Issue 78 – President on brink of bailout for bitcoin

The crypto industry has gotten everything it could have dreamed of in the US after the elections, and yet the market has taken a dramatic turn for the worse. Bitcoin prices have been tanking, dropping more than 25% since the previous all-time high price, which was set on January 20. A 12% tumble last week became the new largest three-day drop since FTX exploded in November 2022.¹ Although Trump has been hailed by the crypto industry as their knight in shining armor, and although he quickly got to work fulfilling the industry wishlist, prices have been on the decline since he took office.

While cryptocurrencies were once viewed as a subversive financial instrument intended to be independent from governments, banks, or the traditional financial system, and although many in the industry still like to repeat that narrative when it suits them, it’s become clear that the crypto world is deeply dependent on outside forces propping it up. Earlier this week, crypto media outlet CoinDesk published a headline that would make Satoshi blush: “Crypto Market Faces Weak Demand, Needs Trump Initiatives to Kick In, JPMorgan Says”.² (Satoshi inscribed into the first block of the bitcoin blockchain the text “The Times 03/Jan/2009 Chancellor on brink of second bailout for banks”. This quote of that day’s Times headline has long been interpreted as a nod to bitcoin’s original ideology, and a rebuke of banks and government financial intervention.)

And although many still describe bitcoin as “digital gold”, believing that it should serve as a hedge against economic turmoil in similar ways as some people view actual gold, bitcoin and other crypto assets are once again demonstrating that they are among some of the first assets to decline among broader economic uncertainty. With looming tariffs by the Trump administration against Canada, Mexico, and China, concerns from the Federal Reserve about those and other policies’ impacts on inflation, and continuing wobbles in the labor market, people are selling off risky assets like crypto in hopes of better weathering the economic storm on the horizon. The comparatively new bitcoin ETFs set new records for the highest single-day outflows on February 25, with investors withdrawing more than $1 billion in total from the eleven ETFs.³

Seeming to respond to the panicked pleas from the cryptocurrency industry, Trump rescued bitcoin from its below-$80,000 slide in a Sunday Truth Social post reiterating his plans for a “U.S. Crypto Reserve”, which he added would contain “XRP [Ripple], SOL [Solana], and ADA [Cardano]”. Further panic [I74, 75] from bitcoin maximalists likely prompted his quick addendum two hours later that “And, obviously, BTC and ETH, as other valuable Cryptocurrencies, will be the heart of the Reserve. I also love Bitcoin and Ethereum!” Nice save.⁴

These assets were certainly not chosen at random, and give us some insight into who’s got the ear of the president (at least at the current moment). Part of it has to do with Trump’s nationalist and also rather absurd insistence that the reserve feature assets that are “made in the USA”. But beyond that: Ripple’s XRP token is an unsurprising if controversial choice — it’s a divisive asset in the crypto world, but on the other hand, the company contributed $48 million to crypto-focused super PACs and another $5 million to Trump’s inauguration fund. The company’s CEO, Brad Garlinghouse, has been rumored to be on the shortlist of people to be named to the much awaited crypto advisory board,⁵ and both he and the company’s Chief Legal Officer dined with the president in early January.

Trump’s “Crypto Czar” David Sacks is a big Solana guy. Andreessen Horowitz has also heavily invested in Solana — both directly and in Solana-based projects — and in the Trump administration. Cardano founder Charles Hoskinson has also clearly been trying to woo Trump, claiming very shortly after the election that he was “going to be spending quite a bit of time working with lawmakers in Washington DC and quite a bit of time with members of the administration to help foster and facilitate with other key leaders in industry the crypto policy”.⁶ While he has continued to boast vaguely about meetings with various influential figures, winkingly describing a “VIP dinner” where “diet coke will certainly be on [the menu]”, there’s been little outside confirmation that he’s had much access to the Trump administration. However, the inclusion of his ADA token on the shortlist certainly suggests some degree of success in his endeavors.

