Blockstream Seeks Funding at 70% Lower Valuation

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ALSO: Su Zhu is subpoenaed in U.S., Sushi faces a significant deficit in treasury and more |

December 7, 2022

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Welcome to The Node. This is Daniel Kuhn and Xinyi Luo, here to take you through the latest in crypto news and why it matters. In today’s newsletter:

In the news: Hedge fund sues Grayscale for details on GBTC, Signature Bank sheds crypto-tied deposits and Binance generates 90% of revenue from transaction fees. The takeaway: David Z. Morris looks at Sam Bankmann-Fried's alleged crimes and possible punishments, as the cryptoratti call for his arrest.

– D.K.

Today marks the next phase of DESK as we integrate our social token into our broader user experience. Now, our readers have the opportunity to earn DESK by reading articles, watching videos and other interactions on CoinDesk.com.
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Downround

Crypto infrastructure firm Blockstream reportedly plans to raise funds at a valuation that may be under $1 billion, a 70% down round far from the $3.2 billion valuation it had received in 2021. CEO Adam Back tweeted the company already raised the capital, without disclosing the actual valuation. BlockFi, the now-failed crypto lender, infamously closed a downround earlier this year. A lower valuation doesn’t necessarily spell doom for Blockstream, a prominent, bitcoin-only firm that launched the rarely used Liquid scaling system, though it does speak to the worsening market conditions across crypto.

3AC Subpoeniaed

A New York judge has agreed to issue subpoenas against the founders of Three Arrows Capital as liquidators wind down the collapsed crypto fund. Founders Su Zhu and Kyle Davies, thought to be in Singapore and Dubai, respectively, have been berated by liquidators for not cooperating with a probe. Separately, hedge fund Fir Tree is suing crypto investment firm (and CoinDesk sister company) Grayscale to obtain details about the Grayscale Bitcoin Trust (GBTC) and force Grayscale to cut fees and resume redemptions. The Grayscale Bitcoin Trust is the largest-such investment vehicle, worth over $10 billion, but is trading at a historically low discount. Investors are reportedly seeking information about potential mismanagement and conflicts of interest.

Banks Unstable?

Signature Bank, one of the first to start custodying stablecoin collateral, will offload $8 billion in crypto-tied deposits, according to the chief executive’s comments at a Goldman Sachs investor summit. The target exposure will be $10 billion in deposits, signaling increased risk for the bank that derives 23.5% of its total deposits from the crypto industry, including USDC issuer Circle. Meanwhile, another crypto-friendly bank, Silvergate Bank, was asked by several U.S. senators to address its supposed role in facilitating transfers between FTX and sister company Alameda Research.

'Immediate Action'

DeFi protocol SushiSwap has proposed to divert 100% of platform fees to its multisig for up to one year to plug a significant treasury deficit. Its developers warned the protocol has about 18 months of runway despite previous attempts to reach financial sustainability during crypto winter. Sushi’s recently appointed CEO, Jared Gray, suggested implementing new tokenomics, too. Separately, Binance CEO Changpeng Zhao said the centralized crypto exchange generates 90% of its revenue from transaction fees, addressing insolvency fears that have ratcheted up since the FTX collapse. Binance, which apparently brought in $20 billion in revenue in 2021, may deploy up to $2 billion to aid troubled projects with its “rescue fund.”

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Sound Bites

"Right now, the way things sit, it's starting to look more like bitcoin is the only thing that would qualify as a commodity."

– U.S. Sen. Cynthia Lummis (R-Wyo.), on CoinDesk TV's "First Mover"

The Takeaway

(Relaxfoto.de via Getty Images)

It has now been more than a month since the CoinDesk report that unraveled Sam Bankman-Fried’s FTX, what could be one of the largest and most egregious criminal frauds in human history. But we’re still getting a steady stream of horrifying revelations, like desiccated victims being excavated from a serial killer’s basement on live TV. On the brighter side, we also have some fresh insight into the severe consequences Bankman-Fried and his co-conspirators are likely to face.

There has been huge anxiety, particularly among crypto types, about when and whether Bankman-Fried will be brought to justice. Despite clear signs of fraud, he does not seem to have been detained by law enforcement. He remains in the Bahamas, giving interviews intended to obfuscate his actions and distract from the continuing drumbeat of grisly financial discoveries. Coinbase CEO Brian Armstrong is not alone in regarding this as “baffling.”

The most paranoid observers (and the seemingly delusional Bankman-Fried himself) might suspect this to be light treatment, the fruit of his years of currying favor with U.S. leaders. But it’s more likely the delay is just part of the slow-grinding legal process, according to an in-depth new legal report from the excellent MacKenzie Sigalos at CNBC. The U.S. Department of Justice has requested an independent probe of the case, and former Federal prosecutor Renato Mariotti told CNBC that “it sure looks like there’s a chargeable fraud case here.”

And Bankman-Fried’s punishment is no small potatoes: he could get life in prison, former CFTC trial lawyer Braden Perry told CNBC. That’s according to U.S. sentencing guidelines, and taking into account the number of victims and the size of the apparent fraud at FTX and its closely related trading shop Alameda Research. The CNBC report goes into gratifying detail about exactly what books are likely to be thrown at Bankman-Fried, and how hard.

The bad news is that those sentencing guidelines are often “bent” to give softer penalties to white-collar criminals. That’s based on the implicit belief, still widespread in the U.S. court system, that things like financial fraud and embezzlement aren’t “real” crime. Bankman-Fried’s youth, combined with his ongoing scheme to paint himself as an incompetent buffoon, could also elicit undeserved mercy from a court. It will take real and sustained public and political pressure to make sure that Bankman-Fried gets what’s coming to him.

– David Z. Morris

Off-Chain Signals

What in the Ethereum application ecosystem excites me (Vitalik’s blog) My story of telling the SEC ‘I told you so’ on FTX (Cointelegraph)Accounting Red Flags Are Common Among Public Crypto Companies (WSJ - paywalled) Why Decentralized Crypto Platforms Are Weathering the Crash (Harvard Business Review)Don’t call FTX’s collapse a ‘run on the bank’ (Fortune) Amber Group Denies Allegations Of Insolvency (The Defiant)Metallica scams net thousands in crypto as band teases new album (Protos)

The Chaser...