Liz Coyne

Why Institutions are Waiting on the Crypto Sidelines

Shalini Nagarajan

Both Canadian crypto quant fund Gadze Finance and its prominent CEO were victims in FTX’s implosion, with founder Mike Silagadze personally losing around $1 million.



Silagadze, known for building online learning firm Top Hat, switched focus to the crypto and decentralized finance (DeFi) by launching Gadze last October.



The fund didn&#8217;t directly invest in crypto but operated as a liquidity provider for exchanges in return for yield. It also employed arbitrage strategies in a bid to shield itself from volatility and provide predictable returns, with Silagadze reportedly pitching up to 10% to 12% per year.



Gadze was apparently doing well right up until FTX crumbled. The fund’s managed $40 million when trouble bubbled over earlier this month, up from $25 million at its <a href="https://www.prweb.com/releases/gadze_finance_launches_us25_million_defi_crypto_fund/prweb18257986.htm" target="_blank" rel="noreferrer noopener">launch</a>. Of that, the firm kept $5.4 million on FTX directly, funds now relegated to bankruptcy proceedings and may never come back.&nbsp;



He told <a href="https://www.theglobeandmail.com/business/article-ftx-collapse-hits-gadze-capital-crypto-fund-led-by-top-hat-founder/" target="_blank" rel="noreferrer noopener">The Globe and Mail</a> the funds were being used to short sell crypto on FTX as part of a hedging strategy — betting against digital assets to capitalize on their anticipated decline to balance overall risk.&nbsp;



Bitcoin and ether both shed up to a quarter of their value as FTX bombed.



Gadze attempted to retrieve its asset in time but was unable to do so, <a href="https://blockworks.co/news/ftx-users-band-together-had-entire-net-worth-on-there-oops" target="_blank" rel="noreferrer noopener">alongside swathes</a> of FTX users. Silagadze anticipates overall losses of 10% to 15% to the fund.&nbsp;



Silagadze hopes to recover 20% to 50% of Gadze’s missing funds but doesn’t expect it to happen for another few years. Gadze is backed by prominent Canadian investors including Boris Wertz’s Version One Ventures and BlueCat co-founder brothers Michael and Richard Hyatt. Blockworks has reached out for comment.



Silagadze told Globe and Mail he’d used FTX as he believed it to be more secure and reliable than its competitors. Those feelings were bolstered by founder Sam Bankman-Fried’s high political profile and FTX’s suite of suitors, which counted Silicon Valley veteran <a href="https://blockworks.co/news/crypto-vcs-sequoia-multicoin-reckon-with-failing-ftx-investments/" target="_blank" rel="noreferrer noopener">Sequoia</a> and state-owned Temasek, among many others.



He also cited the Ontario Teachers’ Pension Fund’s $95 million <a href="https://blockworks.co/news/ontario-teachers-fund-sank-95m-in-failed-ftx-empire" target="_blank" rel="noreferrer noopener">investment</a> in FTX, which contributed to its credibility, stating the fund was “clearly asleep at the wheel.”



But Silagadze told reporters he feels awful for his fund’s investors, of which there are 65. He said he let people down because he was “supposed to be protecting their own money — and my own.”&nbsp;



Gadze investors are said to still be supportive, with one explaining that everyone was happy with the fund but failed to spot FTX as a counterparty risk.&nbsp;



The quant is now switching crypto strategies somewhat. Gadze’s market neutral fund is reportedly out for higher returns via higher risk strategies, commenting that its new style is more interesting with greater upside.



Silagadze said he initially thought twice about continuing in crypto but remains bullish.



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Quant Fund’s Lost FTX Millions Were Meant to Short Crypto

Talk and excitement around the zero-knowledge rollup is heating up as layer-1 protocols take significant steps toward implementing the solution at scale. The technology promises to remove a critical bottleneck in the development of Web3: cost and scaling ceilings. Layer-1 blockchains such as Ethereum struggle to meet full user demand because of high transaction fees and congestion, which work in conjunction with one another.&nbsp;



While various types of rollups and layer 2 solutions have been created to address this problem, the ZK rollup hasn’t been tested at the scale needed to open Web3 to the masses. While rollup technology introduces new advantages, it also brings some new challenges in regards to how they manage data availability in a way that is decentralized and censorship resistant. Implementing rollups without first addressing this issue is like putting the cart before the horse. The path to mass adoption needs to lead with decentralization and security first in mind.&nbsp;&nbsp;&nbsp;



Some blockchains are closer than others. For example, <a href="https://syscoin.org/" target="_blank" rel="noreferrer noopener">Syscoin</a> announced a PoDA (Proof-of-Data Availability) solution, which is already working on testnet, that will work hand in hand with rollups once they are deployed on mainnet. Unlike other approaches, its rollup can effectively inherit the security of the base layer, which is Bitcoin in Syscoin’s case, by protecting against censorship and centralization vulnerabilities. But before explaining how they achieve this we need to explain zero-knowledge proofs and the various approaches to ZK rollups.



<h2>What are zero-knowledge proofs?</h2>



Zero-knowledge proofs (ZK proofs) are a digital verification method where the prover can show that they have access to a piece of information without necessarily revealing it. MIT students Shafi Goldwasser and Silvio Micali introduced the concept in a <a href="http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.419.8132&amp;rep=rep1&amp;type=pdf" target="_blank" rel="noreferrer noopener">research paper</a> in 1985.&nbsp;



ZK proofs have evolved significantly since then, finding real-world use cases in developing privacy and security-oriented systems. Unsurprisingly, ZK proofs also enhance cryptography and powers privacy-oriented coins such as Zcash.&nbsp;



However, ZK proofs can do much more for cryptocurrency. They are a fundamental block for building rollups — solutions that significantly improve scalability and performance for blockchain networks.



<h2>What are rollups, and how do they differ?&nbsp;</h2>



Rollups are layer-2 scaling solutions that bundle millions of transactions into one, which is then submitted on the base layer (e.g., Syscoin) as a single transaction. Rollups spread the single transaction cost across many users, thus making them a cheaper option. Additionally,&nbsp;the off-chain process ensures that rollups offer a faster settlement, thus easing the load on the base layer and unlocking mainstream-level capacity for blockchain networks. There are currently two main types of rollups: Optimistic and ZK rollups. Both approaches solve the blockchain scalability issue but with unique advantages and disadvantages.



<h3>Optimistic rollups explained</h3>



Optimistic rollups are layer-2 scaling solutions that scale throughput by assuming (optimistically) that each transaction bundled within a rollup is valid. Hence, even though transactions on the layer-2 network are processed instantly, there is a window (usually seven days) for users to contest fraudulent transactions. However, these users are not required to wait 7 days, as there are bridges that front liquidity across the chains that let people exit. Barring any challenges, the network automatically adds the rollup transactions on the parent chain for final settlement at the end of the window.



The waiting period guarantees security as the second layer can reverse fraudulent transactions before updating the state on the parent network. However, it also introduces a significant bottleneck. Users must wait a long while to withdraw deposited funds from the layer-2 network. Further, the model fosters censorship, as the project team or a limited group of validators manages core infrastructure and can potentially reverse transactions. This is true for ZK rollups as well if the sequencer is centralized. Therefore, one must decentralize the sequencer as Syscoin is doing, so it’s not an issue on either type of rollup.



Arbitrum and Optimism are the most popular examples of layer-2 solutions already utilizing optimistic rollups to scale Ethereum. However, another type of rollup – ZK rollups – seems to be the end game for the technology because of the unique capabilities it brings to the table.



<h3>So what are ZK rollups?&nbsp;</h3>



ZK rollups are another suite of layer-2 scaling solutions that handle computation and process dozens of transactions off-chain before submitting a rolled-up version on the parent chain. The critical difference is that zero-knowledge rollups offer near-instant settlement on both layers, unlike optimistic rollups.&nbsp;



ZK-rollups tap into their zero-proof technology to submit regular validity proofs to associated smart contracts on the parent network, confirming the accuracy of the transactions on the layer-2 network. The reliance on zero-proofs also reduces the volume of shared transaction data,&nbsp; thus making ZK rollups privacy-focused by default.



In addition to privacy, ZK rollups eliminates the need for users to wait several days before withdrawing funds from the layer-2 solution. However, the technology&#8217;s nascent nature is its most significant disadvantage.&nbsp;



ZK rollups are more complex to build, requiring a heavy reliance on a few developers to maintain the entire system. Additionally, the network structure often involves setting up sophisticated and otherwise expensive hardware to validate transactions. And depending on the approach, ZK rollups can present some of the same censorship risks if the validation sequencing is centralized. Because not all ZK rollups are the same, these centralization factors need to be examined independently.&nbsp;



The primary ZK solutions utilized in cryptography are zk-Stark, zk-Snark and Validium. The latter is a novel ZK rollup already pioneered by Syscoin to scale blockchain systems.



