Bankrupt Hedge Fund Gets Probed By FEDs

Check out the biggest breaking crypto market updates for today:

US Regulators Probing Bankrupt Crypto Hedge Fund Three Arrows Capital

The U.S. Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC) are now reportedly investigating bankrupt crypto hedge fund Three Arrows Capital (3AC). 

The regulators are looking into whether 3AC misled investors about the financial health of its balance sheet and failed to register with the proper authorities. 

Until recently, Three Arrows was one of the crypto industry’s most prominent firms before they filed for bankruptcy in July after the broad sell-off in digital assets spurred in part by the collapse of the Terra blockchain. 

Currently, the whereabouts of 3AC founders Su Zhu and Kyle Davies remain unknown, with some people accusing the duo of being on the run. 

This has prompted Teneo, the court-appointed liquidator for 3AC, to request permission from a U.S. court to subpoena the embattled crypto hedge fund’s founders through “alternative means”, which includes racing out to the duo through their Twitter accounts and email addresses, since normal methods have failed. 

At its zenith, Three Arrows counted a few billion dollars under management, making it a major player in the crypto world. Known for its bullish stance, it was also a recipient of loans from firms across the industry, and was a venture investor in some of the industry’s best-known startups. 

But the firm sustained losses on its position in the Terra blockchain project, which came crashing down as the so-called algorithmic stablecoin TerraUSD crumbled last May like a saltine cracker under an elephant’s hoof. 

As the token’s collapse spread across the broader crypto market over the following weeks, 3AC was unable to meet margin calls from its lenders and eventually declared insolvency. 

Liquidators overseeing the wind-down of the firm, which operated from Singapore until at least early May, have seized control of tens of millions of dollars of the fund’s assets. But that’s a fraction of the billions of dollars that creditors including bankrupt crypto lenders Voyager Digital and Celsius Network said they were owed. 

Teneo, the court appointed liquidator, has claimed that 3AC’s founders haven’t fully cooperated with the unwinding. They took the unusual step of asking a US judge for permission to serve Zhu and Davies with subpoenas through their Twitter accounts and email addresses because normal methods have failed, according to court documents filed last week. 

Celsius is also facing scrutiny from US regulators. Lawyers for the firm this month disclosed it had received a federal grand jury subpoena from the US District Court for the Southern District of New York, as well as inquiries from the CFTC, SEC and Federal Trade Commission. 

The CFTC is investigating if Celsius failed to disclose how customers’ funds were used, and if some of its conduct amounted to market manipulation, according to a person familiar with the matter. 

The regulator declined to comment on its probe of the crypto lender. A representative for Celsius said the firm is “cooperating with all regulatory inquiries, and regulators are key stakeholders in our reorganization.” The firm declined to comment on the specifics of any inquires. 

Although the CFTC’s jurisdiction over crypto is generally limited to derivatives, the agency can take enforcement action if it believes there’s fraud or manipulation in the underlying market. 

The SEC claims oversight over digital coins that qualify as securities under its rules. Both regulators also oversee investment firms. 

The CFTC and the SEC aren’t the only authorities that have turned up the heat on Three Arrows. On June 30, the Monetary Authority of Singapore reprimanded the firm for allegedly providing false information and exceeding the limit on its assets under management. 

Court documents earlier this month indicated that the liquidators of the fund had gotten permission to repatriate some assets from Singapore to the British Virgin Islands.

Ripple Begins Testing EMV-Compatible XRP Ledger Sidechain

According to a tweet by blockchain software company Peersyst, Ripple has launched an Ethereum-compatible sidechain on the XRP Ledger’s devnet, a restricted experimental network used for testing on XRP Ledger. 

If successful, this will be a way for developers to deploy smart contracts made for the larger and more popular Ethereum on the XRP Ledger blockchain with little effort. 

The EMV-compatible sidechain will help developers import dApps and smart contracts from Ethereum to XRP Ledger, a blockchain associated with cross-border payments firm Ripple. 

However, this is just the first step of a three-part process. The second phase will go live in early 2023, when the EVM sidechain will become permissionless, meaning anyone can join it. The third phase is slated for the second quarter when Ripple will fully deploy the software. 

Ripple CTO David Schwartz stated: 

“Our goal in 2023 is to have an EVM sidechain connected to the XRPL mainnet. The bridge in the final solution will be decentralized and all components of the solution will be production ready to handle real-world scale and use cases.” 

The Ethereum Virtual Machine (EVM) is the software that runs smart contracts on Ethereum. Ripple said an EVM-compatible sidechain – a blockchain that runs in parallel with the main XRPL blockchain – is now live on the company’s devnet, which is where developers can test implementations before they go live on the main network. 

Ripple and XRPL stand to potentially benefit because the work developers have already put into building Ethereum smart contracts could be leveraged in the entirely separate Ripple ecosystem. 

The announcement Monday is just hte first step of a three-part process. The second phase will go live in early 2023, when the EVM sidechain will become permissionless, meaning anyone can join it. The third phase is slated for the second quarter, when Ripple will fully deploy the software.

New Allegations Arise Regarding Binance’s Regulatory Framework

A news report published yesterday by Reuters has accused crypto exchange Binance of “dodging” regulatory scrutiny in the United Kingdom and the United States. The report quoted two supposed instances to back its claim. 

The first instance involves Binance backdating a service agreement in order to exempt itself from registration with the UK’s Financial Conduct Authority. The second instance involves a proposal from a Binance-affiliated entrepreneur named Harry Zhou who sought to direct enforcement attention to a U.S. entity instead of Binance. 

Reuters alleged that the proposal arose because “despite the ban on U.S. users [due to financial crime laws in the States], Binance was aware that traders there continued to use the main platform.” 

Changpeng Zhao (CZ), the CEO of Binance, made a blog post in response to the allegations. The post reads, 

“This is the tale of the so-called Tai-Chi [defensive action] PowerPoint,’ which was submitted by an external consultant as a suggestion on how to set up a business in the US. Let me state clearly once again for the record: it was never implemented. I personally rejected it.” 

With regard to its regulatory framework, CZ explained that Binance’s market cap has “multiplied exponentially” over a short period of time and that “there isn’t a manual that explains how to immediately pivot from a small start-up to a Fortune 100 organization.” He added, “But we’re learning fast,” pointing to Binance being the first major exchange outside of the U.S. to KYC users. 

Though, the crypto executive did not provide comments regarding Reuters’ allegations of its conduct in the United Kingdom.

Luke Baldwin

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