prison, former Commodity Futures Trading Commission trial lawyer Braden Perry told CNBC. That’s according to U.S. sentencing guidelines, and taking into account the number of victims and the size of the apparent fraud at FTX and its closely related trading shop Alameda Research. The CNBC report goes into gratifying detail about exactly what books are likely to be thrown at Bankman-Fried, and how hard.

The bad news is that those sentencing guidelines are often “bent” to give softer penalties to white-collar criminals. That’s based on the implicit belief, still widespread in the U.S. court system, that things like financial fraud and embezzlement aren’t “real” crimes. Bankman-Fried’s youth, combined with his ongoing scheme to paint himself as an incompetent buffoon, could also elicit undeserved mercy from a court. It will take real and sustained public and political pressure to make sure that Bankman-Fried gets what’s coming to him.”

See Also: FTT investors’ claims to be investigated for securities laws violations
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“At this point, the crypto industry has more or less resigned itself to the fact that a garden-variety ICO likely satisfies all of the limbs of the Howey Test, a foundational set of standards to determine what is a security. I expect the outcome of the Ripple litigation will only confirm that.

However, there is another economic reality that needs to be considered: today, it is abundantly clear crypto is never going away. For all the precedents discussing “economic reality,” the more material fact is that there are hundreds of millions of crypto users around the globe, and that number is growing exponentially, and many are Americans.

Telling next-generation crypto projects that the only path to compliance is to “come in and register” or drop dead is like trying to take a Ford Model T into space. Crypto’s basic mode of operation is by self-custody and directly peer-to-peer transactions over the Internet, not via paper forms signed with wet ink and mailed to a transfer agent or broker-dealer. There are no national securities exchanges which support crypto asset trading. The SEC won’t even approve a regulated exchange-trade fund (ETF), despite many proposals and much market demand. The list goes on.

It’s pretty clear that a huge class of investors doesn’t want what the SEC’s selling. In fact, they want the opposite. Millions of digital natives use trustless smart contracts daily for loans and other financial beasties, or grant and purchase assets like fractional royalty cash flows. They do so in an instant, from anywhere in the world, with anyone in the world, on handheld supercomputers smaller than a chocolate bar. Very soon they will do so with the assistance of artificial intelligence (AI). Investors will literally have superhuman abilities at their fingertips.

For the last six years, crypto has accepted the economic realities of a Depression-era regulatory scheme. The only question for America, at this juncture, is whether we want to back off from that regime just a little bit so we can nurture and supervise these new crypto companies right here at home – or persist, and drive them offshore. The old ways are finished, whether Congress likes it or not.

“Over the month of November, as the FTX contagion rippled through the system, crypto’s market cap lost 15%. Yet, BTC.D oscillated between 40.0% and 40.9%. It can’t possibly be telling us that sentiment is flat. Has BTC.D lost its role as a sentiment gauge? That would imply that BTC has lost its role as the “safe” crypto asset.

The strange behavior of BTC.D during the recent turmoil tells us that the market composition has changed. Bitcoin is still the anchor asset, by a wide margin, but the volatility of its protagonism is weakening. This is a sign of a maturing asset class. That this should become apparent during one of the industry’s darkest times is cause for hope.”

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“The USDD stablecoin, championed by Tron’s founder Justin Sun and managed by Tron’s decentralized autonomous organization (DAO), fell to slightly below 97 U.S. cents early Monday, hitting the lowest since June 22.

USDD’s prolonged de-pegging is accompanied by a steady increase in the stablecoin’s dominance rate in the USDD/3CRV liquidity pool based on the decentralized exchange Curve. The heavy imbalance suggests users are increasingly swapping USDD for the pool’s other components – DAI, USDC and USDT.

In an attempt to calm market nerves, Justin Sun announced on Twitter that he is deploying more capital to defend USDD.”