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Kraken Under SEC Investigation, Binance Assembles Consortium, Genesis Resolves Disputes with Creditors, and More Legal Updates



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The US Securities and Exchange Commission is looking into Kraken exchange according to a Wednesday Bloomberg report citing a source familiar with the matter. The probe, which is in advanced stages, seeks to establish whether the San Francisco-based exchange violated securities laws in offering unregistered tokens to its US-based customers. Though the report didn’t specify the scope of the offerings in question, it implied that the investigation is advanced and may well result in Kraken taking the settlement approach.

Here is a roundup of other latest developments on crypto-related disputes as of Feb 8.

Binance assembles exchanges and other companies to form a consortium

The probe into Kraken appears to be part of the SEC clampdown on digital assets trading platforms and adds to compounding plights affecting the crypto sector even as prices recover.  Kraken head of strategy Thomas Perfumo earlier this week acknowledged in an interview that the exchange’s business took a hit after last year’s market slump.

Meanwhile, Binance is reportedly lobbying other industry players including other exchanges and analytics providers to form a consortium according to a Wednesday report by CoinDesk. The resulting group of crypto companies will have active involvement in global regulatory discussions as it seeks to restore trust in the sector that has been weighed down by recent heavy losses and financial issues. Binance will have no authority over the consortium – instead, it will function as a decentralized community to “ensure there’s a mechanism in place to call out shortcomings […] and help avoid larger contagion issues.”

DCG subsidiary Genesis embarks on creditor dispute resolution

Digital Currency Group and its financially strained crypto lending arm Genesis on Monday reached an agreement in principle with a group of the lender’s creditors that will see the conglomerate offset its liabilities. Past court documents show that Genesis and its related entities owed creditors including Gemini exchange more than $2.4 billion.  The yet-to-be-approved deal entails selling Genesis’ bankrupt entities and refinancing its loans. Gemini also announced that it will contribute up to $100 million to the proposed plan for its Earn Program users who had funds frozen after the DCG lending subsidiary got into a liquidity crunch in January- the resulting from the implosion of the FTX exchange last November.

DCG starts offloading shares in Grayscale-run crypto funds

Monday’s court filings follow last month’s remarks from DCG assuring that the ongoing conflict would be solved swiftly. Genesis already officially began resolving its creditor disputes, at least through its parent firm. A recent SEC filing shows that the Connecticut-based conglomerate already started releasing holdings in some of the crypto-backed funds managed by Grayscale, its asset management business, at a steep discount. In the last three weeks, the group has sold about a quarter (~$22 million) of its stock on Grayscale’s Ethereum fund at half the share’s claim to $16 of Ether.

This ‘portfolio rebalancing’ occasioned by the financial strife also affected Grayscale’s Litecoin Trust fund. Last month, DCG revealed in a Jan 17 letter that it would suspend its quarterly dividend payments to preserve liquidity. It additionally sought the services of Lazard advisory bankers to help sell its markets-focused news outlet CoinDesk.

Genesis’ restructuring plan

In the latest agreement, DCG will release its equity stake in the brokerage business and trading subsidiary (Genesis Global Trading) to the holding company (Genesis Global Holdco), which will ultimately be sold following a series of transactions. The restructuring framework will reportedly deliver to creditors at least 80% of their funds while specifics will hinge on  “equity note, realized liquidation prices and considers the unknown costs associated with the remainder of this bankruptcy.” Backing this recovery plan by the institutional digital assets brokerage firm, Gemini cofounders the Winklevoss twins, declared they will contribute a cash sum of $100 million. These funds will be reserved for users of its high-yield product, Earn Program, whose withdrawals have been on pause.

Grayscale still after spot Bitcoin ETF conversion

In other developments this crypto-week, Grayscale shared on Tuesday an update on its case against the US SEC initiated after the rejection of the application to convert its flagship crypto fund (GBTC) into a spot Bitcoin exchange-traded fund. The digital asset manager filed its final brief in the litigation awaiting oral arguments scheduled for March 7, reiterating that the commission has set ‘unreasonable’ criteria for assessment of spot Bitcoin ETF proposals resulting in none meeting the significant-market test

“These are essentially identical to other briefs that were filed previously, but with additional citations and references. It’s a requirement to prepare the briefs to be read by a panel of D.C. Circuit judges,” Grayscale wrote.

Last Monday, Grayscale was named in a lawsuit filed by competitor Osprey in the Connecticut Superior Court for allegedly misleading investors and investment advisors alike on the potential conversion of GBTC into an ETF. The over-the-counter (OTC) trust asset market accused Grayscale of advertising based on “a foregone conclusion” that Grayscale Bitcoin Trust (GBTC) would enable investors access to a spot-based Bitcoin ETF – this violates the state’s Unfair Trade Practices Act.

Osprey claimed that Grayscale, which controls about 99.5% of the market share, benefitted from “unfair and deceptive acts and unfair competition” by falsely marketing the GBTC product as a vehicle that would be inevitably converted, a proposal that the SEC has rejected multiple times. The firm further suggested that the deceptive campaign allowed it to maintain a dominant market position, despite charging a management fee four times higher than the former offers. In response to the allegations, Grayscale said the legal dispute lacks substance. The response highlighted that the restructuring of GBTC into an ETF aligns with Grayscale’s commitment to delivering optimal investment structures to its stakeholders in the long term.

