With tens of billions lost to fraud and mismanagement, will crypto bros ever face justice?

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Crypto Regulation
With tens of billions lost to fraud and mismanagement, will crypto bros ever face justice?

Zhu Su, Kyle Davies, Steve Ehrlich, Do Kwon, Alex Mashinsky, Sam Bankman-Fried, and Gerald Cotten; what do all these names have in common? They’re collectively responsible for losing tens of billions of dollars worth of crypto entrusted to their care by ordinary, hardworking men and women.

Crypto crisis echoes 2008 financial crash 

What else do the crypto heads mentioned above have in common? None of them has faced a lick of consequence for their egregious misconduct and dishonest behavior.

However, this lack of accountability isn’t a new phenomenon, nor is it exclusive to crypto. For years, white-collar perpetrators of multi-billion dollar misdeeds have gotten away with nothing more than a few fines and a ticking off.

Remember the 2008 financial crisis? How many Wall Street bankers, traders, and executives were punished for fraudulent actions that contributed to the 2008 crash? At last count, zero

Yes, several mortgage brokers and other small fish were prosecuted for lying or encouraging clients to lie on their home loan applications. Yes, major banks have paid out billions of dollars in civil settlements for unethical behavior in the run-up to the crisis. Yes, the crisis also exposed some outright fraudsters, such as Bernie Madoff and Allen Stanford, who are now dead or in prison.

However, it’s shocking that there’s never been a defining prosecution for a crisis that pushed the global economy off a cliff and caused millions of people to lose their homes. No one who led any of the financial institutions directly responsible for the disaster has ever been imprisoned.

Now it seems like this cushy treatment is being extended to crypto’s bad boys. The names we mentioned at the start of this piece are responsible for precipitating a crypto version of the 2008 financial crisis. Like their counterparts from that time, it seems they’ll also get away scot-free.

Do Kwon and TerraUSD

Do Kwon, the so-called “King of the Lunatics,” is free as a bird, even after presiding over one of the biggest collapses ever seen in crypto. His TerraForm Labs developed the TerraUSD stablecoin, which was designed to maintain a constant value of $1 through a complicated set of algorithms and trade subsidies involving a sister token, LUNA. Their total value once reached $60 billion, but in May 2022, investor confidence in the ecosystem waned, causing them to flee and rendering the tokens worthless.

The TerraUSD implosion shook the crypto space to its core and triggered a wipe-out of nearly $2 trillion of its market value.

Kwon’s whereabouts became unknown four months after South Korea issued a warrant of arrest on accusations including violations of capital markets regulations. He’s denied any wrongdoing and even tweeted that he’s not on the run. However, he’s also the subject of an Interpol red notice. Regardless, Do Kwon is still enjoying his freedom. And he might also have been enjoying his ill-gotten gains had Korean prosecutors not sent requests to crypto exchanges OKX and KuCoin to freeze more than 3K BTC worth about $65 million at the time, which was alleged to be controlled by him. 

Zhu Su and Kyle Davies: whereabouts of 3AC founders still unknown

Three Arrows Capital (3AC) founders Zhu and Davies are also in the wind, nearly six months after the crypto hedge fund went bust. 

3AC once boasted $10 billion in assets under management. However, bungled speculations, loans that should never have been made, a lack of transparency, and exposure to the TerraUSD ecosystem, brought the entire edifice crashing down.

On July 1, Three Arrows Capital filed for Chapter 15 bankruptcy in the Southern District of New York. Before the filing, a British Virgin Islands court ordered the firm to liquidate to pay its creditors. But rather than pay their creditors, Zhu and Davies seemingly went on the run, only making brief Twitter appearances to castigate the liquidators appointed to handle their company’s winding down process.

So far, the most severe action taken against the duo has been a mild reprimand from the Monetary Authority of Singapore (MAS).

Enter Alex Mashinsky

Another one currently running around unfettered after blowing millions of investors’ funds is former Celsius CEO Alex Mashinsky. 

As of May, Celsius was one of the largest players in the crypto lending space, with more than $8 billion in client loans and nearly $12 billion in assets under management. The company would lend customers’ cryptocurrency to counterparties willing to pay exorbitant interest rates to borrow it, and Celsius would split a portion of the revenue with users.

The structure collapsed during an industry-wide liquidity crisis, causing Celsius to halt withdrawals in June.

According to former employees and internal documents, the crypto company made several internal mistakes leading to its recent turmoil. Several employees described the company as replete with risk-taking, disorganization, and alleged market manipulation.

A lawsuit by former Celsius partner KeyFi Inc accused Mashinsky of running a Ponzi scheme. In that suit, KeyFi claimed that Celsius used “customer deposits to manipulate crypto-asset markets,” that it “failed to institute basic accounting controls,” that it was “desperately seeking a potential investment that could earn them more than they owed to their depositors,” and that, eventually, it didn’t have the assets on hand to meet its withdrawal obligations.

But despite all the damning accusations, no criminal proceedings have been instituted against Mashinsky.