Besides the mention of specific crypto assets, Trump’s post doesn’t actually appear to announce anything new, and instead reiterates that his “Executive Order on Digital Assets directed the Presidential Working Group to move forward on a Crypto Strategic Reserve” [I75]. (I will note that the actual wording of the EO was more guarded, directing the working group not to “move forward on” a strategic reserve, but rather to “evaluate the potential creation and maintenance of a national digital asset stockpile”.) Nonetheless, crypto prices rallied a bit, with bitcoin returning to around $93,000. This was still somewhat of a subdued recovery, only juicing bitcoin back to around its February 25 price, leaving me wondering how many promises Trump has left in the tank to keep bitcoin prices pumped up as they are now. Without the actual government infusion of cash into bitcoin markets via this “strategic reserve” gambit — something that may yet be a ways off, could take various forms, and could fail to materialize entirely — words alone seem to be running out.

Adding to pre-existing market jitters, the crypto world has just experienced a new record-shattering hack of the cryptocurrency exchange Bybit. Bybit is less known in the United States, as it is not permitted to serve US customers, which is probably why this hack has not earned the media attention of some of the other major industry disasters. However, Bybit is the second-largest exchange globally, ahead of Coinbase and behind Binance. On February 21, attackers stole more than 400,000 ETH (priced at around $1.5 billion) from one of the company’s so-called “cold wallets”. Cold wallets are crypto wallets that are not routinely connected to the internet, making them less vulnerable to thefts. As a result, crypto exchanges often store substantial quantities of assets in cold wallets, transferring smaller amounts as needed to online “hot wallets” to satisfy withdrawals and purchases. However, any time these transfers happen, there’s some degree of vulnerability, and that’s what North Korea’s state-sponsored Lazarus cybercriminals were able to exploit.⁷ They were able to manipulate the Safe Wallet multisignature system used by Bybit to authorize transfers from the cold wallet to the company’s hot wallet, and when the Bybit employees signed off on what they thought was a routine transfer, the wallet was drained. Bybit and Safe are now pointing fingers at one another, with Bybit claiming that Safe’s infrastructure was compromised, allowing an attacker to manipulate the transaction signing interface. While Safe acknowledged that a developer had been socially engineered and their device was compromised, they blamed Bybit for “blind signing” the transaction (that is, signing a transaction without fully understanding it).⁸

The Lazarus group is an extremely sophisticated cybercrime group that has been responsible for many of the chart-topping attacks in the crypto world, including the previously recordbreaking thefts of $625 million from the Axie Infinity game in March 2022 [W3IGG], and the the $300 million and $235 million hacks of the exchanges DMM [W3IGG] and WazirX [W3IGG] in May and July 2024. Their expertise means that they know how best to launder the stolen funds without causing serious impacts to the ETH price or risking the funds being frozen by exchanges and other centralized entities, and they have successfully laundered more than half of the stolen assets thus far by swapping it across various chains and into different crypto assets.⁹ While a substantial $43 million in stolen assets was frozen and recovered by the mETH Protocol, as was around $181,000 in Tether, that amounts to less than 3% of the total.¹⁰

To put this theft in perspective, the $1.5 billion stolen from Bybit alone surpasses the North Korean cyberattackers’ entire 2024 profits from crypto heists: around $1.34 billion from across 47 separate attacks throughout 2024. It’s more than double what they stole the year prior.¹¹ According to the United Nations and the US government, these thefts have been a substantial source of funding for the country’s nuclear and ballistic missile programs.¹²¹³

Bybit CEO Ben Zhou was quick to try to reassure customers that “Bybit is Solvent even if this hack loss is not recovered, all of clients assets are 1 to 1 backed, we can cover the loss.”¹⁴ Many customers weren’t satisfied with his promises, and they withdrew a combined more than $5.5 billion from the exchange after the theft was announced. Bybit was able to satisfy the withdrawals, and has since said they “closed the gap” in ETH supplies to back client assets through a combination of OTC purchases and loans from exchanges and crypto VCs.¹⁵

The lack of skepticism around Bybit’s solvency is a little odd to me. For one, it’s clear that the assets were not 1:1 backed at the time of Zhou’s tweet, given that 400,000 ETH had just been stolen. Bybit later issued a press release boasting that they were “Fully Backed Within 72 hours”, acknowledging themselves that customer balances weren’t fully backed for those three days.¹⁶ Furthermore, much of the “gap” has been papered over with loans rather than the firm’s own assets. As we saw with Genesis’s $1.1 billion “loan” to try to cover losses in 2022 [I74], a company’s ability to secure a loan to cover a hole does not magically make that hole disappear. While Bybit’s proof-of-reserves demonstrates that the company now holds a sufficient quantity of ETH to back customer balances, these reports do not evaluate Bybit’s ability to repay the loans or provide any information about the terms of those loans.