<h3>zk-Snark vs. zk-Stark</h3>



Zero-Knowledge Succinct Non-Interactive Argument of Knowledge (zk-Snark) are proof systems that enable the prover to publicly verify that they own vital information, such as the private key to a cryptocurrency address and the amount they&#8217;re trying to transfer. Once the user provides cryptographic proof, they can transfer funds without disclosing essential details such as the associated addresses, transaction history and balances. The Zcash cryptocurrency project implements zk-Snark to enable anonymous and private transactions for users. Notably, zk-Snark has a fundamental risk. The requirement of trusted third parties to set up the system increases centralization and makes it vulnerable to attacks.&nbsp;



Zero-Knowledge Scalable Transparent Argument of Knowledge (zk-Stark) solves the initial setup risk with zk-Snark by eliminating the involvement of a few trusted parties. It handles off-chain computation and immediately relays only an insignificant amount of secure data on the parent chain for validation. Zk-Stark technology provides excellent scalability, and privacy features which are immensely valuable to smart contract blockchains.



<h3>Validium on Syscoin</h3>



Validium, a ZK-rollup solution deployed on the Syscoin network, is a unique kind of zero-proof technology with potentially higher throughput than both zk-Stark and zk-Snark. Validium&#8217;s core proposition is its data storage location.&nbsp;



Validium enables Syscoin to handle up to four million transactions per second (TPS), a remarkable feat for a smart contract blockchain. Unlike existing ZK-rollups that store such transaction information on-chain, <a href="https://docs.syscoin.org/docs/intro/syscoin-roadmap/#validium" target="_blank" rel="noreferrer noopener">Validium stores data off-chain</a>. This allows the technology to free up additional space on the base layer.



<h2>The different ZK rollup projects</h2>



Despite being in their infancy, ZK rollups are seeing broad adoption across the crypto industry because of the immense benefits the system brings to decentralized applications. These applications expand far beyond the Ethereum ecosystem, with more use cases expected to emerge as the technology improves.



For example, zkSync is a popular scaling solution utilizing ZK rollups. The earliest version of the protocol enabled privacy-focused and cheap token transfers and payments. However, the solution recently launched zkSync 2.0 will unlock the ability for developers to deploy dapps on the network.



StarkNet is another ZK rollup project enabling Ethereum-based applications to scale throughput. Leading decentralized protocols like dYdX and ImmutableX already implement StarkNet’s solution, allowing low-cost transactions and fast settlement on their platforms.



Outside of Ethereum, advanced networks like Syscoin harness ZK rollups (and Optimistic) in a way that provides full scalability without sacrificing decentralization by storing data off-chain.&nbsp;The result is unprecedented scaling and a mainstream-ready solution for dapp developers.&nbsp;&nbsp;



<h2>The data availability problem and Syscoin’s solution</h2>



Blockchain transactions involve significant volumes of data that only grow as the network expands. The data demand especially takes its toll on smart contract blockchains where users perform complex transactions. As the data volume increases, every network faces a data availability challenge.&nbsp;



The challenge involves devising a means for participants (both validators with sophisticated hardware and light-client nodes) to verify that a block producer included all transaction data in a proposed block. This verification is essential to show that the block producer did not censor participants by enforcing any restrictions that would prevent them exiting the rollup. The ultimate goal is to inherit the security of the base layer.&nbsp;



There are several approaches to solving the data availability challenge. Ethereum’s previous, vision was to roll out sharding, a process that practically splits the network into different bits (shards). But after a recent change in their roadmap, their plan is to go a different route that uses KZG commitments to shard data blobs.&nbsp;Reducing the data into smaller segments makes it easier for validators and light-node operators to access the data.&nbsp;



Both the Ethereum and Syscoin dev teams independently arrived at similar solutions around the same time. But while Ethereum sharding is at least a year away from production, Syscoin’s PoDA (Proof-of-Data Availability) is already on testnet. It uses the Syscoin blockchain to verify that the correct execution data was provided and confirmed by the network, giving the opportunity for any person the ability to store it and retain censorship resistant properties. In addition, it will automatically use a committee of trusted safe-keepers as well as decentralized storage options such as filecoin/arweave and others for long-term archiving.This approach frees up the base layer for greater scalability. It also minimizes the data availability challenge since a zero-knowledge implementation generates less data than a public smart contract blockchain.



<h2>The future of blockchain scalability and virtual machines</h2>



Syscoin offers the most advanced smart contract platform secured by Bitcoin’s impeccable proof-of-work (PoW) through merged mining. Syscoin also delivers remarkable scalability on the <a href="https://syscoin.org/news/nevm-and-related-changes-to-syscoin" target="_blank" rel="noreferrer noopener">Syscoin NEVM</a>, which supports the deployment of Ethereum-native applications.  



Syscoin is paving the future of blockchain scalability and virtual machines by implementing secure rollups and increasing data availability. They are implementing scaling solutions that not only account for technical bottlenecks, but also regulatory ones. They integrated a base layer of opt-in regulatory compliance for all smart contract tokens. This will let token issuers provide users the necessary tools to stay compliant — a tool that would prove useful against complaints from regulatory authorities. They have implemented this feature on their UTXO side and are working on it for the NEVM side for compliant rollups. Mainstream-scale blockchain adoption is possible and can be served over secure and high-performant networks that offer a seamless experience for all network users.



This content is sponsored by <a href="https://syscoin.org/news/nevm-and-related-changes-to-syscoin" target="_blank" rel="noreferrer noopener">Syscoin</a>.



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What Are ZK Rollups? The Future of Smart Contract Blockchains

Sebastian Sinclair

In Indonesia, the central bank has formally laid out plans for a central bank digital currency (CBDC), pitched to combat what it calls rising “cryptoization” of the country’s digital economy.



Bank Indonesia’s new CBDC <a href="https://www.bi.go.id/en/rupiah/digital-rupiah/Documents/White-Paper-CBDC-2022_en.pdf" target="_blank" rel="noreferrer noopener">white paper</a> outlines how “shadow currencies” and “shadow central banking” are furthering unregulated credit creation around the world through crypto.



Two years of pandemic-era investments into the crypto sector have fueled this system. As such, the bank said it has been forced to recalibrate its approach and policies to promote digital forms of “trusted money.”&nbsp;



“Digital rupiah will complement the existing money being commonly used by the public, including physical cash. The task of Bank Indonesia in this regard is to respond to public demand and preferences.”



Bank Indonesia’s CBDC initiative, Project Garuda, will first examine potential use cases of a wholesale CBDC before expanding to include retail tests.&nbsp;



Wholesale CBDCs mostly relate to interbank settlements between financial institutions. They differ from retail CBDCs, which are digital representations of a country’s fiat intended for use by the general public.



In an email to Blockworks, a representative labeled the project “high-level” to be rolled out in three stages. First, testing redemption and transference of a wholesale CBDC. Then, financial markets transactions will be explored including money market business models.&nbsp;



The final phase will explore integrating an end-to-end wholesale digital rupiah into the financial ecosystem alongside further experimentation with a retail CBDC. The spokesperson didn’t offer a timeline for the project.



<h3>Indonesia CBDC adds to long list of pilots</h3>



Project Garuda echoes other nations&#8217; attempts to explore and develop their own sovereign digital currencies.



Around 40 countries have already begun researching their use including in the US and Australia while a further 10 have advanced to a proof of concept. China — the world’s most developed economy to do so — currently has a CBDC in the pilot stage, with tokens distributed in lotteries across several provinces.



Seven nations have developed a pilot which have been tested in real world scenarios while just two countries, the Bahamas and Jamaica, have fully launched a CBDC, data from <a href="https://cbdctracker.org/" target="_blank" rel="noreferrer noopener">CBDC Tracker shows</a>.



“Most central banks are still mindful before taking a decision to issue a CBDC for the public,” the bank said. “There is no one-size-fits-all solution in the development of CBDC as each country has its own unique characteristics and specific policy contexts.”



The bank said it would conclude its findings in a policy stance review.



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Indonesia Wants to Counter ‘Shadow Central Banking’ With CBDC

BlackRock chief executive Larry Fink says he still sees promise in cryptocurrency’s underlying technology despite everything that happened with FTX.



The billionaire money manager touched on the FTX scandal at the <a href="https://www.youtube.com/watch?v=PSVpth7uqb4" target="_blank" rel="noreferrer noopener">New York Times DealBook Summit</a> on Wednesday. “I actually believe most of the [crypto] companies are not going to be around,” Fink said.



