August 17, 2022 | Issue #232

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Galaxy Digital ❌ BitGo

What was at one point the largest crypto deal in history and the first to be more than $1 billion seems to now be over.
This week, Galaxy Digital (GLXY) announced that it has terminated its $1.2 billion acquisition offer of BitGo. The deal was first announced in May 2021 with Galaxy putting up $265 million in cash and the rest in 33.8 million newly issued shares. The acquisition would have given BitGo shareholders a 10% stake in Galaxy.
The deal was first expected to close Q4 2021, but in March of this year the terms were being renegotiated based on the progress BitGo had made as an independent company since the deal was originally announced. The deal was hyped (including in CoinSnacks) up as a great catalyst for GLXY holders as it gave the company access to institutional investors by adding services such as investment banking, prime lending, and tax services. For context, at of the end of 2021, BitGo had more than $64 billion in assets under custody.
Now, in a stunning turn of events, the deal is off.
Galaxy states that they have ended the deal because BitGo failed to deliver audited financial statements for 2021 by a July 31 deadline. BitGo claims that the termination is "improper" and that it will seek a $100 million termination fee.
The Hits Just Keep Coming For Galaxy
Like most public crypto companies, GLXY's stock price has taken a beating ever since the market dropped. Tie that to this week's news and too much exposure to Terra/Luna prior to its collapse (not to mention this regrettable ink on their CEO's arm), and it's fair to say that Galaxy Digital has seen better days.
Making things worse is the company's latest earnings release, where it reported a massive $555 million quarterly loss.
What's Next?
All things considered, a rough quarter doesn't necessarily spell doom and gloom for Galaxy Digital going forward. The company, known as a "one-stop shop" for onboarding institutions, still has much to look forward to.
Despite backing out on the BitGo merger, it appears that the management team already has an alternative plan in place with the development of Galaxy One Prime, a new product for institutional investors that will "integrate trading, lending, and derivatives alongside access to qualified custody all through a unified tech platform."
While this may save the company a lot of money, both companies are coming out of this situation a bit battered and most likely worn out after more than a year of trying to close the deal.
Here at CoinSnacks, we also wouldn't be surprised if the deal re-emerges with a much lower price tag for BitGo considering that valuations have been nearly cut in half since the market correction.
Either way, it hasn't been a great year for Michael Novogratz's Galaxy Digital. With BitGo now likely in its rearview mirror, Galaxy's long-anticipated Nasdaq uplisting is seemingly the only catalyst to look forward to for the time being.

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DEEP DIVES

Here At Last: The Ethereum Merge Is Officially Scheduled

We’ve been talking a lot about The Merge lately, and for good reason. Ethereum’s transition to proof-of-stake is one of the most anticipated events in crypto’s history, with many hopeful that it ushers in a golden era for Ethereum and decentralized finance.
After years of delays, it finally (sort of) has a date.
On either September 15th or 16th, the new era for Ethereum officially begins.
The Endgame
The catalyst for the date-setting was the completion of the last obstacle standing between Ethereum and The Merge: the merging of the Goerli testnet.
With that last hurdle successfully cleared, developers had the green light to set the Total Terminal Difficulty (TTD) to 587506-00000000000000000. This means that the final proof-of-work block will be mined when this TTD is reached. After that, all subsequent blocks will be produced with proof-of-stake.
At the current mining rate, TTD is projected to be reached on September 15th. If the mining rate speeds up, TTD and The Merge will happen sooner. Likewise, If the mining rate slows down, TTD and The Merge will be delayed. That’s why the date is kind of, sort of the 15th or 16th.
A Quick Price Update
Since our first post on The Merge, ETH’s price has continued its steady ascent. It even temporarily broke $2000 on August 14th but has since retraced to the ~$1900 level, which is where it is currently hanging out.
Although The Merge is a bullish event, and these prices could very well look like a bargain in a few months, it might be best to proceed with some caution. Trading volume is still low, and on-chain gas prices are the lowest they’ve been in two years. This suggests that this rally might not have legs and is actually setting up to be a “sell the news” sort of situation. In any case, it’ll be interesting to see how ETH moves as The Merge gets closer.
Interestingly, Ethereum Classic (ETC) has done even better than ETH over the last month. For context, ETC is up a whopping ~175% since the beginning of July, whereas ETH has climbed only ~75% during the same time frame.
Why? Honestly, we aren’t sure.
The likeliest explanation is it has something to do with miners advocating for a proof-of-work Ethereum fork. Whatever the case, be extra careful if you decide to get involved in this trade. The odds of ending up as exit liquidity seem especially high with this one.

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REGULATORY FRONT

The Tornado Cash Drama Sheds Light On A Very Serious Debate

If you missed last week’s article and are not quite up to speed on what’s happening, here’s a quick TLDR on the Tornado Cash situation.

Here’s what has happened since we published last Wednesday.
Tornado Cash Developer Arrested in Amsterdam
29-year-old Tornado Cash developer Alexey Pertsev was arrested in Amsterdam last Wednesday, a few days after the much-maligned U.S. sanctions against Tornado Cash.
It’s a frightening turn of events for a story that was already among the scariest in crypto’s recent history.
The official statement regarding Mr. Pertsev’s arrest states:

“He is suspected of involvement in concealing criminal financial flows and facilitating money laundering through the mixing of cryptocurrencies through the decentralised Ethereum mixing service Tornado Cash.”

