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Lawyers for crumbling crypto exchange FTX and liquidators in the Bahamas have smoothed things over after a contentious courtroom brawl over who has jurisdiction in the failed company’s bankruptcy. 

The truce between the FTX debtors and the Bahamian liquidators earlier this month is welcome news for FTX’s creditors, who want to recover at least some of their money locked in the company. It might also bring a sense of normalcy to a wide-reaching and unconventional bankruptcy case that has captivated the world beyond the crypto industry. 

“What had been happening in the case was unusual,” said Matthew Gold, a partner at the law firm Kleinberg, Kaplan, Wolff & Cohen who advises on bankruptcy issues. “Now they have agreed to stop fighting and to establish a cooperative protocol so that the case I think, will probably now follow a more ordinary track.”

FTX filed for Chapter 11 bankruptcy protection in Delaware after a run on its native utility token in November. The massive firm, which has an estimated 9 million customers, was once valued at $32 billion and could owe its top 50 creditors as much as $3.1 billion. Meanwhile, disgraced former CEO Sam Bankman-Fried faces a litany of fraud charges in a separate criminal court for his alleged mishandling of FTX customer funds. 

Jurisdictional drama

Some aspects of the FTX bankruptcy are playing out in Delaware, but others are unfolding in the Bahamas, where FTX Digital Markets and many FTX executives were based. Regulators in the Bahamas seized $426 million around the time FTX filed for bankruptcy protection.

In the early weeks of the bankruptcy proceedings, lawyers for the FTX debtors in the United States and the liquidators in the Bahamas warred over issues including access to FTX computer systems. The two parties came to an agreement at the beginning of the month.

“They’ve agreed to go to the neutral corners and do their jobs. And if they need to fight about something later, they reserve the right to do so. But their goal is not to do that,” said Joseph Moldovan, partner at the law firm Morrison Cohen, commenting broadly on how bankruptcy cases work.

Agreeing to disagree

Even with an agreement between the debtors in the U.S. and the liquidators in the Bahamas, the bankruptcy could take years to unwind in court. New FTX CEO John Ray has said he does not trust the few financial records that existed at FTX before he took over, meaning the debtors need to figure out how much money the company has and what it can return to creditors.

Although he agreed to cooperate with the Bahamian liquidators, Ray also gave himself some wiggle room in announcing their agreement earlier this month. 

“There are some issues where we do not yet have a meeting of the minds, but we resolved many of the outstanding matters and have a path forward to resolve the rest,” Ray said in a statement. Lawyers for the debtors and the liquidators did not respond to requests for comment. 

“We’re probably still in the first inning of this,” said Jeffrey Blockinger, general counsel for the web3 company Quadrata. “The most important thing really is: Are we seeing assets starting to accumulate? Because if you’re a creditor, that’s what you care about.”

The FTX debtors have identified $5.5 billion in cash, liquid cryptocurrency and liquid securities, which Ray called a “Herculean effort” to maximize value for creditors. The sum does not include millions of dollars worth of crypto in the custody of Bahamian regulators.

Bankruptcy experts noted that despite the agreement, conflicts are still likely to arise because the bankruptcy case is so large. FTX’s bankruptcy filing encompasses a web of 134 entities in several jurisdictions. The debtors and liquidators are already making plans to sell four relatively independent companies, including LedgerX, and the firm’s $253 million Bahamian real estate portfolio.

“Can they fight later? Sure. Will there be disagreements? Well, everybody’s human. There will be disagreements. Will these disagreements get resolved? I’m a bankruptcy lawyer. Disagreements always get resolved,” Moldovan said. “That’s the way it works.”

Disclaimer: Beginning in 2021, Michael McCaffrey, the former CEO and majority owner of The Block, took a series of loans from founder and former FTX and Alameda CEO Sam Bankman-Fried. McCaffrey resigned from the company in December 2022 after failing to disclose those transactions.

© 2023 The Block Crypto, Inc. All Rights Reserved. This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.

Bitcoin rose slightly by the U.S. close as crypto-related stocks ended the day largely higher in a rally led by Coinbase and Hut 8.

The largest cryptocurrency by market capitalization rose about 0.5% to $21,731.

Traditional markets were mixed, with the S&P 500 falling 0.2% and the Nasdaq up 0.1%. The Dow Jones slumped after Goldman Sachs missed earnings estimates.

BTCUSD chart by TradingView

Silvergate Capital shares pared big gains to close up 1%; it had rallied despite the firm’s $1 billion fourth-quarter loss as business is intact, KBW analysts said. Earlier in the month, shares plummeted 40% after the company reported preliminary earnings on Jan. 5.

Coinbase rose 8.3%, Hut 8 was up 17% and MicroStrategy tacked on 8.7%.