BlackRock, the world’s largest asset manager overseeing some $8 trillion, had previously invested $24 million in FTX through a fund of funds. Fink noted Sam Bankman-Fried’s firm may have misled investors.&nbsp;



&#8220;We&#8217;re going to have to wait to see how this all plays out… I mean, right now, we can make all the judgment calls. It looks like there were some misbehaviors of major consequences,” Fink said.



FTX’s valuation shot to <a href="https://blockworks.co/news/ftx-valued-at-32-billion" target="_blank" rel="noreferrer noopener">$32 billion</a> at the start of the year, having raised funds across <a href="https://www.crunchbase.com/search/funding_rounds/field/organizations/funding_total/ftx-exchange" target="_blank" rel="noreferrer noopener">seven venture capital rounds</a> starting from 2018 per Crunchbase, including a meme-bound Series B-1 worth $420.69 million last October. 



All that quickly crumbled earlier this month after a debilitating $6 billion bankrun triggered by concerns of shallow liquidity and gross mismanagement. FTX is now undergoing bankruptcy proceedings, the latest figures show it owes $3.1 billion to its 50 largest creditors with up to a million users out-of-pocket. 



Former CEO Sam Bankman-Fried said at the DealBook Summit that he <a href="https://blockworks.co/news/bankman-fried-underestimated-collapse" target="_blank" rel="noreferrer noopener">didn’t intentionally commit fraud</a>, and he was “frankly surprised” at how big Alameda’s position was in his exchange’s native token, FTT — a reference to its leaked balance sheet that surfaced about two weeks before its demise.



Fink reasoned that FTX issuing its own cryptocurrency, especially without appropriately disclosing its own balances, ultimately led to its downfall.



Major venture capital firms <a href="https://blockworks.co/news/crypto-vcs-sequoia-multicoin-reckon-with-failing-ftx-investments" target="_blank" rel="noreferrer noopener">Sequoia</a> and <a href="https://blockworks.co/news/singapore-central-bank-defends-red-flagging-binance-ftx" target="_blank" rel="noreferrer noopener">Temasek</a> were among those exposed to the embattled exchange. Sequoia had been vocally enthusiastic about Bankman-Fried, once <a href="https://www.ft.com/content/67b1899f-4b1f-4676-b264-0d19e205d64e?shareType=nongift" target="_blank" rel="noreferrer noopener">saying</a> in a now-deleted blog that his intellect was “as awesome as it is intimidating.” 



Both Temasek and Sequoia have since marked their FTX equity down to zero, while the Ontario Teachers&#8217; Pension Fund <a href="https://blockworks.co/news/ontario-teachers-fund-sank-95m-in-failed-ftx-empire" target="_blank" rel="noreferrer noopener">plans</a> to do the same with its own $95 million investment.



Despite problems surrounding the collapsed exchange, Fink — once a crypto skeptic — said the tech powering it will be “very important,” harking back to the “blockchain, not Bitcoin” mantra heard across Wall Street in cycles past.



&#8220;I believe the next generation for markets and next generation for securities will be tokenization of securities,” Fink said.&nbsp;



There have indeed been novel and important developments in this area of late, with major institutions <a href="https://blockworks.co/news/jpmorgan-trade-on-public-blockchain-monumental-step-for-defi" target="_blank" rel="noreferrer noopener">dabbling</a> in trading tokenized securities and <a href="https://www.eib.org/en/press/all/2021-141-european-investment-bank-eib-issues-its-first-ever-digital-bond-on-a-public-blockchain" target="_blank" rel="noreferrer noopener">bonds</a> on public, reasonably decentralized blockchains. 



And on-chain <a href="https://blockworks.co/news/can-defi-handle-new-wave-of-users" target="_blank" rel="noreferrer noopener">decentralized exchanges</a> are indeed increasingly successful, but blockchain-powered traditional markets may still be a ways off. The Australian Securities Exchange earlier this month <a href="https://blockworks.co/news/blockchain-not-bitcoin-is-dead-australian-bourse-cans-dlt-shift" target="_blank" rel="noreferrer noopener">canned</a> its $170 million project to transform its settlement layer into a blockchain-powered system after more than three years of development. 



Consulting giant Accenture found the shift untenable due to the distributed ledger’s high latency.



David Canellis contributed reporting.



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BlackRock CEO Still in Crypto for the Tech Despite FTX Scandal

Several top law firms are reportedly banking millions in legal fees over bankruptcy proceedings instigated by former crypto lending giants earlier this year.



Kirkland &amp; Ellis, White &amp; Case and Quinn Emanuel Urquhart &amp; Sullivan are charging as much as $2,130 per hour to represent parties involved in Voyager Digital’s and Celsius Network’s Chapter 11 bankruptcy cases. The three law firms are ranked by American Lawyer, which first <a href="https://www.law.com/americanlawyer/2022/11/30/am-law-50-law-firms-charging-seven-figure-legal-fees-in-crypto-bankruptcies/?slreturn=20221030185659" target="_blank" rel="noreferrer noopener">reported</a> the news, as among the top 50 by revenue.&nbsp;



Several other US-headquartered firms are also involved in both cases, which have global implications.&nbsp;



Kirkland has billed Voyager $6.5 million in compensation and expense reimbursements, while also charging Celsius $7.1 million, according to The American Lawyer.&nbsp;



The steep fees provide a glimpse into just how much attorneys stand to make from the restructuring of now-defunct crypto companies, including Voyager and Celsius, which both filed for bankruptcy in July.&nbsp;



Sam Bankman-Fried’s former FTX empire is also seeking bankruptcy protection. And, with considerably more money at stake, those proceedings could up the ante further on legal fees.&nbsp;



In all instances, millions of dollars of customers&#8217; digital assets have been frozen on the platforms while proceedings play out.



<h3>Voyager fees start in the hundreds, eclipse $1,000 per hour</h3>



Kirkland, for instance, <a href="https://cases.stretto.com/public/x193/11753/PLEADINGS/1175307212280000000104.pdf" target="_blank" rel="noreferrer noopener">is charging Voyager</a> between $1,135 and $1,995 an hour for partners, as well as $650 and $1,245 for associates.



Kirkland generally increases its hourly rate twice a year, depending how a case progresses.



Quinn Emanuel, also representing Voyager, has <a href="https://cases.stretto.com/public/x193/11753/PLEADINGS/1175307212280000000104.pdf">already billed</a> $2.5 million to the defunct company.&nbsp;



Kirkland is acting as Voyager’s general counsel, while Quinn Emanuel has a more-defined responsibility as part of its so-called special committee. The committee’s primary role is to investigate Voyager’s historical transactions, public reports and regulatory issues.



Quinn Emanuel is raking in $1,246 to $1,917 an hour for its partners. Associates are charging $747 to $1,183, and paralegals clock in between $432 and $603.&nbsp;



Quinn Emanuel is also advising FTX’s sister trading firm, the insolvent Alameda Research — which was dragged down by the exchange’s collapse.&nbsp;



Chicago-based McDermott Will &amp; Emer, meanwhile, is laying claim to $2.3 million in legal fees and is expecting an additional $63,000 of expenses.



<h3>Celsius’ fees mount, too</h3>



The three law firms assisting Celsius have likewise racked up millions of dollars in fees and expenses.



Kirkland &amp; Ellis is general counsel, while Akin Gump Strauss Hauer &amp; Feld and Latham &amp; Watkins are advising debtors in complementary capacities.&nbsp;



So far, Kirkland has billed Celsius $7.1 million, Akin Gump $1.4 million and Latham and Watkins $1.7 million.&nbsp;



New York-based law firm White &amp; Case, meanwhile, says it is owed $5.9 million for representing unsecured creditors of the former crypto lending giant Celsius from July 29 to Sept. 30.



Representatives for all of the law firms did not immediately return requests for comment.