From hero to zero: Sam Bankman-Fried burns FTX

Most recently, the internet has been awash with news of the fall from grace of crypto’s golden boy Sam Bankman-Fried (SBF). The once-celebrated founder of the $32 billion crypto exchange FTX was yanked into the harsh light of public scrutiny following the company’s collapse just over a week ago.

Concerns about financial instability sparked a flurry of customer withdrawals totaling billions of dollars at FTX. However, the crypto exchange didn’t have enough funds to pay sellers, so it stopped withdrawals entirely. The company declared bankruptcy a few days later, and Bankman-Fried resigned as CEO.

Before the FTX debacle, SBF was the self-styled ambassador for crypto. He attended conferences, spoke on TV, and testified before Congress while wearing his trademark t-shirt and fuzzy hair. He was a public proponent and private lobbyist in favor of US rules regulating the crypto space. He even assisted in the bailout of other struggling cryptocurrency companies.

Then the facade fell off. It started with a news report showing that a sizable amount of assets held in Alameda Research, a crypto hedge fund owned by Bankman-Fried, consisted of FTT. Now, FTT is a token issued by FTX that enables users of the exchange to receive lower trading fees, but it isn’t easy to convert into cash. The presence of such a huge chunk of this token in Alameda raised concerns regarding the hedge fund’s capital reserves and, by extension, FTX’s.

Days later, Binance CEO Changpeng Zhao (CZ) declared that he would sell all of the company’s FTT holdings, totaling $580 million. This news triggered a wider selloff, resembling a bank run, putting FTX under tremendous pressure to handle the rapid surge in customer withdrawals. Consequently, the company was forced to stop withdrawals, putting billions of its customers’ funds in peril.

Reports indicate that FTX lent customer deposits to Alameda to shore up its liquidity. This revelation has raised more scrutiny about the relationship between the hedge fund and FTX.

The SEC and the Justice Department are looking into the collapse of FTX. There’re reports that federal authorities are also looking into the case.

So bad is the situation at FTX that new CEO John Ray III, who guided Enron through bankruptcy, has said he’s never witnessed such a “complete failure” of corporate controls in his entire career. 

Are there different sets of rules for different people?

What irks most people is the feeling that authorities seem to have different strokes for different folks regarding criminality in crypto. A case in point is the handling of Tornado Cash developer Alexey Pertsev. 

Pertsev was arrested by Dutch officials in Amsterdam on August 10 for allegedly facilitating money laundering and concealing the flow of criminal finance through Tornado Cash. The so-called crypto mixer mashes up and obscures crypto transactions to enable anonymous payments between parties.

Days before Pertsev’s arrest, the US Treasury’s Office of Foreign Assets Control (OFAC) sanctioned the crypto mixer claiming it had been used to launder more than $7 billion since 2019. The arrest sparked outrage and left observers wondering why authorities would arrest a person for writing code instead of those misusing it for nefarious purposes.

At the time of writing, Pertsev was still languishing in a Dutch jail with no charges against him. Many are asking why a mere code writer would be treated so harshly while those responsible for the loss of billions of people’s hard-earned money are allowed to roam free.

Elizabeth Holmes sentencing offers blueprint for how crypto wrongdoers should be punished

One might say that it’s still early days for most of these cases, especially with regard to FTX. But there’s little evidence that perpetrators of white-collar crimes have ever faced more than a cursory slap on the wrist for their misconduct.

However, the just concluded case of former Theranos CEO Elizabeth Holmes might offer a spark of hope for those skeptical about whether SBF and his cronies will ever face justice.

Holmes was sentenced to 11 years in prison yesterday for defrauding investors out of hundreds of millions of dollars. In January, the once-celebrated Stanford dropout was found guilty of four counts of wire fraud. 

She misled investors about a potentially ground-breaking device that could check for hundreds of conditions with just a few drops of blood. But the prosecution claimed that Holmes fabricated test results, blatantly exaggerated the capabilities of her tests, and attempted to hide her actions when journalists and whistleblowers started to question what was really going on at her company.

While she might not have been in crypto, Elizabeth Holmes’ case shared stark similarities with those of Messrs. Bankman-Fried, Mashinsky, Kwon, Zhu, and Davies. Their respective companies were nothing more than houses of cards built on false promises and wild machinations.

Final thoughts

Long-suffering investors of 3AC, Voyager, Celsius, FTX, and Terra (LUNA) hope they may one day get restitution. But what’s to stop these slick-talking, flip-flop-wearing, video-game-playing, 30-something-year-olds from coming back into the crypto space in different guises if they don’t get punished for what they’ve done?

Apart from half-hearted apologies on social media, has any of them shown genuine remorse for the damage they’ve caused, not only to the lives and finances of millions of ordinary people but to a fledgling industry?

To bring back confidence in the crypto sector, stiffer regulations and tougher penalties for lawbreakers need to be introduced. Lines need to be drawn, and examples need to be made. But given the unclear legal status of so many aspects of the industry and the high-priced lawyers these reprobates can afford to line up in their defense, it’s probably going to be a while before we see any of them in an orange jumpsuit. 

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