In the courts

The Seychelles-based OKX crypto exchange has pleaded guilty and will pay more than $500 million in penalties and forfeiture as part of a US Justice Department investigation into the company providing services to US customers without a money transmitting license. According to the DOJ, although the company knew it could not serve US customers without registering, and had an official policy prohibiting US customers, the company sought out such customers and allowed them to use the exchange. According to the DOJ:

Even after OKX began requiring all customers to provide some KYC information to trade, OKX employees on certain occasions advised customers how to provide false information to circumvent the company’s KYC process and official policy prohibiting U.S. customers. For example, in April 2023, an OKX employee encouraged a potential U.S. customer to open an account by providing false information about the customer’s nationality during the KYC processing, writing “I know you’re in the US, but you could just put a random country and it should go through. You just need to put Name, nationality, and ID number. You could just put United Arab Emirates and random numbers for the ID number.”

The payment will include an $84 million fine, and another roughly $420 million in forfeited fees obtained from US customers. For a period of three years, OKX will also retain a consultant to advise them on properly prohibiting US customers.¹⁷ Around the time of the settlement, a “crisis management” document prepared by the company was leaked, outlining how the company’s PR team should try to “buy time by offering up leadership schedules” if contacted by journalists about investigations, and describing a plan “to contact key friendly publications for a parallel story to seed in a complimentary narrative to the originating story”.¹⁸

The DOJ has extradited Aleksei Andriunin, co-founder of the Gotbit market making firm. Gotbit and several other market makers were charged with wash trading and other market manipulation in October [I68], and a superseding indictment shortly afterwards added charges against Andriunin personally [I69]. Gotbit actively marketed to their clients that they could stealthily wash trade cryptocurrencies to inflate their trading volume, in turn helping the tokens get listed on crypto exchanges and cryptocurrency tracking sites. Andriunin allegedly personally profited to the tune of millions of dollars.¹⁹

US law enforcement has seized $31 million in crypto assets believed to be the part of the proceeds from the April 2021 Uranium Finance hack [W3IGG].²⁰ At the time of the theft, the total amount of assets stolen was priced at around $50 million, and it seems this recovery is only a portion of that. While it’s to be expected that crypto thieves will try to launder their ill-gotten funds, this thief took the rather unusual approach of doing so via Magic: The Gathering cards [W3IGG].

A federal judge has dismissed the case from the SEC against Hex founder Richard Heart, determining that the agency failed to demonstrate that the Finland-based American had sufficient presence within the US to fall within their jurisdiction. This is a win for Heart, who also took it as an opportunity to thank Trump (although neither Trump nor his new crypto-friendly SEC seemed to have much to do with the federal judge’s decision).²¹ Heart still faces major issues abroad, where he remains on Europe’s Most Wanted List on warrants from Finland alleging hundreds of millions of euros in tax evasion and physical assault on a minor [I72].

Although Nigeria in October finally freed Binance executive Tigran Gambaryan, who they’d imprisoned for eight months in a seeming attempt to get leverage over the company [I52, 54, 56, 60, 64], the country’s legal action against Binance remains ongoing. Over the months, Nigeria has alleged that Binance was evading taxes, undermining Nigeria’s currency, operating without a license, and allowing criminals to launder money through the exchange. Most recently, the country’s Federal Inland Revenue Service filed suit against Binance, demanding $71.5 billion in compensation for economic losses, and another $2 billion in back taxes.²²

In US regulators

SEC

Trump’s nominee for SEC Chair, Paul Atkins [I71], has not even been confirmed yet, but that hasn’t stopped the agency from barreling ahead with the new administration’s promises to the industry that all their problems would go away.