Bit Mining closed up 37%, as most mining stocks rallied along with bitcoin. The company announced a new litecoin and dogecoin mining machine dubbed LD3 on Tuesday, having first publicized the launch on Jan. 9 on Twitter.

© 2023 The Block Crypto, Inc. All Rights Reserved. This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.

Bitcoin mining stocks tracked by The Block were higher on Tuesday, with 17 gaining and the other two declining.

Bitcoin rose slightly to $21,317 by market close.

Here is a look at how the individual miners performed today:

© 2023 The Block Crypto, Inc. All Rights Reserved. This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.

Beleaguered crypto exchange FTX identified $5.5 billion in liquid assets in what CEO John Ray called a “Herculean effort” to assess the firm’s financial situation.

FTX debtors have identified $1.7 billion of cash, $3.5 billion of crypto assets and $3 million of securities, the firm said in a statement. FTX filed for bankruptcy protection in November and could owe $3.1 billion to its top 50 creditors. 

“We are making important progress in our efforts to maximize recoveries, and it has taken a Herculean investigative effort from our team to uncover this preliminary information,” Ray said in a statement.”We ask our stakeholders to understand that this information is still preliminary and subject to change.” 

FTX’s top-level management and advisers met with the committee of unsecured creditors in the bankruptcy case on Tuesday to share a presentation on the asset recovery process. The $5.5 billion in assets is slightly higher than the $5 billion that FTX lawyers told a bankruptcy judge they had located last week.

The debtors also discovered that both FTX.com and FTX US face digital asset shortfalls. Debtors have identified $1.6 billion of digital assets associated with FTX.com. Of that total, $323 million was subject to unauthorized third-party transfers after the bankruptcy filing, and another $426 million of that sum is in the custody of Bahamas regulators.

Meanwhile, $742 million is in cold storage under FTX debtor control and $121 million is pending transfer to cold storage under the debtors’ control.

“The assets identified as of the Petition Date are substantially less than the aggregate third-party customer balances suggested by the electronic ledger for FTX.com,” the company said.

The debtors identified $181 million of digital assets associated with FTX US, $90 million of which was subject to unauthorized third-party transfers after the bankruptcy filing. Of the rest, $88 million is in cold storage under FTX debtor control and $3 million is pending transfer to debtor control.

Former FTX CEO Sam Bankman-Fried, who is facing criminal fraud charges, has insisted that FTX US is “fully solvent” and can pay back its customers. 

Disclaimer: Beginning in 2021, Michael McCaffrey, the former CEO and majority owner of The Block, took a series of loans from founder and former FTX and Alameda CEO Sam Bankman-Fried. McCaffrey resigned from the company in December 2022 after failing to disclose those transactions.

© 2023 The Block Crypto, Inc. All Rights Reserved. This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.

Bit Mining jumped about 51% as most mining stocks rallied along with bitcoin, which has been trading above $21,000 after two months in the $17,000 range.

The company announced a new litecoin and dogecoin mining machine dubbed LD3 on Tuesday, having first publicized the launch on Jan. 9 on Twitter.

Bit Mining’s American Depositary Shares were trading around $4.70 at 2:45 p.m. EST.

Last month, it implemented an ADS ratio change that was effectively a one-for-ten reverse share split. That followed a warning from the New York Stock Exchange in August because shares were trading under $1. Bit Mining was given six months to gain compliance. 

“This release of new LD3 miners is one validation of our corporate strategy into action,” Youwei Yang, chief economist at Bit Mining, said in a statement sent to The Block. “We have been dedicated to transitioning the company to be more diverse in various areas of blockchain besides the mining center and be hardcore technology driven.”

A total of 5,000 LD3 machines have been produced, counting the ones for internal use and for sale, the company said. It is the second ASIC miner the company developed since acquiring hardware manufacturer Bee Computing last year. Bit Mining also owns mining pool BTC.com, which was hacked last month.

“Vertically integrating via ASIC manufacturing offers the company numerous benefits, including cost control, limited reliance on third parties, and customization in the event it decides to devote a large portion of its machines to self-mining, in addition to building as an alternate, and potentially significant revenue stream,” said H.C. Wainwright & Co’s analyst Kevin Dede in a note from December.

The firm recently started coverage of Bit Mining with a neutral rating.

© 2023 The Block Crypto, Inc. All Rights Reserved. This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.

Obol Labs, a startup aiming to make proof-of-stake blockchains more secure, raised $12.5 million in Series A funding. 

Investment firms Pantera Capital and Archetype co-led the round, with additional participation from BlockTower, Nascent, Placeholder, Spartan and IEX, the company said in a statement. Obol’s prior investors, Coinbase Ventures and Ethereal Ventures, also joined the round. 

Obol Labs intends to make proof-of-stake blockchains more secure with its Distributed Validator Technology, which allows multiple machines to simultaneously run an Ethereum proof-of-stake validator.

