In this issue
- Sam Bankman-Fried: Bust and busted
- The Block: Payback time
- Hong Kong: Rules for a reboot
From the editor’s desk
Only when the tide goes out do you discover who’s been swimming naked. So said the Oracle of Omaha, otherwise known as Warren Buffett.
Buffet may be well known for his skeptical view of cryptocurrencies — a view that Forkast doesn’t share — but it’s hard to argue with his track record of wealth generation, overall wisdom, and the relevance of his maritime metaphor to the current moment in our industry.
Recent days have seen yet another player in the crypto space caught with his beach shorts around his ankles — Michael McCaffrey, the now-former chief executive of news outlet The Block. McCaffrey is one of the latest industry figures to have come unstuck as a result of the collapse of crypto exchange FTX, following revelations that he failed to disclose US$43 million in loans from FTX brokerage operation Alameda Research.
As McCaffrey cools his heels and ponders his repayment options, things have become even hotter and more uncomfortable for FTX’s founder, Sam Bankman-Fried — and not just thanks to the sunny climes of the Bahamas, where he resides. Bankman-Fried was picked up by Nassau police this week after New York prosecutors filed criminal charges against him, and his extradition to the U.S. looks all but inevitable.
Meanwhile, the town that Bankman-Fried left for the Bahamas — Hong Kong — is looking to learn the lessons of this year’s crypto busts by bringing in a system of regulation and licensing for digital assets.
Hong Kong has a history of reinventing itself as times and fortunes change. And despite the difficulties Hongkongers continue to endure as a result of a China-led crackdown on free speech and civil liberties, authorities in the territory — like their counterparts elsewhere in Asia — have clearly spotted a wave of opportunity they think they can surf to restore the city’s status as a digital asset hub.
As the tide goes out in the Caribbean, it may well be rising in our part of the world. Watch this space.
Until the next time,
Founder and Editor-in-Chief
1. Tell it to the judge
By the numbers: Sam Bankman-Fried — over 5,000% increase in Google search volume.
Sam Bankman-Fried, former chief executive of FTX, is now in custody in the Bahamas, according to the New York Times. The Royal Bahamas Police arrested him this week at the request of U.S. authorities, a month after the implosion of the US$32 billion crypto exchange he founded, amid accusations that it misappropriated or commingled client deposits for trading by its brokerage arm, Alameda Research.
- The arrest was based on an indictment that was unsealed on Tuesday with civil and criminal charges including wire fraud, securities fraud and money laundering. A Bahamian judge on Tuesday denied Bankman-Fried’s request for bail after agreeing with prosecutors that he could be a flight risk.
- “The arrest may have been due to his refusal to testify in person and to remain overseas,” said Braden Perry, a former senior trial attorney at the Commodity Futures Trading Commission and partner at law firm Kennyhertz Perry, referring to a hearing on Tuesday before the House Financial Services Committee that Bankman-Fried had been invited to.
- “There was also speculation that [Bankman-Fried] had planned to flee the Bahamas for a non-extradition country,” Perry told Forkast. “The arrest could be a response to those rumors as well.”
- The U.S. will likely request Bankman-Fried’s extradition, according to Bahamian Attorney General Ryan Pinder.
- “The Bahamas and the United States have a shared interest in holding accountable all individuals associated with FTX who may have betrayed the public trust and broken the law,” Bahamian Prime Minister Philip Davis said in a statement.
- Bankman-Fried’s arrest led to speculation about whether the former heads of Alameda Research, Caroline Ellison and Sam Trabucco, will be indicted, too. The 13-page indictment against Bankman-Fried also includes the charge, “conspiracy to defraud.”
- “Based on the commingling concerns, I would not be surprised if Ellison, Trabucco and potentially others are charged,” Perry told Forkast.
- Perry said the indictment had been in the works for days and that its timing shows the urgency of U.S. authorities’ desire to hold Bankman-Fried in custody, but the extradition process could take weeks or months. “Due to his refusal to voluntarily enter the U.S. prior to his arrest, it could be a lengthy process,” he said.
- If convicted of all charges, Bankman-Fried faces up to 115 years in prison.
- FTX was among the world’s largest crypto exchanges, and Bankman-Fried was one of the most admired crypto founders until the extent of the exchange’s problems became known last month. FTX and Alameda Research filed for Chapter 11 bankruptcy protection on Nov. 11, and the company’s collapse caused users and investors around the world to lose billions of dollars.
Forkast.Insights | What does it mean?
The speed at which Sam Bankman-Fried has seen criminal charges filed against him reveals a sea change in how regulators regard the crypto industry. U.S. law enforcement has been making more arrests in the sector than ever before, and Sam Bankman-Fried is on a lengthening list of founders destined for the dock.
Before the latest charges, the U.S. Securities and Exchange Commission had already begun civil proceedings against the former FTX founder and chief executive, and he was due to appear this week before the House Financial Services Committee to explain what happened at his business.
The swift move to criminal proceedings demonstrates American authorities’ confidence in the prospects of a conviction and a determination not to allow Bankman-Fried to seek refuge in a country lacking an extradition treaty with the U.S., as appears to be the case with Terraform Labs cofounder Do Kwon.
The South Korean cofounder of the collapsed Terra stablecoin has been engaged in a game of cat and mouse with Interpol, all the while continuing to use Twitter to claim his innocence. Bankman-Fried took Do Kwon’s lead, also using his Twitter account to make claims about how little he knew of misuses of funds. No longer.