Most notably, the SEC case against Coinbase was dismissed with prejudice, meaning the SEC cannot refile the case in the future. CEO Brian Armstrong was explicit with his thanks when announcing the dismissal on Twitter: “I have to give credit here to the Trump administration, for winning the election”. He insisted that he believed “we would have won this case in the courts either way”, but noted that Trump’s election “certainly helped accelerate the process”.²³ Coinbase has spent $75 million on contributions to crypto-focused super PACs, some apparently in violation of federal election law, and contributed $1 million to Trump’s inauguration fund.

A case against Justin Sun and his Tron project, opened in March 2023 and alleging fraudulent market manipulation “through extensive wash trading”, “orchestrating a scheme to pay celebrities to tout TRX and BTT without disclosing their compensation”, and unregistered securities offerings, has been stayed as parties “consider a potential resolution”.²⁴ As a foreign national, Sun is not permitted to make contributions to American political candidates or committees. However, he has spent $75 million purchasing World Liberty Financial’s WLFI tokens, and Trump personally gets a 75% cut of that project’s revenues.

A case against Consensys, the makers of the MetaMask crypto wallet, will be dropped shortly by the agency, according to the company.²⁵ Consensys contributed $800,000 to crypto-focused super PACs.

Simultaneously, ongoing investigations of companies including Gemini, OpenSea, Robinhood, and Uniswap have been dropped, despite the agency previously having sent Wells notices signaling impending enforcement action. Gemini’s Winklevoss twins contributed $4.9 million to crypto-focused super PACs and $2.6 million to Trump directly; Robinhood contributed $2 million to Trump’s inauguration fund.

Having succeeded in lobbying for the investigation into Gemini to be dropped, Cameron Winklevoss is not satisfied. Winklevoss, a billionaire, argues that the government should pay him 3× his legal expenses, and that furthermore anyone at the SEC who was involved in cases or investigations such as the one into his company should be “dishonorably discharged” and publicly named-and-shamed on the SEC website.²⁶

Target	Outcome	Political contributions
Coinbase	Case dismissed with prejudice	$75 million to crypto-focused super PACs $1 million to Senate super PACs $1 million to Trump’s inauguration fund $300,000 to the Democratic National Convention
Justin Sun and Tron	Case stayed as parties explore resolution	$75 million purchase of Trump-affiliated WLFI tokens
Binance	Case stayed as parties explore resolution
Gemini	Investigation dropped Ongoing enforcement case status unclear	$4.9 million to crypto-focused super PACs $2.6 million to Trump
Consensys	Consensys says SEC has agreed to drop the case	$800,000 to crypto-focused super PACs
OpenSea	OpenSea says SEC has closed their investigation
Robinhood	Robinhood says SEC has closed their investigation	$2 million to Trump’s inauguration fund
Kraken	No announcements with respect to ongoing SEC case Relaunched staking services which were shut down as part of a February 2023 SEC settlement	$1 million to Trump $1 million to Trump’s inauguration fund $1 million to crypto-focused super PACs
Circle	January 2024 IPO still under review	$1 million to crypto-focused super PACs $1 million to Trump’s inauguration fund
Ripple	No announcements with respect to ongoing SEC case	$48 million to crypto-focused super PACs $12.6 million to Harris $5 million to Trump’s inauguration fund $3 million to the Democratic National Convention ~$1 million to House and Senate Democrat super PACs

In Gemini’s case, although the twins have publicly declared victory over the SEC, it’s not clear that there have been any changes to the ongoing case from the SEC in which both Genesis and Gemini were named. Docket activity in early February schedules deposition deadlines ahead of a jury trial, and there has been no further activity.²⁷ Other as-yet unaffected SEC enforcement cases include those against Kraken and Ripple, two other big spenders this cycle. However, I’d be surprised if any of these cases remains ongoing much longer.