“To make networks more secure, staking must be decentralized by design,” Obol Labs co-founder and CEO Collin Myers said. “Obol’s DVT brings decentralization and resiliency to the ground floor of staking products.”

The firm is focusing on Ethereum for its proof-of-stake security scaling, with plans to address Cosmos and Ethereum L2 networks in the future. The latest round brings the company’s total financing to $19 million. 

© 2023 The Block Crypto, Inc. All Rights Reserved. This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.

The U.S. Consumer Financial Protection Bureau, which is tasked with overseeing a hodgepodge of financial service providers including payment companies, appears to be taking a fresh look at crypto regulation despite earlier inertia.   

“Crypto is now becoming a vehicle of choice,” agency director Rohit Chopra told the progressive think tank Americans for Financial Reform last month, noting the potential for fraud that could occur in the sector. “I really want to be sure that we are thinking about digital currencies in the context of real-time payments.”

In Congressional testimony and elsewhere, Chopra has highlighted the prospect of payment stablecoins as a CFPB domain, although he’s always careful not to push the bounds of the agency’s authority in the crypto universe and avoids treading on the toes of the older, larger Securities and Exchange Commission.

Just weeks after those comments at AFR, Chopra answered “no” when asked by Rep. Bill Huizenga, R-Mich., if the agency was planning more crypto enforcement after a November analysis of consumer complaints about crypto scams drew attention from lawmakers. A spokesperson for the CFPB declined to comment on the November analysis and any change in enforcements against crypto companies. 

Last January, the agency hired Alexis Goldstein, a progressive policy advocate who’d quickly made a name for herself testifying before Congress in opposition to the crypto industry. The industry at the time reacted with alarm, but little has happened aside from a July request for better crypto analytics software after scrapping a contract with Elliptic. A year later, the CFPB seems to be moving in. 

Nexo Case

A court order the CFPB quietly released on Dec. 1 rejected crypto lender Nexo’s petition to stop an investigation the agency was carrying out, after the company had argued that an ongoing SEC investigation meant that the CFPB had no standing. In no uncertain terms, the court found that “the Bureau has the authority to investigate whether Nexo Financial or others associated with it may have violated federal consumer financial law.”

While Europe-based Nexo’s fate remains uncertain after recent police raids on its offices in Sofia, the petition, and its rejection, showed the CFPB asserting a bigger place at the table. Kathy Kraninger, Chopra’s predecessor at the agency under former U.S. President Donald Trump, called Nexo an example of “the CFPB exploring the bounds of its authorities.”  

Kraninger, who now works for crypto market surveillance company Solidus Labs, noted “the conundrum that the crypto industry finds itself in, generally.”  

“There is confusion around which regulators have asserted jurisdiction over these products, but the flip side of that is exactly the point that the CFPB made in response — which is the conundrum — which is that you can’t have it both ways,” she explained.  

Particularly, Nexo’s argument was that the CFPB couldn’t investigate their product because the SEC was already investigating. Yet Nexo also avoided saying their Earn accounts were securities, leaving the door open to reject the SEC’s jurisdiction as well.  

Key applications

“The CFPB is asserting power over crypto solutions that bring financial products to consumers,” investment bank Cowen’s Washington team said in a recent newsletter.

Even as the CFPB avoids treading on SEC territory, it’s still trying to find a foothold. The most pressing application of its authority in crypto is Regulation E, which the Nexo decision namechecks repeatedly. The measure gives the bureau authority to oversee non-investment electronic fund transfers, monitoring for failures that get in the way of consumers moving their money around. 

Stablecoins, if they become a widely used means of payment, are also clearly top of mind for Chopra, as he has said repeatedly, making particular reference to a Libra-like token that could spread quickly through an existing network. Other potential areas for the CFPB in crypto are applications of the Truth in Lending Act and Truth in Saving Act. 

While Chopra has said that crypto is not a product his agency regulates, “certain electronic consumer transactions are.” It’s a critical carve-out for non-investment use of crypto that, as the CFPB is setting it up, won’t raise the hackles of markets regulators.

“The SEC has a lot of primacy there,” said Mark Hays, a senior fellow in fintech at AFR. He noted that the CFPB had been “good team players” and contrasted the bureau’s respect of the SEC’s lines with the Commodity Futures Trading Commission, which has pushed for a distinct regulatory regime for at least some crypto exchanges.  

© 2023 The Block Crypto, Inc. All Rights Reserved. This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.

The Securities and Exchange Commission’s recent charge against cryptocurrency exchange Gemini and crypto firm Genesis over a lending product is another warning shot to the industry on yield-bearing accounts.