With the arrest of Tornado Cash developer Alexey Pertsev earlier this year, the takedown of two Estonians responsible for a US$500 million money laundering scheme, and the busts of a group of early Bitcoin pioneers for running an illegal business and tax evasion, U.S. authorities are trying to put crypto on trial like never before.
2. Borrowed trouble
By the numbers: The Block — over 5,000% increase in Google search volume.
Michael McCaffrey, the chief executive of media company The Block, has resigned from his position following an Axios report of the crypto news site receiving three multimillion-dollar loans from Alameda Research, the brokerage arm of now-bankrupt crypto exchange FTX.
- McCaffrey’s limited liability company, MJMCCAFFREY LLC, took an initial US$12 million loan from Alameda in 2021 to buy out investors.
- A second loan of US$15 million helped fund the company’s day-to-day operations, and a third loan worth US$16 million was used to buy personal property in the Bahamas, where FTX is based.
- McCaffrey didn’t disclose the loan amid concerns related to compromising the news outlet’s objectivity when it came to FTX-related content, according to a Twitter thread he published shortly after the Axios report. “Absolutely no one at The Block knew about the financial arrangement between my holding company and [Sam Bankman-Fried], including the editorial and the research teams,” he wrote.
- The Block aims to buy out McCaffrey’s majority stake in itself as part of a restructuring exercise.
- The company’s chief revenue officer, Bobby Moran, will lead the business following McCaffrey’s departure, according to a statement.
Forkast.Insights | What does it mean?
The relationship between journalism and the industries its practitioners cover has always been a fraught issue.
For years, powerful figures have bought or donated heavily to some of the world’s biggest media organizations. Some have acquired media outlets to support the work they do. Others have used the influence of their acquisitions to shape the news agenda.
In crypto, the boundary between ethics and expediency is particularly indistinct. Investors in crypto start-ups haven’t discriminated between tech companies and media companies, and venture capital has often flowed into both within the same portfolios.
Sam Bankman-Fried knew that better than most. He made investments not only in The Block but also Semafor and Trustless Media, two media companies covering the industry.
He had also given — or was in the process of issuing grants to — ProPublica, Vox, The Intercept and the Law & Justice Journalism Project. Giving money to media organizations obviously isn’t illegal, but it does make it tougher for journalists to demonstrate their independence if their reporting reflects negatively on sponsors.
The Block had, until recent revelations, been regarded as an example of solid, independent digital asset journalism. The fact that it secretly took loans from someone who is now facing criminal charges sadly calls much of its work into question.
Although allegations of murky practices have become commonplace in crypto, moving beyond that becomes even harder when the media industry tasked with holding it to account falls into the same trap.
3. License and registration
Hong Kong’s legislature has passed an amendment to a bill that includes a licensing regime for virtual asset service providers (VASPs) that will come into effect in June next year.
- The amended Anti-Money Laundering and Counter-Terrorist Financing Bill will require VASPs to obtain a license from the city’s Securities and Futures Commission (SFC).
- Applicants will also be required to meet local anti-money laundering and counter-terrorist financing standards and to comply with investor protection requirements that include maintaining safe custody of clients’ assets.
- Transition periods mandated in the bill are intended to provide sufficient time for businesses to apply for licenses and pursue registrations, according to a government press release.
- “According to the number of previously issued licenses and the transition period of the new draft, applicants have to be prepared for a protracted battle, which may take more than a year to gain a license,” Wing Tan, chief finance officer at Hong Kong-based Fore Elite Capital Management, told Forkast.
- Hong Kong authorities recently said that the government remains optimistic about digital assets despite the FTX debacle, and it is advancing plans to re-establish the city’s position as a global digital assets hub.
- Hong Kong received three applications for crypto-linked exchange-traded funds (ETFs) last week after the Securities and Futures Commission said it was seeking to build a regime to allow digital asset-based ETFs to be publicly traded in the city.
Forkast.Insights | What does it mean?
Hong Kong authorities appear determined to get cryptocurrency regulation into place as local industry players show greater interest in rolling out crypto-related financial products.
CSOP Asset Management, Samsung Asset Management and Mirae Asset Global Investments have been some of the first to submit the applications to the SFC for ETFs tracking Bitcoin and Ether futures, according to a report by Nikkei Asia last week, and CSOP has received approval.
The crypto market’s volatility and risks appear to have prompted Hong Kong Securities Clearing Company, the clearing unit of Hong Kong Exchanges and Clearing (HKEX), to set higher margin rates for virtual asset futures ETFs at 30%, compared to a flat rate of 12% applied to other instruments, according to HKEX.
Rebuilding trust is something the crypto community needs to do right now following FTX’s meltdown, an issue that Hong Kong’s government is well aware of. The city’s financial secretary, Paul Chan, said last month that Hong Kong remains bullish on crypto assets and that regulations could underpin the operation of a robust, orderly market.
The moves by regulators, ETF issuers and HKEX show that they are bracing themselves for policymakers’ vision to reclaim Hong Kong’s position as an international crypto hub. As Chan has noted, corporate governance regulation, financial and operational disclosures, and investor protection are guard rails the crypto sector desperately needs, and they’re exactly what Hong Kong’s authorities are working toward.