Besides the axing of ongoing cases, the SEC has also issued a statement opining that memecoins don’t fall within the agency’s remit. This is somewhat predictable, at least in the same sense that so many previously unthinkable US government actions are predictable once one’s prediction model shifts to factor in Trump’s authoritarianism. In that sense, it would be wild for the SEC to crack down on memecoins shortly after the president launched his own in the current political environment where Trump is bringing formerly independent agencies to heel. Yet it is still somewhat remarkable that the agency is washing its hands of one of the most fraud-ridden, manipulated sectors of the cryptocurrency world. They note that fraudulent conduct in the memecoin world could still be prosecuted… just by somebody else.²⁸ Expect a lot of Spiderman-style fingerpointing if you ask who that “someone else” might be — presumably the FTC, although the FTC is among the “so-called independent agencies” that Trump has mentioned by name in his executive order promising to “rein in” such entities (along with the FCC and SEC). The order purports to require such agencies to submit draft regulations for White House review, in another move by Trump demonstrating that he believes he is entitled to unilateral and unchecked power as president.²⁹

Meanwhile, Democratic Representative Sam Liccardo (CA) has proposed a bill called the “MEME Act” that would prohibit the president, Congresspeople, and related figures from creating or sponsoring securities, commodities, or crypto assets, and would require Trump to return the money he’s made from sales of his $TRUMP token.³⁰ Needless to say, it has precisely zero chance of passing in the current Congress under the current president, where profiting off one’s elected role is more openly accepted than ever.

Elsewhere

A Biden-nominated Democratic CFTC Commissioner, Christy Goldsmith Romero, has announced she will resign from the agency following the likely confirmation of Andreessen Horowitz’s Brian Quintenz as its new chairman [I77].³¹ She has previously spoken of contagion risk from the crypto industry, saying in a 2022 speech:³²

The vulnerabilities seen during this beginning of what some call the “Crypto Winter” warn of growing intra-market risks, with parallel themes seen in 2008. Opaque, complex, leveraged, and unregulated products. Underappreciated risk. A lack of confidence that underlying assets were stable or of high quality. Lots of connections between market participants. A market vulnerable to contagion risk, run risk, risk of defaults, cascading losses and a liquidity crisis. … Just as regulators could not see the true exposures or risk in 2008 due to unregulated companies and products, we cannot see that today with unregulated crypto markets.

Her exit will leave only one Democrat at the agency.

I have been musing a lot lately on the fact that the cryptocurrency industry has spent years attacking US regulators by claiming that they are what have stifled innovation and prevented crypto from fulfilling its true potential. Now that the industry has obtained the friendliest possible regulatory environment in the US, they’ve lost their go-to excuse when someone asks why, 16 years in, crypto has yet to fulfill the many lofty promises of reinventing the financial system or “democratizing wealth” or creating a fairer internet or whatever else the entrepreneur in front of you might have latched upon. This should be interesting to watch.

Along those lines, I couldn’t help but laugh when I saw a CoinDesk op-ed from crypto industry lawyer Renato Mariotti, who writes in “The U.S. War on Crypto Isn’t Over” that the crypto industry is still a victim. According to him, the absolute demolition of any federal regulatory oversight of the crypto sector isn’t enough, nor would be potential future federal legislation to hamstring state regulators, because state Attorneys General will continue to file lawsuits against crypto businesses.³³ I’m beginning to think that anything besides massive sums of government money on a silver platter and a red carpet welcome into the White House will be considered a “war on crypto” that is responsible for any of the industry’s failures, and I’m also beginning to believe that the money platter and red carpet — both well underway — are only the first items on a much longer list of demands from the crypto world as its wealthy executives continue to enrich themselves without much to show for it.

