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FTX’s former CEO pins his hopes on an acquittal, Coinbase is rapped for over-stretching its compliance muscle and a federal judge confirms that Celsius owns its customers’ crypto.
Sam Bankman-Fried, former CEO of FTX, has pleaded not guilty to all criminal charges filed against him by the Southern District of New York, including wire fraud, securities fraud and conspiracy to commit money laundering.
On Tuesday (January 3), Bankman-Fried appeared at a federal court in Manhattan, where his defence attorney Mark Cohen pleaded not guilty on his behalf.
Bankman-Fried’s team also requested that Judge Lewis Kaplan seal the names of two co-signers who contributed to Bankman-Fried’s $250,000 bail, and this request was granted.
This leaves only Bankman-Fried’s parents, Joseph Bankman and Barbara Fried, whose names were unsealed as co-signers of the bail bond.
Over the Christmas period, Bankman-Fried’s case was reassigned to Kaplan, after the previous judge, Ronnie Abrams, recused herself due to a potential conflict of interest.
In 2021, the law firm where Abrams’ husband is a partner, Davis Polk & Wardwell, served as an advisor to FTX, and is currently advising parties that are adverse to FTX in its bankruptcy case.
Bankman-Fried, 30, whose trial is set to begin in October this year, is facing a maximum sentence of well over 100 years in prison.
His plea contrasts with that of Caroline Ellison, former CEO of FTX-linked Alameda Research, and Gary Wang, co-founder of FTX, both of whom have pleaded guilty to criminal charges related to FTX’s collapse.
This opens up the possibility that both Ellison and Wang will be called to testify against Bankman-Fried, who is also the former boyfriend of Ellison.
More bad news for Coinbase
One day after Bankman-Fried’s court hearing, another crypto exchange was hit with a major penalty by a New York regulator.
On Wednesday (January 4), the New York Department of Financial Services (DFS) announced that it has reached a $100m settlement with Coinbase after finding “significant" failures in its compliance programme.
These failures led to violations of both New York Banking Law and DFS regulations on virtual currency, money transmitting, transaction monitoring and cybersecurity.
As part of the settlement, Coinbase has been ordered to pay a $50m penalty, and has agreed to invest $50m over the next two years in a compliance plan approved by the DFS.
Coinbase has operated in New York since 2017, when it first obtained a license from the DFS — known as a “BitLicense” — to conduct virtual currency and money transmitting activities in the state.
In May 2020, however, the DFS opened an investigation into potential compliance failures by Coinbase between July 2018 and December 2019.
During that time, the DFS found that Coinbase’s know your customer (KYC), customer due diligence (CDD) and transaction monitoring system (TMS), among other checks and balances, were “inadequate” for a company of its size and complexity.
“During much of the relevant period, Coinbase treated customer onboarding requirements as a simple check-the-box exercise and failed to conduct appropriate due diligence,” the DFS said in a statement.
The DFS also said that Coinbase was unable to keep pace with the growth in the volume of alerts generated by its TMS, and by late 2021, this had resulted in a backlog of more than 100,000 unreviewed transactions.
Similarly, the DFS found “numerous” instances of suspicious activity reports (SARs) being filed months after the suspicious activity was first known to Coinbase.
In early 2022, the DFS therefore took the “extraordinary step” of installing an independent monitor to evaluate the situation and work with Coinbase to fix its compliance issues.
As per the settlement, the independent monitor will continue to work with Coinbase for one more year, a term that is extendable at the DFS’s sole discretion.
In its own statement, Coinbase said: “We are always willing to acknowledge where we have fallen short, and we welcome opportunities to improve our programs.”
Judge rules Celsius owns its customers’ deposits
On the same day the DFS published its settlement with Coinbase, crypto lender Celsius received a different kind of settlement in a New York bankruptcy court.
In a new opinion entered on January 4, Chief Bankruptcy Judge Martin Glenn ruled that deposits made to Celsius Earn accounts, i.e. those that accrue interest to the depositor, are legally the property of Celsius.
Describing the question as a “gating issue” at the centre of the Celsius bankruptcy, Glenn said the company’s Terms of Use make clear that all crypto-assets (including stablecoins) held in Earn accounts belong to Celsius.
On the day of Celsius’ bankruptcy filing (July 15, 2022), Celsius had about 600,000 Earn accounts that collectively held $4.2bn worth of crypto-assets.
The current value of those assets is likely to be significantly lower, however, due to the pummeling the crypto markets have taken over the last six months, largely due to the chain of bankruptcies set in motion by the collapse of the TerraUSD stablecoin.
Prior to filing for bankruptcy, Celsius had published eight versions of its Terms of Use, with the latest one, published in April 2022, considered “in force” by the court.
In those Terms of Use, customers are told that when using an Earn account to generate yield, they are effectively handing over the title to their assets so that Celsius can lend them out to other users.
“If our Earn Service is available to you, upon your election, you will lend your Eligible Digital Assets to Celsius and grant Celsius all rights and title to such Digital Assets, for Celsius to use in its sole discretion while using the Earn Service,” the document states.
Going forward, Celsius customers who still have assets in Earn accounts will be deemed unsecured creditors, and the recovery of their assets will depend on distributions made in either a Chapter 11 plan, or, in the event of liquidation, priority rules outlined in the US Bankruptcy Code.
“A fundamental principle of the Bankruptcy Code is equality of distribution,” but “There simply will not be enough value available to repay all Account Holders in full,” said Judge Glenn.
“Most of the Account Holders are left as unsecured creditors and may recover only a small percentage of their claims.”
Although this may seem cruel to Celsius’ customers, one-sided terms of use such as these are almost universal among crypto firms.
Tether, for example, writes in its Terms of Service that it can terminate its services to any user at any time, and for any reason: “Tether reserves the right to refuse registration to, to bar transactions from or to, or to suspend or terminate the administration of Services, Digital Tokens Address, or Digital Tokens Wallet for or with, any user for any reason (or for no reason) at any time.”
New York attorney general sues Celsius
Finally this week, the New York Attorney General’s Office has filed a new lawsuit against former Celsius CEO Alex Mashinky.
The complaint alleges that, between 2018 and 2022, Mashinsky engaged in a scheme to defraud hundreds of thousands of investors, including 26,000 New Yorkers, of billions of dollars in deposits.