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Crypto Bankruptcies Have No Winners — Except Their Lawyers

Casey Wagner

In a highly anticipated and wide-ranging interview, FTX founder Sam Bankman-Fried claimed he was both unaware of and not intentionally committing fraud — and largely dismissed his prospects for criminal or civil prosecution.&nbsp;



“I didn’t knowingly commingle funds,” Bankman-Fried said. “I wasn’t trying to commingle funds,” he added moments later.&nbsp;



Bankman-Fried appeared virtually from an undisclosed location at the New York Times DealBook Summit on Wednesday. Though he has lived in the Bahamas since FTX moved its headquarters there in 2021, Bankman-Fried’s current whereabouts are unclear.&nbsp;



Bankman-Fried confirmed he did, at one point, live with “one or two” members from the Alameda Research team, although he maintained the companies operated separately enough that he was not aware of margin positions and liquidity levels. Alameda, also founded by Bankman-Fried, is a now-insolvent crypto market maker.&nbsp;



Bankman-Fried said he was “frankly surprised at how big Alameda’s position was” in FTX’s native token, FTT, and that he was not worried about customer losses or potential insolvency until Nov. 2, when details of the trading firm’s balance sheet was published by CoinDesk.&nbsp;



“I substantially underestimated the scale of the crash and the speed of it,” he said of FTT’s collapse.&nbsp;



By Nov. 6, the founder said he was aware that customer funds were likely to be impacted and FTX would not likely be able to make customers whole. This was “the day the tweet about FTT” came out, Bankman-Fried said, referring to rival exchange Binance’s Changpeng ‘CZ’ Zhao’s <a href="https://twitter.com/cz_binance/status/1589374530413215744?s=20&amp;t=wB7_kTDethngT8h2w91TNA" target="_blank" rel="noreferrer noopener">viral announcement</a> his company would be liquidating their FTT. 



This timeline contradicts a now-deleted tweet from Bankman-Fried on Nov. 7 where he promised users client assets were not improperly invested elsewhere — a direct violation of the exchange’s terms of service.&nbsp;



As for FTX US, the exchange’s American subsidiary, Bankman-Fried said user funds should be safe.&nbsp;



​​FTX US is “totally solvent,” he said. “I’m confused why FTX US is not processing customer withdrawals right now.”



Bankman-Fried said he agreed to the interview against his lawyers’ recommendation, but he felt an obligation to speak, he said.&nbsp;



“Obviously, I don&#8217;t, I don&#8217;t personally think that I have, you know… I think the real answer is that&#8217;s not what I&#8217;m focusing on,” Bankman-Fried said about the likelihood of criminal charges being brought against him. “I’ve had a bad month.”&nbsp;&nbsp;



Asked if he would be able to travel to the US — where he would potentially come face-to-face with securities regulators — Bankman-Fried said, “to my knowledge, I could.”



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Bankman-Fried ‘Substantially Underestimated’ Size, Speed of FTX Collapse

Macauley Peterson

The collapse of FTX has put crypto market participants on edge.&nbsp;



You see it in the embrace of unsubstantiated, doomsday Twitter chatter, <a href="https://blockworks.co/news/weth-fud-is-a-joke" target="_blank" rel="noreferrer noopener">no matter how fanciful</a>. And you see it in the <a href="https://blockworks.co/news/bitcoins-correlation-with-stocks-bonds-hits-3-month-low" target="_blank" rel="noreferrer noopener">decoupling of crypto markets</a> from tech equities.



The entire industry, essentially, has been called into question — from the prospect of Ethereum developers delaying withdrawals of staked ether to Coinbase’s safe storage of bitcoins <a href="https://blockworks.co/news/the-grayscale-dilemma-a-record-discount-and-a-golden-goose" target="_blank" rel="noreferrer noopener">backing Grayscale’s Bitcoin Trust</a> (GBTC).



In the tumultuous last few weeks, wrapped bitcoin on Ethereum (WBTC) fell uncomfortably below par, but finally returned to a healthy valuation on the spot market toward the end of the stock trading session in New York. The deviation started in earnest on Nov. 11 — <a href="https://blockworks.co/news/cryptos-erase-gains-ftx-token-slips-further-on-bankruptcy-news" target="_blank" rel="noreferrer noopener">the day FTX declared bankruptcy</a> — and reached a Nov. 25 nadir of around 0.985 BTC, on the Binance exchange, according to data from TradingView.


<div class="wp-block-image">
<figure class="aligncenter"><img src="https://lh4.googleusercontent.com/Pd3KNivKba52YYMqNgqUFq6WX7fC2x6tegWOEKsPfWEAt_8g_b3cV46FwbaxDHBg23ihvE010JZBFzNDBgyLvqazUBw2NqhEpRQ9GpAOKN4W8t5RrYN5fnH1HzRJ4QdwsZUs5h3rOTN41aJ6QG5zeQ7RKbrJibk7-M7napbRbHfZ0SO_y9Ob_YtzfHqmdw" alt=""/><figcaption>WBTC:BTC pair on Binance, daily timeframe; Source: TradingVideo</figcaption></figure></div>


Euler Finance’s CEO Michael Bentley told Blockworks the incident can be lumped in with general nervousness about lending and borrowing markets.



<blockquote class="wp-block-quote">“There were some unfortunate circumstances, and frankly it made me a little nervous when I first started reading about some of the issues as well,” Bentley said.</blockquote>



He referenced the Thanksgiving holiday weekend, which may have slowed the pace of WBTC redemptions for underlying BTC, as partly to blame.



Market data provider Kaiko called the slide a “crisis of confidence.”



“Investors panicked after charts circulating on Twitter showed that Alameda Research is by far the top WBTC merchant by the number of tokens minted, having created more than 100,000 WBTC. This sparked fears that WBTC is not fully backed,” Kaiko <a href="https://marketing.kaiko.com/wrapped-assets-under-scrutiny" target="_blank" rel="noreferrer noopener">wrote</a> in its newsletter on Monday.



But such panic, like <a href="https://blockworks.co/news/weth-fud-is-a-joke" target="_blank" rel="noreferrer noopener">the misread of wrapped ether</a>, which Bentley said “spread like wildfire, despite being a joke,” betrays a basic misunderstanding of how WBTC works.



For WBTC to be minted on Ethereum, BitGo takes custody of an equivalent amount of BTC. So, Alameda’s insolvency has no relevance; any WBTC they hold either required them to send BTC to BitGo first, or was bought off the spot market. Either way, BitGo has the bitcoins and can redeem them for any circulating WBTC in the market when needed. Chen Fang, BitGo’s chief operating officer, sought to allay investor fears via a tweet that did, indeed, mark the bottom of the crisis.



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true">BitGo is just the custodian — all end user minting/burning must go through one of the merchants in the WBTC network or trade it at an exchange If folks capitulates to fake news, the market makers win — every WBTC is 1:1 backed, verifiable on chain&mdash; 🍟 Chen Fang (@chenbfang) <a href="https://twitter.com/chenbfang/status/1596225826995179520?ref_src=twsrc%5Etfw">November 25, 2022</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
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There was another “unfortunate circumstance,” as Bentley put it.



“It seems also that they have this multisig that helps participate in the redemption process…it appears that a couple of people on this multisig either lost access or needed to have their access removed,” he said. “And they decided to make this change at a time when everyone was nervous.”



Victor Tran, CEO of Kyber Network and a member of the multi-signature custodial setup, <a href="https://twitter.com/vutran54/status/1596162341196136448" target="_blank" rel="noreferrer noopener">tweeted</a> he saw no evidence of delayed redemptions but was coordinating the <a href="https://github.com/WrappedBTC/DAO/pull/12">amendment to the multisig keys</a> with BitGo. The group was reduced from 18 to 13, with the number of signatories required to approve transactions dropping from 11 to 8. Notably, one of those removed was the key held by FTX-owned Blockfolio.



The confusion around what was happening led the normal arbitrage market behavior — which normally would restore the peg in such cases — to stall.



“The market’s very inefficient right now, everyone’s very, very nervous; liquidity’s thin in a lot of places,” Bentley said.



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Unusual Wobble in Wrapped Bitcoin Showed Trader Fear

David Canellis

European central bankers, on brand as ever, have shared a tersely worded cope-memo decrying bitcoin and its dastardly ways — and inadvertently made the case for never regulating it.



The essay doubles as a no-coiner bingo card of sorts. It’s a string of silly misnomers and half-truths: “Bitcoin is rarely used for legal transactions” and “the market valuation of Bitcoin is therefore based purely on speculation.”



But within the ECB’s <a href="https://www.ecb.europa.eu/press/blog/date/2022/html/ecb.blog221130~5301eecd19.en.html" target="_blank" rel="noreferrer noopener">musings</a>, first published in German finance press Handelsblatt, there are a few points that actually ring true.



Director general Ulrich Bindseil and adviser Jürgen Schaaf rattled off an oft-cited criticism that says Bitcoin generates as much e-waste as the Netherlands (a <a href="https://www.theguardian.com/technology/2021/sep/17/waste-from-one-bitcoin-transaction-like-binning-two-iphones" target="_blank" rel="noreferrer noopener">statistic</a> based on <a href="https://datadrivenlab.org/climate/blockchain-energy-consumption-debunking-the-misperceptions-of-bitcoins-and-blockchains-climate-impact/" target="_blank" rel="noreferrer noopener">hotly</a> <a href="https://www.cnbc.com/2017/12/21/no-bitcoin-is-likely-not-going-to-consume-all-the-worlds-energy-in-2020.html" target="_blank" rel="noreferrer noopener">debated</a> modeling from former Dutch central bank collaborator Alex de Vries).&nbsp;



Dovetailing with that tidbit, the pair rightly point out that depreciation of mining hardware (described as an inefficiency of the system) is not a flaw, but a feature. “It is one of the peculiarities to guarantee the integrity of the completely decentralized system.”