Latest on FTX bankruptcy case and related developments

Less than a week after Bloomberg revealed that the US Department of Justice’s fraud unit was investigating Silvergate bank in relation to FTX’s case, another Wall Street bank with crypto dealings has been caught up in the FTX mess. A previous Bloomberg report disclosed that the DOJ was combing through Silvergate’s hosting of accounts tied to SBF-founded FTX exchange and Alameda Research. While Silvergate has not been implicated in any illegal activities, and the ongoing inquiry may not result in formal charges, the bank’s handling of accounts related to businesses owned by Sam Bankman-Fried is getting probed.

Silvergate and Signature banks involved in FTX, Alameda dealings

Federal reserve member and crypto-focused bank Silvergate Capital is facing mounting pressure from a sect of bipartisan senators in the US over the financial institution’s connection to the failed FTX. In a letter sent by US Senators  Elizabeth Warren, Roger Marshall, and John Kennedy on Jan 30, the trio queried the bank over whether it was aware of the crypto exchange’s misuse of user funds. The Senators demanded that the bank elaborates on the “evasive and incomplete” answers it gave last month, in addition to facing a potential class action for an accusation of securities fraud. FTX CEO Sam Bankman-Fried and co. have been accused of illegally diverting customer funds into the digital asset trading firm also founded by the crypto entrepreneur. The exchange used the crypto-friendly bank to move customer funds particularly due to the reluctance of regular banks to deal with digital assets for their regulatory risks.

State Street grew its stake in Silvergate Capital

A previous filing revealed that fund manager State Street had increased its stake in Silvergate Capital to 9.3% as of December 31 from a previous shareholding of 5.3%. This was in the same week that BlackRock also said it grew its stake in the bank to 7.2%, joining Vanguard (9.15% of shares) among the biggest institutional investors in the bank.  The trio alleges that previous responses by Silvergate on the matter were “evasive and incomplete,” frequently citing “confidential supervisory information,” rather than providing the full details to determine the bank’s involvement.

The senators explained that while Silvergate has risk management and due diligence measures, which it subjected FTX to as a customer of the bank, these curtails, in fact, failed miserably. They add that both independent auditors and the Federal Reserve (required to perform annual audits on the bank) had failed to identify the glaring shortcomings in Silvergate’s due diligence process. As the senators consider Silvergate’s previous responses incomplete, they want the crypto-centric bank to answer additional questions to settle several matters, among them being how the bank plans to use the $4.3 billion loan it received last December from the Federal Home Loan Bank of San Francisco, and whether lapses in auditing had contributed to the loss of funds on FTX.

Signature bank comes up

Midweek reports now add that the contagion has spread to Signature Bank, the only federally regulated bank with a receptive take to crypto transactions. The bank faces a lawsuit for allegedly allowing FTX to muddle up with customer funds.  In addition to these accusations amounting to abetting fraud and a breach of fiduciary duties, Statistica – the firm that brought the claims up – said the bank promoted the embattled exchange. Signature Bank announced in December a month after FTX’s liquidity issues first came to light that it would reduce its exposure to crypto by as much as $10 billion. Last month, Binance advised its users that the bank would stop issuing crypto transactions worth less than $100,000 – an order that already went into effect this month affecting all of Signature’s exchange clients.

Bidding deadline for FTX Japan extended by five weeks, auction set for late April

In other legal developments, the Bankruptcy Court in Delaware approved a Wednesday order allowing FTX’s new executive and the official creditor committee to subpoena the exchange’s founders and other former top employees. Elsewhere, the bidding deadline for potential buyers of FTX Japan to formally declare their interest has been extended to April 19 from an initial March 15. The auction of the Japanese trading platform will be on April 26, to conclude the sale by early May. A total of 41 interested buyers had already lined up to acquire the exchange as of Jan 16 including Tokyo-based financial services and investment advisory Monex Group.

The sale of FTX Japan to a local bidder will contribute to the uprooting of a global presence as FTX successfully found its way into Japan by bailing out a rival trading platform Liquid last year. FTX initially gave a $120 million loan to the Japanese exchange before agreeing to acquire it wholly, thereby earning an operating license.

Yuga Labs settle with Ryder Ripp’s developer

Yuga Labs, creator of the  Bored Ape Yacht Club NFT collection, on Monday, reached a court settlement with Thomas Lehman, a developer associated with Ryder Ripp’s project which bears a close resemblance to Bored Ape Yacht Club NFTs. The complaint against Thomas Lehman was filed on Jan 20 for his involvement in building the websites hosting the ‘copycat’ NFTs of Yuga Lab’s flagship collection. A federal judge earlier ruled that the Yuga Labs execs, Wylie Aronow and Greg Solano, give depositions in the trademark infringement lawsuit against Ryder Ripps.

The legal tussle between the two began in June 2022, when the BAYC/MAYC creator accused Ryder Ripps of violating their intellectual property by creating and selling ‘copycat’ NFTs. In response to the lawsuit, the conceptual artist hired legal representation and filed a counterclaim, arguing that each NFT is unique by design and, therefore, cannot be imitated as claimed. Yuga, on the other hand, tried to limit the artist’s ability to gain an advantage from the lawsuit by suing him only for trademark infringement, not for copyright infringement or defamation.

Sam is a financial content specialist with a keen interest in the blockchain space. He has worked with several firms and media outlets in the Finance and Cybersecurity fields.