Notes 1/19: Binance Drinks Bitzlato, DCG Falls Apart

It was not the allegations of “rampant” wash trading. It was not the absence of proper audits or the *snigger* decentralized chief financial officer. It was not the presence of an unregulated stablecoin or a useless security token masquerading as a utility coin on its exchange.

Eventually, it was Binance’s brush with crypto exchange Bitzlato that brought the world’s biggest crypto trading exchange by volume under the scanner of U.S. authorities.

Yesterday, FinCen named Binance as the biggest counterparty to the exchange in an enforcement action brought against it. Binance said it was pleased to have provided “substantial assistance” to authorities.

Not Your Coffee, Not Your Crypto

For those wondering, Bitzlato is not what you get when you pay for your coffee with Bitcoin at the local Starbucks. It is a Hong Kong-based exchange that has been charged with money laundering by the Department of Justice. According to them, it allegedly laundered more than $700 million in cryptocurrencies and received more than $15 million in ransomware proceeds.

Its founder, Anatoly Legkodymov, was arrested on Tuesday night in Miami. Like the exchange itself, there is not much record of Legkodymov online. Some sleuths have dug out an old posting he made on the bitcointalk forum. In the Twitter posting, which has been deleted, he comes across “as an idiot” because he claims that bitcoin was downloaded to his wallet even after Mt. Gox was hacked.

The DoJ had cultivated mystery about the enforcement action against a major player in crypto and crypto Twitter was all ago, waiting with bated breath in anticipation of the next big player to collapse in an ecosystem that is swiftly unraveling under the weight of its own lies. The announcement that it was Bitzlato, an exchange that no one had heard of until yesterday, turned to be an anticlimax.

Naturally, crypto Twitter went to town on the announcement.  

DCG Retains Spotlight

A big name that is in danger of tumbling over is the Digital Currency Group (DCG). As I wrote yesterday, two of its divisions are reported to be facing serious problems. The list seems to have expanded today. CoinDesk, its media division, is reportedly in talks with an investment bank to sell itself for as much as $200 million. DCG purchased the site for $500,000 in 2016.

Genesis, its trading and lending division, is said to be exploring a prepackaged bankruptcy that will allow its creditors to buy up stake in the company, thereby thickening the already murky soup of related entities that make up a small crypto ecosystem.

Grayscale, operator of the world’s biggest publicly traded investment vehicle for bitcoin, is under pressure to liquidate its bitcoin trust or offer a way out to its shareholders to redeem their holdings.

What Challenges for Foundry?

In its report, the WSJ states that other businesses within the DCG umbrella “also face significant challenges.” The nature of those challenges is not made clear and, indeed, one would say suspect. Texas-based Foundry has the biggest hash rate among bitcoin miners, meaning it has the scale to withstand a precipitous drop in its price. The recent crypto winter, which has driven smaller outfits out of business, has helped it acquire competitors.

What’s more, Bitcoin price has been on an upward trajectory in recent weeks. That should be good news for miners whose profits and operations depend on sale of their coins in crypto markets. What problems at Foundry, then?

But then facts or numbers don’t count for much in cryptocurrencies.

Will DCG’s Fall Affect Crypto?

In a recent interview, Meltem Demirors, chief strategy officer at investment and trading firm CoinShares, said there were no more “pockets of forced selling” for bitcoin that might affect its price.

DCG, and its stash of bitcoin at Genesis and Grayscale’s GBTC [according to data, the largest holder of bitcoin among publicly traded companies] could have been a potential pocket. In fact, sale of GBTC’s bitcoin may induce a catastrophic drop in its price. Shareholders and customers should also forget about getting their coins back. They have already signed away the rights to their bitcoin.  

Bitcoin Price

One would have thought that news of major enforcement action would be enough to drive down prices for bitcoin. But that doesn’t seem to be happening. Bitcoin is holding steady in the $20,000 range. As of this writing, Bitcoin is changing hands at $20,887, relatively unchanged from its price yesterday. In the past, enforcement action against bitcoin businesses caused selloffs in the cryptocurrency.

But investors and Binance – the exchange with the biggest trading volumes for the cryptocurrency and one of the parties named in the charges by authorities – are still sticking around.

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