That’s entirely true. Capitalistic game theory dictates the bitcoin industry relentlessly develop faster and more energy-efficient mining rigs. Miners want to spend the same amount of energy for more bitcoin, so they’ll invent new mining rigs that will generate more hash rate with less energy.



Miners that can’t afford them (or can’t access credit) will inevitably fall to the wayside, prioritizing efficiency across the board above all else.&nbsp;



In fact, the value proposition of the network relies heavily on its claim to decentralization; a bitcoin miner monopoly could very well render the network less valuable than if it were shared more equally — especially if they wield more than 51% of the hash rate.



This makes bitcoin mining as much a team game as it is a solo sport.&nbsp;



The freedom to develop, invest and accumulate bitcoin mining rigs directly inspires decentralization. Chinese chipset maker Bitmain was once a powerhouse of bitcoin mining, and some might argue a deeply centralizing factor, <a href="https://bitcoinmagazine.com/business/bitmain-nears-51-network-hash-rate-why-matters-and-why-it-doesnt" target="_blank" rel="noreferrer noopener">controlling almost</a> 51% of Bitcoin hash rate in 2018.



But <a href="https://www.coindesk.com/business/2021/01/26/bitmain-co-founder-exits-resolving-years-long-power-struggle-as-mining-firm-preps-ipo/" target="_blank" rel="noreferrer noopener">infighting</a>, restrictive regulations at home, and an untenable position in Bitcoin Cash has all but scrubbed Bitmain — which bases its entire business on the “inefficiency” of the Bitcoin system — from the mining map, with an array of bitcoin mining companies and pools taking its place.



The authors follow up that righteous Bitcoin factoid with another: Bitcoin should not be regulated as a form of payment or investment.&nbsp;



Schaaf and Bindseil actually justify never regulating Bitcoin by claiming it “appears neither suitable as a payment system nor as a form of investment.&#8221; But fewer words from a central banker have rung as soundly as Bitcoin “should be treated as neither in regulatory terms.”



Yes. That’s an excellent Bitcoin mantra: Do away with government-powered, Sauron-style surveillance of the Bitcoin network. And while you’re at it, scrap the tax regulations.



The Internal Revenue Service considers BTC an asset just like property, which renders every transaction a taxable event. This obviously renders some crypto-folks’ quests to pay for coffee and burgers with bitcoin a <a href="https://bitcoinmagazine.com/culture/bitcoin-tax-reporting-nightmare-2023" target="_blank" rel="noreferrer noopener">pain in the ass</a>.&nbsp;



Let’s hope the ECB’s wise suggestion of keeping big government out of little bitcoin catches on.



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Yes! The European Central Bank Gets This Right About Bitcoin!

Jack Kubinec

DeFi protocols have seen their usage swell as investors flee centralized crypto exchanges.&nbsp;



The top ten decentralized exchanges by on-chain value have all seen their trading volumes <a href="https://messari.io/protocol-explorer/decentralized-exchange" target="_blank" rel="noreferrer noopener">jump by over 30%</a> this month. And a Kaiko research note found DEX tokens saw their prices the least affected by FTX’s fall, even as bitcoin and other layer-1s test new lows.



For some, it looks like DeFi is ready for its big break, as <a href="https://blockworks.co/news/hey-daos-are-venture-capitalists-your-friends" target="_blank" rel="noreferrer noopener">venture capitalists descend</a> on DAOs and centralized crypto faces deep reputational damage. But others urge caution. Will Harborne, CEO of rhino.fi, noted the boost in DeFi usage comes at the cost of crypto usage in general.



“We&#8217;ve had our most active volumes and number of users in the last few weeks, basically because people are withdrawing from centralized changes and topping up their accounts, but we&#8217;ve also had some of our lowest numbers of new users,” Harborne said.&nbsp;



Harborne sees DeFi seeing major sustained growth in a two to three year window. This sentiment is common in crypto’s post-FTX reality — that DeFi is the inevitable destination once crypto grows out of its <a href="https://blockworks.co/news/crypto-behaving-like-teenager" target="_blank" rel="noreferrer noopener">adolescence</a>.



<h3>The struggle for credibility</h3>



“After the events of 2022, decentralized protocols will likely enjoy a bump in credibility, while centralized players getting too creative with their books will feel more regulatory heat — and will probably take a dent or two in terms of user confidence” Max Thake, co-founder of peaq, said in an emailed statement.



The term DeFi typically refers to two kinds of protocols: DEXs and lending platforms. DEXs, such as Uniswap or Curve, let users trade crypto with automated market makers that match buyers with sellers using smart contracts. Lending platforms, like Aave or Compound, let users lend and borrow crypto while either paying or receiving interest. Assets are mixed together in liquidity pools, and an algorithm automatically liquidates accounts if their collateral falls below a certain level. Many DeFi protocols are governed by DAOs.



The common thread is that computer code, instead of people, governs DeFi, so protocols can’t do things like secretly <a href="https://blockworks.co/news/ftx-run-by-inexperienced-unsophisticated-traders-court-hears" target="_blank" rel="noreferrer noopener">lend out customer deposits</a>.



“DeFi is the answer,” Harborne said. “People will be able to fully onboard into DeFi and only use DeFi and avoid these things.”



Still, DeFi isn’t a silver bullet to crypto’s woes. While DeFi customers don’t need to worry about nefarious executives, they do risk falling victim to a hack, which has looted more than $300 billion from DeFi coffers this year. And, liquidity isn’t guaranteed — Aave <a href="https://blockworks.co/news/aave-tightens-risk-controls" target="_blank" rel="noreferrer noopener">froze some assets</a> this week after a vulnerability in one of its lending markets was exploited, <a href="https://blockworks.co/news/aave-curve-bad-debt" target="_blank" rel="noreferrer noopener">leaving the protocol</a> with $1.7 million in bad debt.



DeFi protocols seem less prone to wholesale collapse in the mold of Mt. Gox or FTX. Even Terra, which got as close to bankruptcy as any in DeFi, relaunched and <a href="https://blockworks.co/news/terra-dao-platform-opens" target="_blank" rel="noreferrer noopener">is still kicking</a>. But JPMorgan, which executed its first DeFi trade earlier this month, doesn’t think DeFi can claim the mantle from centralized exchanges.



“DeFi protocols rely heavily on centralized exchanges to be able to function,” the bank wrote in a crypto report last week, before giving a laundry list of concerns about DeFi: Centralized exchanges boast quicker price discovery, protocols have lost billions to <a href="https://blockworks.co/news/october-already-record-month-for-hacks-and-exploits" target="_blank" rel="noreferrer noopener">hacks</a> this year, cascading automated liquidations could create systemic risks, and the overcollateralization common in DeFi is inefficient.



Crypto investors fleeing to lending protocols won’t find much yield, either. Aave and Compound, the two preeminent lending pools, both list yield under 3%. US Treasury yields currently sit <a href="https://www.bloomberg.com/markets/rates-bonds/government-bonds/us" target="_blank" rel="noreferrer noopener">north of 3.5%</a>.



Representatives for Aave and Compound did not return requests for comment.



Harborne said yield is a measure of capital’s perceived value, and percentages should increase as DeFi does more to prove its usefulness. And as for the rest of DeFi’s issues?



“DeFi isn&#8217;t quite yet ready to onboard everyone,” Harborne said. “[But] all these things can and are and will be solved.”



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Is DeFi Ready for Prime Time?

Ornella Hernandez

Animoca Brands, blockchain gaming giant and venture capital company, plans to raise between $1 billion and $2 billion as part of a new metaverse-focused fund called Animoca Capital, Nikkei Asia reported.