Basically, the Fiscal and Information Services (FIOD), the agency responsible for investigating financial crimes, is saying that Mr. Pertsev helped criminals launder money through Tornado Cash.
Immediately, the crypto community was up in arms, with many high profile executives stating that locking someone up over writing code sets a dangerous precedent.
Their argument is that there is a well-established understanding that code is a form of free speech. This has allowed developers to write code that pushes the boundaries and meaningfully affects the world without fear of legal recourse.
Arrests like Mr. Pertsev’s could scare people away from experimenting with coding like they had in the past.
Nobody wants to go to prison for a few lines of code.
Coin Center Prepares Legal Challenge to Tornado Cash Sanctions
If the Tornado Cash debacle has shown us anything, it’s that crypto is not going down without a fight.
Since the sanctioning of Tornado Cash and the arrest of Mr. Pertsev, Coin Center, a crypto policy think tank, announced that they are exploring a court challenge to the Tornado Cash blacklisting.
It’s a case that has tremendous implications for crypto, privacy, and digital code.
Coin Center believes that the Treasury Department has overstepped its legal authority in blacklisting TC. Like most legal documents, there’s a lot of jargon and mental gymnastics. But, beneath all that, their argument boils down to one key point: the SDN is reserved for persons, and TC is just a piece of open-source code, not a person.
To illustrate this point, Coin Center compares the May blacklisting of similar privacy tool Blender with TC.
For Blender, an addition to the SDN was justified because it was a company. There were people who controlled Blender and decided to provide privacy services to criminals. This made adding them to the SDN wholly justified.
The opposite is true with TC according to Coin Center. Nobody controls TC due to its decentralized and open-source nature. It is simply just a piece of code that anybody can use. This means that the developers have no control over who uses TC and are utterly powerless to stop criminals from using TC.
This distinction between code and persons is the crux of Coin Center’s case. Persons are within OFAC’s jurisdiction. Autonomous code is not.
If Coin Center can prove this in court, TC might live to see another day.
The Other Side
Longtime readers of CoinSnacks know that your trusty writers are quite skeptical of government authorities from a foundational level.
With that being said, to be intellectually honest, it is worth trying to steelman any argument and take a look from the other side.
At this point in time, many in the crypto community are passing judgment and making statements based on incomplete information. Only a very small amount of information has been released regarding TC and the arrest and there may be a deeper story than is currently understood by the community.
In regards to Mr. Pertsev’s arrest, it is quite possible that the story is much deeper than simply that a software developer was arrested for writing code.
In regards to the sanctions against TC, it's quite possible OFAC has damning information that has yet to be made public. It is also possible that OFAC has made a mistake, misunderstands the technology, or has succumbed to political pressure as Jake Chervinsky points out.
At this point in time, we simply don’t know.
But, if the Tornado Cash story is actually that it is an organization that developed, built, and profited from code that the DPRK used to launder $500 million+ for their nuclear program, we have a problem. Again, many are pointing out that the code is open source, but Tornado Cash also had a token (TORN) which paid holders 1% of withdrawal fees. An open source method to profit off of illegal activity is not a great argument.
We know we will get a lot of feedback on this section, but again we are just providing an alternative viewpoint. Even in Coin Center’s argument they point out:

"So there is potentially an entity called Tornado Cash that is controlled by certain individuals, and the web address and some of the Ethereum addresses in the notice can be thought of as either pseudonyms for that entity or, alternatively, as its property. At this point, we’re not offering an opinion on whether it was appropriate to sanction that entity—we do not know all the facts that have led to this action—but we would agree that there may be an entity behind those donation addresses and that said entity may be legally eligible for listing. If those people have done nothing beyond author mixing software now found on the Ethereum blockchain then they may have a strong First Amendment defense; we just don’t know all the facts yet."

Our Take
Although we want to give the benefit of the doubt, our gut feeling is that the government is once again doing something nefarious.
As the saying goes, when people show you who they are, believe them the first time. When it comes to crypto, the US government has shown their true colors more than once.
With that being said, the crypto – and particularly DeFi – community needs to begin having an adult conversation around the balance between anonymity and safety. Yes, the permissionless nature of crypto is positive for the world. But, we believe most people can agree that any tool that is used to fund the DPRKs nuclear development (or other illegal or immoral acts) is probably not a great thing.
Just as we believe the US government should be smart enough to figure out other ways to fight crime and immoral behavior other than sanctioning code, we also believe the crypto community is smart enough to build something that simply works better.
Be honest with yourself, if you built a tool – open source or not – that allowed for immoral activity (we are talking human trafficking, enslavement, nuclear development, etc) to flourish, how would you feel?
At the end of the day, we find it quite hypocritical that governments around the world are sanctioning Tornado Cash and arresting its developers while at the same time banks such as HSBC admit to laundering nearly $1 billion for the Sinaloa cartel and other Mexican drug gangs and after being caught and paying a fine continued to launder for Ponzi schemes and drug cartels.

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