The U.S. regulator charged Gemini and Genesis Jan. 12 for the unregistered offer and sale of securities to retail investors through a Gemini crypto lending program. That program has been the subject of a public feud between Gemini’s Cameron and Tyler Winklevoss and the head of Genesis’ Digital Currency Group, Barry Silbert.  

“It creates a warning signal for other exchanges and actors in the crypto space that are also offering yield bearing products, which is quite frankly a lot of the exchanges,” said Alex More, a partner at Carrington, Coleman, Sloman & Blumenthal who focuses on digital assets.  

Gemini ended the Gemini Earn program earlier this month. Retail investors in Gemini Earn have not been able to withdraw their assets, the SEC said on Thursday. Those charges last week and others make clear that crypto lending platforms and other intermediaries need to comply with securities laws, SEC Chair Gary Gensler said.  

“We look forward to defending ourselves against this manufactured parking ticket. And we will make sure this doesn’t distract us from the important recovery work we are doing,” Gemini co-founder Tyler Winklevoss tweeted in response to the allegation. A spokesperson for Digital Currency Group declined to comment on the charges. 

The SEC alleges that the Gemini Earn program constituted an offer and sale of securities, said Michael Piwowar, executive vice president of finance at the Milken Institute and a former Republican SEC commissioner.   

“The nuance is that the SEC is not alleging that the underlying crypto assets themselves are securities,” Piwowar said.  

Lending no more credibility

This is not the first time the SEC has brought charges against a crypto lending firm. Prior to its bankruptcy filing, BlockFi settled with the agency in February for $100 million and said it would cease its unregistered offers and sales of its lending product.   

Zachary Fallon, partner at Ketsal, a law firm that specializes in fintech and digital asset industries, said the SEC’s move last week is another warning for crypto companies interested in lending and yield products.

“The SEC’s action this week against Gemini and Genesis is nothing new, and it’s in line with some of its previous actions in the industry, including with BlockFi,” Fallon said in an emailed statement. “That said, the business of crypto-focused lending among institutions will likely continue, but this most recent action should disabuse market participants of any notion that retail-focused crypto lending products can be offered in the United States without compliance with the securities laws.” 

Other exchanges have tried to move forward with a lending product. Crypto exchange Coinbase had plans to launch its own crypto lending product, but dropped that in September 2021 in light of the SEC’s view that it would constitute a security.  

“Platforms that offer these sort of programs are going to be continually targeted for them and they need to make a correct legal and risk assessment if they’re going to offer them,” said Christopher LaVigne, head of U.S. litigation at law firm Withers and co-chair of Withers’ Global Digital Assets Practice. 

The SEC’s broader view towards crypto

Piwowar thought it notable that the SEC made no allegations concerning whether the underlying crypto in this case are securities. But he added that the agency could still make those allegations in other cases. 

“It just means they feel they don’t need to make those arguments for this case,” Piwowar said.  

LaVigne also said the action is a reminder that they agency has a broad view that nearly everything in the crypto sector should be subject to its regulatory regime.  

“They want to be the main regulator,” he said.  

© 2023 The Block Crypto, Inc. All Rights Reserved. This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.

Bernstein has some advice for institutions: Get some skin in the game. 

“Get off zero crypto allocation,” the asset manager told institutions following the publication of its global crypto revenue pool model for the next decade. “For institutional investors with no allocation to crypto, 2023 might be the best time to start placing the building blocks for a long-term strategy.”

Analysts at Bernstein expect revenue to grow to $400 billion by 2033 from less than $25 billion today — an increase of more than 1600%.

To date, crypto has mostly been driven forward by retail investors and off-shore regulations, the note said. “Going forward, we expect growth to be driven by institutional investors with participation in on-shore regulated structures,” analysts Gautam Chhugani and Manas Agrawal wrote.

Based on this, Chhugani and Agrawal said opportunities in custody, market making and prime brokerages present “massive opportunities” for the growth of institutional capital in crypto. 

The asset manager expects institutional services’ opportunity to grow to $30 billion by 2033, a compound annual growth rate of 37%. The growth will be driven by custody solutions ($8 billion), market making ($8 billion), and prime broking ($14 billion).

© 2023 The Block Crypto, Inc. All Rights Reserved. This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.

Coinshares saw the first inflows into ethereum in two months as assets under management rose 13% thanks to the recent increase in crypto prices, the largest gain since Oct. 2021.

Digital asset investment products saw minor inflows of $9.2 million, though trading volumes were low at $866 million, the company said in its digital asset fund flows weekly report. Bitcoin saw the largest flows at $10 million, while ethereum reversed eight weeks of outflows with $5.6 million coming in.

Multi-asset investment products saw outflows as investors moved toward specific digital assets.

XRP reverse last week’s gains with outflows of $3.3 million.

© 2023 The Block Crypto, Inc. All Rights Reserved. This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.