The fund is looking to invest in mid- to late-stage metaverse businesses, according to Yat Sui, Animoca’s co-founder and executive chairman. It will focus on digital property rights for NFTs and land in the metaverse, and function as a “good entry point” for investors to access Web3 companies.&nbsp;



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true"><a href="https://twitter.com/hashtag/HongKong?src=hash&amp;ref_src=twsrc%5Etfw">#HongKong</a>-based <a href="https://twitter.com/hashtag/blockchain?src=hash&amp;ref_src=twsrc%5Etfw">#blockchain</a> <a href="https://twitter.com/hashtag/gaming?src=hash&amp;ref_src=twsrc%5Etfw">#gaming</a> group <a href="https://twitter.com/animocabrands?ref_src=twsrc%5Etfw">@AnimocaBrands</a> plans to launch a fund of up to $2 billion to invest in <a href="https://twitter.com/hashtag/metaverse?src=hash&amp;ref_src=twsrc%5Etfw">#metaverse</a> businesses, according to company co-founder and Executive Chairman <a href="https://twitter.com/ysiu?ref_src=twsrc%5Etfw">@ysiu</a>. Read the full story: <a href="https://t.co/92Y3uYzrym">https://t.co/92Y3uYzrym</a>&mdash; Animoca Brands (@animocabrands) <a href="https://twitter.com/animocabrands/status/1597865721320865792?ref_src=twsrc%5Etfw">November 30, 2022</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div></figure>



Animoca Brands has grown to become the largest blockchain investment unit in Asia by being an early investor in projects such as OpenSea, Dapper Labs, Yield Guild Games, Star Atlas and Axie Infinity developer Sky Mavis.



However, Animoca itself has various backers, such as <a href="https://blockworks.co/news/singapores-temasek-aims-100m-at-metaverse-giant-animoca" target="_blank" rel="noreferrer noopener">Temasek</a> and True Global Ventures, who now want to directly invest in later stage companies with less risk and not just be exposed to Animoca’s portfolio companies — hence the new Animoca Capital structure.



“The fund will be focused on equity optimization,” Sui told Nikkei Asia when describing the need for a separate investment vehicle. “As a fund, you optimize for return. So it&#8217;s different.”&nbsp;



Its first investment in a startup is expected to happen next year, and there will be no geographical restrictions when assessing startups, he added.



Animoca did not immediately respond to Blockworks’ request for a comment.



Animoca Brands has over 340 investments and dozens of subsidiaries in the Web3 space, including The Sandbox. Its portfolio investment and digital asset reserves combined were valued at approximately $5.7 billion as of June 2022, according to a <a href="https://www.animocabrands.com/glimpsing-the-future-through-the-lens-of-days-past" target="_blank" rel="noreferrer noopener">letter</a> from the chair.  



Animoca has been “building an open Web3 and facilitating an open metaverse” and <a href="https://blockworks.co/news/the-sandbox-parent-animoca-brands-raises-359m-to-build-out-open-metaverse" target="_blank" rel="noreferrer noopener">raised $358 million fundraising in January</a> and completed another <a href="https://www.animocabrands.com/animoca-brands-raises-usd110million-in-funding-round-led-by-temasek-boyu-capital-ggv-capital" target="_blank" rel="noreferrer noopener">$110 million raise in September</a> to do so.



It has also partnered with Yuga Labs on the <a href="https://blockworks.co/news/web3-watch-yuga-labs-takes-voyagers-to-the-otherside-while-minecraft-bans-nfts">Others</a><a href="https://blockworks.co/news/web3-watch-yuga-labs-takes-voyagers-to-the-otherside-while-minecraft-bans-nfts" target="_blank" rel="noreferrer noopener">i</a><a href="https://blockworks.co/news/web3-watch-yuga-labs-takes-voyagers-to-the-otherside-while-minecraft-bans-nfts">de project</a>, the metaverse game of Yuga Labs’ Bored Ape Yacht Club. And most recently has <a href="https://www.animocabrands.com/faze-clan-enters-the-metaverse-in-partnership-with-the-sandbox-to-bring-faze-world-to-life" target="_blank" rel="noreferrer noopener">announced</a> a partnership with esports company FaZe Clan to co-produce events and games in The Sandbox.



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Animoca’s New $2B Investment Fund Focuses on the Metaverse

Inflation is far from over, Federal Reserve Chair Jerome Powell said Wednesday, but a rate-hike slowdown is still on the table for December. Regardless, according to the central bank head, rates will keep rising and remain high “for some time.”&nbsp;



&#8220;It will take substantially more evidence to give comfort that inflation is actually declining,” Powell said during an appearance at the Brookings Institute in Washington. “By any standard, inflation remains much too high.&#8221;



Markets immediately rallied on the news. The S&amp;P 500 and Nasdaq Composite indexes both gained about 1% and 1.5% in the moments following Powell’s speech, respectively. Crypto also jumped into the green, with bitcoin and ether rising 3% and 5.3%, respectively.&nbsp;



“We need to raise interest rates to a level that is sufficiently restrictive to return inflation to 2%,” Powell <a href="https://www.brookings.edu/events/federal-reserve-chair-jerome-powell-the-economic-outlook-and-the-labor-market/" target="_blank" rel="noreferrer noopener">said</a>. “There&#8217;s considerable uncertainty about what rate will be sufficient.”



Stable prices can only be achieved through supply and demand management, Powell said — adding that reaching the central bank’s inflation target is likely going to require more-tempered growth. Waning of pandemic-era easy monetary policy, raising housing prices and global unrest have also contributed to the economy’s sluggish pace, Powell added.&nbsp;



The speech comes weeks after the Fed’s last rate-setting meeting on <a href="https://blockworks.co/news/cryptos-stocks-rally-on-fourth-straight-0-75-interest-rate-increase" target="_blank" rel="noreferrer noopener">Nov. 2</a> when the central bank opted to raise interest rates by 0.75% for the fourth straight time. The US central bank cited slowing consumer spending and production levels.



In June, when the central bank opted to raise rates 75 basis points for the first time this cycle, Powell called the move “<a href="https://blockworks.co/powell-calls-feds-0-75-rate-increase-unusually-large-warns-of-slowing-economy/" target="_blank" rel="noreferrer noopener">unusually large</a>.”  But if current conditions persist, higher increases could become the norm, he later warned.



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Powell Slightly Hawkish Ahead of December Meeting

Bessie Liu

Binance has acquired a highly regulated crypto exchange in Sakura Exchange BitCoin (SEBC) for an undisclosed amount as it, once again, makes moves to enter the Japanese market.



Japan’s financial regulators have previously <a href="https://www.fsa.go.jp/policy/virtual_currency02/Binance2_keikokushilyo.pdf" target="_blank" rel="noreferrer noopener">warned consumers</a> that Binance is not registered to do business in the country, stating that the exchange has been conducting unauthorized transactions locally.



In a blog post <a href="https://www.binance.com/en/blog/ecosystem/binance-acquires-jfsa-registered-sakura-exchange-bitcoin-committed-to-enter-japan-under-regulatory-compliance-1479109563632749072" target="_blank" rel="noreferrer noopener">announcing</a> the acquisition, the top exchange by global trade volume said, “by offering Japanese-regulated services through SEBC, Binance aims to support a responsible global environment for cryptocurrencies.”



SEBC’s website shows trade for only 11 cryptocurrencies including bitcoin, ether and ripple against the yen. Binance Japan’s General Manager Takeshi Chino said the company will be “actively work[ing] with regulators to develop our combined exchange in a compliant way for local users.”



“Japan is a big market for digital assets, and it’s pretty clear that Binance sees this as an opportunity to tap into this market,” Brent Xu, CEO and co-founder of Umee, a Web3 bond-market platform, told Blockworks.



Although, this isn’t the only reason for Binance to move into the Japanese market, Xu said. Its acquisition of SEBC comes at a time where regulators worldwide have been wary of cryptocurrency exchanges following the collapse of Binance’s rival FTX.&nbsp;



“FTX had recently acquired the Japanese exchange Liquid, and Liquid has since experienced serious issues because of FTX’s collapse,” Xu said.&nbsp;



Binance CEO Changpeng Zhao is credited with spurring FTX’s unraveling by pledging to offload more than half a billion dollars in the platform’s native token, before offering to acquire FTX only to pull out.



Liquid halted withdrawals to <a href="https://twitter.com/Liquid_Global/status/1594313077700591620" target="_blank" rel="noreferrer noopener">comply</a> with FTX’s <a href="https://blockworks.co/news/ftx-contagions-next-victim-a-japanese-exchange" target="_blank" rel="noreferrer noopener">Chapter 11 bankruptcy</a> proceedings initiated in Delaware earlier this month — leaving room for Binance to swoop in.



According to recent <a href="https://www.bloomberg.com/news/articles/2022-11-30/ftx-s-japan-unit-drafts-plan-to-return-client-funds" target="_blank" rel="noreferrer noopener">reports</a> from Bloomberg, Liquid has been working on a yet-to-be-finalized plan that will allow its customers to get their money back, a rarity for bankrupt firms worldwide. The plan is set to be executed in January.



“So, again, Binance smells opportunity here, and this play makes business sense,” Xu said. “On a global level, I should note, this is a broader strategic play by Binance to reinforce its status as the dominant digital asset exchange.”