In US politics

Although he’s currently in prison, Sam Bankman-Fried has managed to resurface. Not long after rumors emerged that his parents were investigating the possibility of securing a pardon for their son [I76], Bankman-Fried gave a jailhouse interview to the New York Sun. Bankman-Fried, a Biden megadonor who was second only to George Soros in political contributions to the Democratic party in 2021–22, now claims he too is a victim of the Biden-led “prosecutorial abuse” and “politicization of the DOJ” that Trump has alleged for years. Why would they target him? Because, he says, they learned he was “giving to” and “working with” Republicans and conservatives more than was previously known.³⁴ In the interview, he also gave an approving nod to Elon Musk’s “chainsaw” approach to government cuts — something he would extrapolate upon in a 10-tweet long thread posted a few days later, where he apparently felt the need to make his return to Twitter in order to give his thought leader-style take on widespread firings of federal employees.³⁵ The sudden about-face is a rather transparent and groveling attempt to suck up to Trump, but it’s not terribly surprising that Bankman-Fried’s once claimed strongly held moral beliefs have wilted in the face of the possibility of 25 long years in prison.

The revolving door has spit out former Representative and longtime crypto industry ally Patrick McHenry (R-NC) into roles at not one but three industry players. He will be joining Andreessen Horowitz as a senior adviser, where he will “help innovators navigate the policy landscape”, touting his time in Congress “remov[ing] bureaucratic barriers for American entrepreneurs”. He wrote that “It’s time to level the playing field and ensure that Little Tech—the next generation of builders—gets a fair shot.”³⁶ (“Little Tech” in this case apparently meaning the largest venture capital firm in the world, which is so very small that it was able to blow $83 million on political contributions to ensure that no fewer than four of its employees were placed in major White House roles, including as the likely upcoming head of the crypto industry’s chosen regulator, the CFTC). Any mention of everyday American and the fairness of their shots was conspicuously absent in McHenry’s statements.

McHenry subsequently revealed he would also be taking a role as an advisor to the fintech firm Stripe, as well as as vice chairman of the advisory board to Ondo Finance. Ondo Finance is a “tokenized real-world asset” firm that wants to do things like put US treasury bills or stocks on the blockchain, and McHenry will likely be a valuable asset in — in his words — “making sure that Ondo is heard by the right people in Washington” and “helping shepherd them to new relationships.”³⁷ Ondo contributed $1 million to Trump’s inauguration in late December;³⁸ in early February, Trump’s World Liberty Financial project purchased almost half a million dollars’ worth of ONDO tokens.³⁹

The Web3 is Going Just Great recap

There were four entries between February 18 and March 2, averaging 0.3 entries per day. $1.51 billion was added to the grift counter.

Infini “stablecoin neobank” suffers $50 million theft

[link]

Infini is a “stablecoin neobank”: a fintech company that promises “financial freedom” by “democratizing banking” and “redefining the future of digital finance”. Infini experienced a different form of “financial freedom” and a redefinition of its own financial future last week when attackers liberated almost $50 million from the company after a thief with access to a wallet with admin rights drained USDC stablecoins, then swapped them for the DAI stablecoin, which unlike USDC cannot be frozen by its issuer.

The attack came only a day after a celebratory tweet from the company in which it had announced that they had achieved $50 million in total value locked, suggesting that the theft affected substantially all of the assets on the platform. Despite this, they have claimed that transactions on the platform are unaffected, and when someone asked how that was possible, they simply replied: “We’ve got solid runway to operate. No worries.”

Everything else

• Founder of the Mask Network loses more than $4 million to a wallet hack [link]
• $1.5 billion taken from Bybit crypto exchange [link]
• Around 9,000 wallets used with Cardex fantasy trading card game compromised [link]

Worth a read

In the news

Before I sign off

Later this week, I am traveling to Austin to speak at South by Southwest. I will be speaking with the unparalleled Brian Merchant of Blood in the Machine about Speaking Truth to Crypto Power on March 7. Then I will be chatting with Flipboard’s Mike McCue in a session entitled Digital Sovereignty Is the New Influencer Status on March 9. You’ll also be able to find me on the morning of March 9 opening up Flipboard’s Fediverse House with a brief manifesto on a better web.

I believe all of the Featured Sessions are recorded (and my two sessions both are Featured), so hopefully I’ll be able to share those with you at some point if you will not be attending the conference. If you are attending, come say hi!

That’s all for now, folks. Until next time,

– Molly White

I have disclosures for my work and writing pertaining to cryptocurrencies.