Week In Crypto: Leaks, Fake Trading Volume And Celebs Put On Notice For ’Shilling’ NFTs

September 2, 2022
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The Wikileaks of crypto drops its biggest case yet, Tether’s reserves come under scrutiny, a major study finds most bitcoin trades are fake and celebrities face the rap for "shilling" NFTs.

The Wikileaks of crypto drops its biggest case yet, Tether’s reserves come under scrutiny, a major study finds most bitcoin trades are fake and celebrities face the rap for "shilling" NFTs.

Crypto Leaks, a new website for whistleblowers looking to expose “big money corruption and hidden attacks” in the industry, has published new video evidence that appears to show weaponised lawfare by a major crypto firm.

Based on undercover footage released this week, Crypto Leaks alleges that Ava Labs, the US-based developer of the Avalanche blockchain, has pursued a three-year campaign of fraudulent lawsuits to damage its rivals and inflate its own token price.

At the centre of the claims is Roche Freedman, a US-based law firm that Ava Labs hired in 2019.

Roche Freedman, led by founding partner Kyle Roche, was allegedly paid hundreds of millions of dollars in Avalanche (AVAX) tokens and Ava Labs stock to pursue the strategy.

“I think litigation is an underused tool by everyone,” Roche said in one exchange with an undercover agent posing as a potential client. “It’s a completely different way of being a lawyer.”

According to Crypto Leaks, Roche Freedman pursued multiple bogus lawsuits designed to “mislead” the US Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC).

The firm is also accused of using fraudulent lawsuits to force Ava Labs’ rivals to disclose confidential information through discovery procedures.

“Because I sue half the companies in this space, I know where this market is going,” Roche said in another clip. “I’m one of the top ten people in the world: I’ve seen the insides of every single crypto company.”

In a final clip, Roche is asked what he has done to impress Ava Labs as its attorney: “They haven’t been sued yet,” he replied, “and there’s a reason for that.

“I deal with making sure that the SEC and the CFTC have other magnets to go after.”

Roche Freedman is currently pursuing at least 25 class action lawsuits against a range of individuals and crypto firms, including Binance, Solana Labs and Dfinity Foundation.

In response to Crypto Leaks’ claims, Ava Labs CEO Emin Gün Sirer published a statement in which he denies the allegations but attempts to distance himself from Roche.

“These claims evidently came about when Kyle Roche, a lawyer at a firm we retained in the early days of our company, tried to impress a potential business partner by making false claims about the nature of his work for Ava Labs,” said Sirer.

But Crypto Leaks’ claims appear to be corroborated by Jason Cyrulnik, a former Roche Freedman partner who is suing the firm for “illegally” ousting him from the company.

In court documents, Cyrulnik details token payments made by Ava Labs to Roche Freedman as part of the firm’s fee agreement.

Cyrulnik notes that, in February 2021, around the time he was ousted, a “sudden appreciation” of the AVAX token meant the firm’s agreed fee had grown to be worth more than $250m.

The AVAX token continued to make new highs following Cyrulnik’s departure, hitting a total market cap of almost $30bn later in the year.

Tether dismisses WSJ investigation

From crypto leaks to stablecoin queries, this week Tether has been in the spotlight again courtesy of a look at its reserves by the Wall Street Journal (WSJ).

In an article based on Tether’s Q2 attestation report, the WSJ suggests that a 0.3 percent drop in the total value of Tether’s assets could result in “technical insolvency”.

Described by the WSJ as a “thin cushion of equity”, the article notes that Tether has only $191m more in assets than liabilities, despite having issued $66.4bn worth of stablecoins.

The WSJ also questioned the safety of Tether’s assets, given that $8.4bn is still held in commercial paper — a number that Tether plans to reduce to zero by the end of 2022.

However, Tether has still not undergone a full audit, despite having promised to do so repeatedly over many years.

In response to the article, Tether hit back with a statement accusing the WSJ of “disinformation” and bias towards rival stablecoins.

“Tether's disclosures have been the most honest and transparent in the market — everyone knows that we have not had an audit and they know we are working towards one,” the company said.

“Tether is committed to maintaining its role as the leading stablecoin in the market and we will continue to demonstrate our transparency, regardless of naysayers.”

It is worth noting that Tether only started publishing quarterly attestation reports last year as part of an $18.5m settlement with the New York attorney general, whose office accused the stablecoin of not being fully backed.

Fake trading volume?

Yet more doubt was cast on the numbers behind crypto this week by Forbes magazine, which published a major study of bitcoin exchange trading volume.

After analysing trading data from 157 exchanges worldwide, Forbes concluded that 51 percent of daily bitcoin trading volume is likely to be “fake or non-economic”.

Taking a snapshot of bitcoin trading on June 14, total volume self-reported by exchanges was $262bn, although Forbes put the likely total of real trading activity at about $128bn.

According to Forbes, the main reason for the large delta between real and bogus volume is wash trading.

The CFTC defines wash trading as “entering into, or purporting to enter into, transactions to give the appearance that purchases and sales have been made, without incurring market risk or changing the trader's market position”.

As noted by Forbes, both bots and humans engage in bitcoin wash trading to inflate the asset’s total trading volume, thereby giving it an appearance of widespread buying and selling, and helping to encourage more legitimate trading.

In July, as reported by VIXIO, the SEC’s concerns around wash trading was one of the main reasons it rejected an application from Grayscale, a major digital asset manager, to launch a spot bitcoin exchange-traded fund (ETF).

Celebs on notice for ‘shilling’ NFTs

Another crypto market that has had its own volume problems lately is non-fungible tokens (NFTs).

According to data from DappRadar, OpenSea, the largest NFT marketplace, has seen its volume drop by 99 percent in the last four months, from $2.7bn in May to just $9.34m in late August.

Along with NFTs’ collapse in volume has come a vengeance for the celebrities who promoted the new asset class to their followers.

This week, US consumer watchdog Truth In Advertising.org (TINA) wrote a cease and desist letter to Justin Bieber, calling on the singer to disclose his financial interest in social media posts promoting the inBetweeners NFT studio, as per Federal Trade Commission (FTC) rules.

In August alone, TINA sent similar letters to 19 celebrities urging them to disclose such financial interests when promoting NFT companies online.

The 19 recipients include Jimmy Fallon, Madonna, Gwyneth Paltrow, Eva Longoria, Eminem, Floyd Mayweather, Neymar Junior, Tom Brady, DJ Khaled and Paris Hilton.

“We have found that celebrity NFT promotions is an area rife with deception, including, but not limited to, a failure to clearly and conspicuously disclose the promoter’s material connection to the endorsed NFT company,” said TINA.

“[This includes] the omission of other material information, such as the risks associated with investing in such speculative digital assets, the financial harm that can result from such investments, and the personal benefit(s) the promoter may gain by virtue of the promotion(s).”

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