<h3>Binance ‘trying to capitalize on the moment’</h3>



Japan is not the only country that Binance has been making moves in. It has also secured regulatory approvals and authorizations in France, Italy, Spain, Bahrain, the United Arab Emirates, New Zealand, Kazakhstan, Poland, Lithuania and Cyprus amid a push for nods seen across the crypto ecosystem.



This does not come as a surprise to Calanthia Mei, co-founder of Masa Finance, a soulbound identity protocol.



“Binance is well positioned financially, and they are preparing to expand their presence globally,” she said.



“People in Japan are very tech-focused, and this [acquisition] likely means they are open to frontier technologies like digital assets. So Binance sees demand for its services there and is trying to capitalize on the moment,” she added.



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Binance Seizes FTX Bankruptcy To Expand Into Japan — Again

Jon Rice

Kraken CEO Jesse Powell has announced that around 30% of the company’s staff will be laid off as a direct result of the ongoing crypto winter, a bear market that has claimed major companies and thousands of jobs across the globe.



Powell noted in a Kraken blog post that “This reduction takes our team size back to where it was only 12 months ago” and described the move as necessary because “negative influences on the financial markets have continued and we have exhausted preferable options for bringing costs in line with demand.”



CoinGecko lists Kraken as the fifth-largest crypto exchange by volume, with a 24-hour volume of over half a billion dollars.



The 11-year old crypto exchange <a href="https://blog.kraken.com/post/16442/business-update/" target="_blank" rel="noreferrer noopener">offered</a> 16 weeks of pay to staff who were laid off, as well as an extension of a window to exercise vested stock options and immigration support for those who need it.



Powell, the co-founder of Kraken who <a href="https://blockworks.co/news/kraken-ceo-jesse-powell-steps-down" target="_blank" rel="noreferrer noopener">recently announced</a> that he would be leaving the role of CEO, gained a reputation within the crypto industry as a pugnacious but caring employer who believed strongly in the original philosophical tenets of cryptocurrency.



“I’m confident the steps we are taking today will ensure we can continue to deliver on our mission which the world needs now more than ever before,” he said.



Kraken <a href="https://blog.kraken.com/post/14372/kraken-announces-global-hiring-push-and-commitment-to-crypto-first-culture/" target="_blank" rel="noreferrer noopener">previously announced</a> in June 2022 that &#8220;We have not adjusted our hiring plan, and we do not intend to make any layoffs.&#8221; In a passionate Twitter thread on November 10, following the FTX meltdown, Powell said &#8220;I pray that we don&#8217;t lose our people, like we did in the wake of Gox.&#8221;



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<blockquote class="twitter-tweet" data-width="550" data-dnt="true">14/ I pray for everyone who got caught up in this mess. I hope it doesn&#39;t turn you off of crypto. I hope you take care of yourself and continue to be a part of this community. These are growing pains. Money can be made again. Stay with me. I remain your humble servant, Jesse&mdash; Jesse Powell (@jespow) <a href="https://twitter.com/jespow/status/1590635245912887298?ref_src=twsrc%5Etfw">November 10, 2022</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
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Blockworks has reached out to Kraken for comment.



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Kraken Lays Off Over 1,000 People as Crypto Winter Wears On

As the crypto industry continues to reel from FTX’s collapse, total assets under management for digital asset investment products is at its lowest level in almost two years, according to data from CryptoCompare.&nbsp;



Digital asset management firms saw their AUM decline by an average of 14.5% in November, the lowest monthly figure recorded since December 2020, researchers noted.&nbsp;



Trust products specifically, such as Grayscale’s Bitcoin Trust (GBTC), saw a 13.6% decline in AUM, bringing total value held down to $15.3 billion. Trust products as a whole make up close to 80% of total crypto investment product AUM.&nbsp;



“AUM represented by ETFs also saw a significant fall of 23.9% to $1.68bn in November, representing 8.64% of the total market share,” CryptoCompare analysts wrote in the <a href="https://www.cryptocompare.com/media/43936180/damr_november.pdf" target="_blank" rel="noreferrer noopener">report</a>. “As of November, the market share of ETFs has fallen 24.9% since its 2022 peak in June.”&nbsp;



As investor interest in crypto ETFs shows signs of waning, Grayscale is holding out hope the SEC will greenlight its plans to <a href="https://blockworks.co/news/sec-grayscale-exploring-bitcoin-trust-options" target="_blank" rel="noreferrer noopener">convert GBTC to an ETF</a>.&nbsp;



“The SEC will use the FTX situation to argue that their position is correct — that GBTC shouldn’t be converted to an ETF,” said Jeffrey Blockinger, Quadrata’s general counsel. “The delay in pushing regulation forward on Capitol Hill could in turn be used by the SEC to reinforce its stance towards the GBTC application to become an ETF.”&nbsp;&nbsp;



The topic has come under further scrutiny in recent weeks as concerns about Grayscale’s parent company, Digital Currency Group, and its solvency mount. <a href="https://blockworks.co/news/the-grayscale-dilemma-a-record-discount-and-a-golden-goose" target="_blank" rel="noreferrer noopener">Analysts and bankruptcy</a> experts, however, remain confident that GBTC assets would remain protected in the event of a bankruptcy filing, which DCG has maintained it is determined to avoid.&nbsp;



Crypto investment products on the whole have experienced a significant decline in inflows since signs of trouble at FTX first started to surface in early November. In the week of Oct. 31, digital asset investment vehicle providers had about $27.4 billion in AUM, according to <a href="https://blog.coinshares.com/volume-104-digital-asset-fund-flows-weekly-report-4f7e017fed86" target="_blank" rel="noreferrer noopener">data</a> from CoinShares. By the week of Nov. 21, that number had dropped to around $22.2 billion, CoinShares <a href="https://blog.coinshares.com/volume-107-digital-asset-fund-flows-weekly-report-8c4942fcc525" target="_blank" rel="noreferrer noopener">reported</a>.&nbsp;



Inflows to short-bias funds by contrast <a href="https://blockworks.co/news/what-fud-coinshares-reports-largest-inflows-in-months" target="_blank" rel="noreferrer noopener">have been rising</a>. The week of Nov. 21 was marked by “deeply negative sentiment with the largest inflows into short-investments on record,” James Butterfill, head of research at CoinShares, said.&nbsp;



“Short investment product inflows represented 75% of the total inflows, suggesting on aggregate sentiment was deeply negative for the asset class, while total AuM is now at the lowest point in 2 years at $22 billion,” Butterfill added.



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Crypto Investment Product AUM Drops to Lowest Level Since 2020

Sam Bankman-Fried, disgraced boss of collapsed crypto exchange FTX, has claimed an extra $4 billion appeared minutes after filing for bankruptcy — money he says could’ve made out-of-pocket users whole.



“Eight…minutes after I filed for bankruptcy, $4 billion more [of liquidity] came in,” he said, without elaborating on where or who it came from. When asked whether that amount could be used for customer recovery, Bankman-Fried said he was working on it.&nbsp;



The bankruptcy process means current trustees are seeking alternatives to maximize value for creditors, according to the former crypto billionaire, who says he’s been locked out of the proceedings in lieu of restructuring lawyers.



Lawyers reckon FTX owes funds to up to one million users. “I honest to God believe that if I hadn’t filed for bankruptcy, all users would be whole and withdrawals would be on…and not just [FTX] US, international as well,” he said in a 23-minute <a href="https://www.youtube.com/watch?v=6DezodR9hNI&amp;t=8s" target="_blank" rel="noreferrer noopener">interview</a> conducted on Nov. 16, about a <a href="https://blockworks.co/news/ftx-bankrupt-hacked-investigated-a-timeline-of-events" target="_blank" rel="noreferrer noopener">week after</a> the exchange and its subsidiaries declared bankruptcy.&nbsp;



As fellow YouTuber Coffeezilla <a href="https://www.youtube.com/watch?v=0rL35_WV3lE" target="_blank" rel="noreferrer noopener">pointed out in a video</a> breaking down both interviews with crypto vlogger Tiffany Fong, it’s difficult to take Bankman-Fried’s claims seriously.



Allegations of misappropriating user funds aside, he repeatedly reassured FTX users that the exchange remained solvent throughout a crippling $6 billion bankrun.&nbsp;



FTX was in fact insolvent. FTX, FTS US and adjacent trading unit Alamada Research are now under the oversight of veteran restructurer John J. Ray III, who replaced Bankman-Fried after his resignation.



