Revisting FTX & SBF before trial

Vitalik hacked I LayerZero teams with Google Cloud I Banana token sinks

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Decential Media
September 15, 2023

Decential Media
A weekly recap of the most insightful news, analysis, and capital flows in the wild west we call crypto.

Hello and welcome back to the Web3 Rewind! Per usual in this industry, lots has happened this past week. Here's what we have in store for you:

  • SBF/FTX trial 👨‍⚖️

  • LayerZero partners with Google Cloud ☁️

  • Banana token sinks 📉

  • BTC & ETH ETF apps keep coming 📊

  • Vitalik hacked 😱

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The Latest

A Walk-Through on Stoner Cats

If you’ve been around crypto for long enough you’ve heard the complaint that the U.S. Securities and Exchange Commission has a habit of regulating through enforcement action. In a nutshell, the SEC would rather sue you after you do something than give you clear guidelines on what’s legal vs. illegal. What does that really mean, though? The recent SEC lawsuit and settlement against the creators of the Stoner Cats cartoon provides a good case to delve into this. The settlement included a $1 million civil fine to the firm that created Stoner Cats.

Those makers, which included producers, animators and voice actors Ashton Kutcher, Mila Kunis, Chris Rock and even Vitalik Buterin himself, sold nonfungible tokens (NFTs) to the public to fund the creation of the show, raising about $8 million in 2021. The company, referred to as SC2 in the SEC complaint, “offered and sold the Stoner Cats NFTs as an investment into SC2’s efforts to create this content. SC2’s public communications tied the success of the show to the value of the NFTs and thus led investors reasonably to expect to profit from the managerial and entrepreneurial efforts of SC2.”

The firm also embedded a 2.5 percent royalty payment to itself any time a Stoner Cats NFT was sold on an unnamed NFT platform, the SEC said. “Investors were also told that ‘the more successful the show, the more successful your NFT’ will be,” the SEC said. Ok, that’s bad. Incentivizing second-market sales of the NFTs with the royalty payment is also bad. Stoner Cats made several mistakes, I wish they hadn’t, but they did.

But what if they hadn’t? What if a similar firm went to the NFT market to raise money to produce a show? They sold an NFT or some other digital good backed by a blockchain, except they didn’t advertise or promise or allude to a possible rise in the price of the NFT, they didn’t market it at all, they didn’t have further interaction with it once it was minted. The NFT, in other words, was a bonus to investors for helping raise a production budget. How is that any different than rounding up a group of investors to make a TV show? The SEC doesn’t address this at all, of course. It offers no ways Stoner Cats could have done this legally.

That’s the problem with regulation by enforcement. Reasonable questions aren’t addressed, and firms are left wondering where their activity falls on the legal spectrum. The SEC could write its own rules, but that isn’t something the agency is known for (it’s taken more than a decade for the SEC to finalize rules on the CDS market). Congress needs to speed up its involvement in digital asset regulation so that that perfectly reasonable way of raising funds for a movie or a TV show or whatever can be an option to the investing public and people in general. – Matthew Leising, editor in chief, Decential Media

You’re going to jail dept.

Bankman-Fried and FTX On Trial

Bloomberg has a very good, concise summary of the case against San Bankman-Fried, the co-founder of crypto-exchange FTX who goes on trial for fraud in October in New York after he allegedly stole billions from his customers. Here’s a refresher on the accusations he faces. With a one-time valuation of $32 billion, SBF helped build FTX into a powerhouse, yet all along he was allegedly illegally using customer funds to make investments, trade and donate to politicians. When loans came due as the crypto market tanked in 2022, FTX and its related company Alameda Research couldn’t pay. As Bloomberg put it, “Even though FTX had allegedly already given Alameda billions of dollars in customer funds, Bankman-Fried began to give Alameda even more money to cover those positions, the SEC alleged.”

This is such a big fucking no no in the traditional financial world, it’s hard to get across how fundamental a breach this is. Yet SBF allegedly blew through his customer’s cash without a second thought. What fascinates me about FTX’s implosion is how similar it is to how the financial crisis began, though writ small. SBF and FTX didn’t know exactly where all the customer money they’d spent had gone, there was too much to keep track of or they were just sloppy. So when the demand for payouts increased, FTX couldn’t honor them all and customers panicked. Sounds a bit like terrible mortgage debt that had been sliced and diced and sold to financial firms all over the world, with Wall Street’s biggest banks neck-deep in the crisis. No one knew who had what risk on their books, no one trusted each other, and the global economy was on the verge of collapse.

One final thought: the current animosity towards crypto by most of Washington DC can largely be tied to SBF. He was the second-largest Democratic donor in the 2022 elections and gave more than $100 million of his customer’s money to lobbyists, politicians and political action committees. Congress fawned over SBF and have been made to look like fools by FTX’s collapse. It’s not hard to make a politician look like a fool but they are coming after crypto in general I believe in an attempt to wash away their prior malfeasance. The trial next month will be riveting and a reminder that we’ve seen this story unfold on Wall Street many many times. That’s the crux of SBF and FTX, they were simply criminals who used crypto as their means, and had not an ounce of the radically transparent ethos and honesty that animates much of the industry. — ML

Quick Bits

LayerZero & Google Cloud strike deal

  • The interoperability protocol LayerZero has teamed with Google Cloud to verify messages sent between blockchains. The network connects 30 blockchains including Ethereum, Arbitrum, Optimism, Polygon, BNB and Avalanche so users can send messages, assets and information from one chain to another.

  • While there are other ways to verify messages on LayerZero, such as PolyhedraZK, the centralizing force of Google in the blockchain space, in general, is troublesome and should be resisted at every turn. The whole idea here is decentralization, don’t forget.

Bug crashes Banana launch

  • The Telegram trading bot Banana Gun’s token launch sank to zero this week after a bug in its code was made public. The protocol allows users to trade crypto on decentralized exchanges from a Telegram channel, obviating the need for a wallet or interacting on a DEX.

  • Reread that sentence above if the absurdity of this didn’t sink in. Why a trading bot needs a token is a question no one seems to care to answer, so it’s hard to feel much when the company claimed two audits didn’t catch the problem. The ultimate irony is that running its code through ChatGPT did find the bug. 🤦‍♂️

ETF apps keep coming

  • Franklin Templeton, the asset manager with about $1.3 trillion in assets, filed with the SEC for a spot Bitcoin exchange-traded fund this week. Nasdaq is seeking the SEC’s approval for a mixed spot and futures based Ethereum ETF in conjunction with Brazilian asset manager Hashdex.

  • The amount of money that could be coming into Bitcoin and Ether markets is mind-boggling if the ETFs proposed by BlackRock, Fidelity, VanEck, Invesco and now Franklin Templeton and Nasdaq are allowed to trade. Fair warning.

And last but not least

Vitalik Hacked 

So even Vitalik Buterin, the inventor of Ethereum, can get hacked. The rest of us might as well give in and post our private keys on social media.

No, don’t do that. It is a great reminder, however, to never associate a phone number or email address with an account recovery mechanism. That’s a great way for hackers to take over your account, as appears to have happened to Buterin’s Twitter account. Kind of comical until you learn his followers were tricked into losing $691,000 in a fake NFT scam. For the love of God, always use an authenticator app for two-factor authentication.

Buterin spoke about all this on Farcaster, the decentralized social network, and thinks Twitter’s Blue program associated his phone number with his account, allowing the SIM swap. Elon Musk can’t seem to catch a break lately, can he? Let’s add terrible op sec and atrocious customer relations to his growing list of failures. — ML

Have you read the definitive history of Ethereum? No? Well then get your copy of Out of the Ether while you can.