With this in mind, skepticism is warranted when it comes to Bankman-Fried’s version of events going forward.&nbsp;



<h3>Sam Bankman-Fried: ‘I could barely use the system’</h3>



Bankman-Fried admitted that customer wire transfers directed to FTX went to Alameda by default, because FTX didn’t have its own bank account when it started. This led to accounting problems that got out of hand, Bankman-Fried said.



FTX’s native token FTT was central to FTX and Alameda’s intertwined accounting. FTT featured prominently on both Alameda and FTX’s balance sheets, while Bankman-Fried firms owned a majority of the tokens in existence — creating a precarious position worsened by weakened token prices.



The value proposition for FTT, like many other crypto exchange tokens, mostly relies on two things: discounts on trading fees and buy-and-burn schemes, the latter of which consists of the exchange itself buying up its own token and destroying the haul. Often exchanges will use revenue from trading fees as part of that system.&nbsp;



“I think FTT was basically more legit than most tokens in some ways. I think its value is more economically underpinned than the average token was,” Bankman-Fried told Fong in defense of using the token so prominently in his accounting.



Separately in the interview, Bankman-Fried downplayed allegations that he’d built a backdoor to siphon funds from FTX to Alameda without alerting auditors or internal systems.&nbsp;



He claimed he wouldn’t have been able to create such a system as he didn’t actually know how to code or how to use FTX’s backend. “I could barely use the system. I used this system from a user interface perspective. But I literally never opened the code for FTX,” he said.



Coffeezilla later pointed out that the Reuters <a href="https://www.reuters.com/markets/currencies/exclusive-least-1-billion-client-funds-missing-failed-crypto-firm-ftx-sources-2022-11-12/" target="_blank" rel="noreferrer noopener">report</a> containing the initial allegations actually claimed FTX Chief Technology Officer Gary Wang built the backdoor — not Bankman-Fried — leaving the matter unaddressed.



<h3>Bankman-Fried says he gave dark money to Republicans</h3>



In the <a href="https://www.youtube.com/watch?v=xP54LZB3WRw" target="_blank" rel="noreferrer noopener">second interview</a> with Fong on Nov. 20, Bankman-Fried sounded more reflective and deliberate. He acknowledged that any apologies now ring hollow.



A key problem for the exchange, according to him, was that no individual was solely in charge of monitoring the risk of monetary positions.&nbsp;



He also added that FTX’s situation would be a “lot more stable” had Binance CEO Changpeng Zhao not expressed concerns about its balance sheet before pledging to dump more than half a billion dollars in FTT.



Bankman-Fried’s political donations also came up, as he was among the <a href="https://www.wsj.com/articles/crypto-firms-executives-step-up-campaign-donations-lobbying-ahead-of-midterms-11667612593?mod=article_inline" target="_blank" rel="noreferrer noopener">biggest donors</a> in US politics ahead of this year’s midterm elections. As Blockworks previously reported, Bankman-Fried personally donated <a href="https://blockworks.co/news/ftx-donations-campaign-finance" target="_blank" rel="noreferrer noopener">$40 million</a> to Democratic candidates and political action committees, the latter of which contributed to campaigns on both sides of the aisle.&nbsp;



He was also <a href="https://nymag.com/intelligencer/2021/02/sam-bankman-fried-biden-donor.html" target="_blank" rel="noreferrer noopener">famously</a> the second-highest contributor to Joe Biden’s 2020 campaign behind media mogul Mike Bloomberg, giving $5.2 million to Bloomberg’s $56 million. The splurge left many to consider Bankman-Fried a staunch Democrat.



Bankman-Fried however told Fong that he actually donated about the same to both parties. His Republican donations were dark and therefore didn’t require disclosure.



According to <a href="https://campaignlegal.org/update/what-dark-money" target="_blank" rel="noreferrer noopener">Campaign Legal</a>, “wealthy special interests can easily hide their political spending from the public and avoid accountability for trying to rig the system and influence our votes and our government…by giving to super PACs through non-profits.”



Bankman-Fried said he opted to make his donations to Democrats public as journalists “freak the f— out” when figures backed Republican causes.



David Canellis contributed reporting.



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Sam Bankman-Fried: FTX Would Be More Stable if CZ Stayed Silent

The BlockFi bankruptcy last week marked the latest instance of crypto’s collapse starting to resemble TradFi’s 2008 crisis. More high-flying firms are running out of financial runway, if they have yet to shut their doors entirely.&nbsp;



Attorneys for BlockFi — once one of the largest crypto lenders — appeared before a bankruptcy court in New Jersey, where the company is headquartered, on Monday. Industry participants, closely following the proceedings, told Blockworks what BlockFi’s insolvency means for the industry more broadly.&nbsp;



Crypto companies, if the entities haven’t done so already, ought to take a serious look at their accounting practice and ensure compliance with <a href="https://blockworks.co/news/crypto-industry-must-report-bad-actors" target="_blank" rel="noreferrer noopener">fast-moving</a> regulatory requirements, according to Aaron Jacob, head of accounting solutions at TaxBit.



“After a chaotic crypto winter, regulatory clarity, transparency, and better accounting will let spring finally emerge again,” Jacob said.



BlockFi’s next court appearance is tentatively set for Jan. 9, 2023. Below is a rundown of what&#8217;s happened so far:



<h3>BlockFi sues Sam Bankman-Fried for Robinhood shares</h3>



Soon after filing for Chapter 11 bankruptcy, BlockFi <a href="https://pacer-documents.s3.amazonaws.com/109/1094078/118164201903.pdf" target="_blank" rel="noreferrer noopener">sued</a> embattled FTX founder Sam Bankman-Fried for outstanding Robinhood shares.&nbsp;



BlockFi alleged it entered a Nov. 9 agreement to specific payment obligations from an unnamed borrower, later identified as Bankman-Fried’s Alameda Research, by pledging unidentified “common stock” as collateral.&nbsp;



Bankman-Fried previously acquired a <a href="https://blockworks.co/news/ftx-denies-claims-to-acquire-robinhood" target="_blank" rel="noreferrer noopener">7.6%</a> stake in Robinhood, leading to speculation the former FTX chief executive could purchase the brokerage firm outright, though the company <a href="https://blockworks.co/news/ftx-denies-claims-to-acquire-robinhood" target="_blank" rel="noreferrer noopener">later denied</a> a potential acquisition being on the table.



BlockFi is now looking to cash in on the collateral as the likelihood of Alameda repaying its loan is very slim.&nbsp;



<h3>Two-thirds of staff will be laid off</h3>



Following the demise of Three Arrows Capital, BlockFi had already cut its staff by <a href="https://blockworks.co/news/cryptocurrency-lender-blockfi-set-to-cut-staff-by-a-fifth" target="_blank" rel="noreferrer noopener">one-fifth</a>.



BlockFi now has 292 employees and 82 contractors, according to Joshua Sussberg, a partner at law firm Kirkland &amp; Ellis.



After selling roughly <a href="https://www.docdroid.net/dvgRC8u/x3tecaphkcg84s9obt8s0jmcg84-pdf#page=31" target="_blank" rel="noreferrer noopener">$238 million</a> worth of its cryptoassets to try to remain above water, the company said additional two-thirds of its remaining employees would need to be laid off to save $34 million annually.



The laid-off employees will be paid through the notice period.



<h3>$355 million in cryptoassets are frozen on FTX</h3>



Court filings revealed BlockFi had “substantial exposure to FTX.” That &#8220;substantial&#8221; turned out to be $355 million worth of frozen cryptocurrencies now in limbo on the insolvent centralized exchange, Sussberg said in bankruptcy court.



The $355 million is on top of an existing $671 million loan to Alameda — which has already defaulted.



<h3>SEC among BlockFi bankruptcy creditors</h3>



BlockFi has roughly 100,000 creditors and $1 billion to $10 billion in liabilities and assets, the latest bankruptcy filings show. Among them is the SEC, which the troubled lender is said to owe roughly $30 million.



The lender previously reached a $100 million settlement with the SEC after the regulator said BlockFi failed to register yield-bearing products as securities earlier this year. The settlement, in an industry first, included a provision for the firm to stop offering such accounts to US clients.&nbsp;



As its largest creditor, per filings, Ankura Trust owes BlockFi $729 million.



<h3>Emphasis on transparency</h3>



Meanwhile, FTX’s new CEO John Jay Ray III dubbed internal mismanagement of the exchange “a complete failure.”



“Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here,” Ray said in a statement.&nbsp;



Opaqueness didn’t apply to BlockFi’s own bankruptcy, according to filings.



“BlockFi was forthright about what it would and would not do with funds on its platform — in stark contrast to others reported to have done the opposite,” the filings said.



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5 Highlights From BlockFi Bankruptcy Proceedings

Dan Smith

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