The crypto sector needs a little Christmas right this very minute, but that doesn't seem likely.
Cryptocurrency investors have been pounded by a series of setbacks and scandals, including most recently--and most spectacularly--the collapse of the FTX crypto exchange.
Founder Sam Bankman-Fried, the alleged grinch who stole crypto, arrived in New York from the Bahamas just in time for the holidays to face a stocking-full of federal charges, including conspiracy to commit wire fraud and campaign finance violations.
Zixiao (Gary) Wang, 29, is a FTX co-founder and former chief technology officer. Caroline Ellison, 28, is the former CEO of Alameda Research, the hedge fund founded by Bankman-Fried. Both of them agreed to provide the authorities with all the information at their disposal to further assist in the investigation of the collapse.
And it seems like the collapse of Bankman-Fried's empire is the gift that keeps on giving--only not in a good way.
Winston Ma, a New York University Law School adjunct professor, said "it looks like the FTX bankruptcy domino just reached the auditing sector."
'Rocking the Crypto World'
Ma, author of Blockchain and Web3: Building the Cryptocurrency, Privacy, and Security Foundations of the Metaverse, cited news reports about Mazars Group, which said that it was cutting ties with crypto firms, and more particularly Binance, Crypto.com and Kucoin.com.
Mazars said it "paused its activity relating to the provision of proof of reserves reports for entities in the cryptocurrency sector due to concerns regarding the way these reports are understood by the public.”
Ma pointed out that in February the company "backed away from another high-profile client — former President Donald Trump." He added that "the Mazars Group suspension is rocking the cryptocurrency world."
Mazars issued proof-of-reserve reports (PoR) for cryptocurrency exchange clients, Ma said, noting that an Agreed-Upon Procedures (AUP) engagement provides a report based on factual findings regarding financial information—no assurance is expressed, but the PoR report provided by Mazars is widely misused as an “audit.” According to Mazars, that’s the main reason for its retreat from this service.
In addition, Ma said, The Wall Street Journal reported that accounting firm BDO, which recently signed off on reserves reports for Tether.to, said it is reconsidering its work for crypto companies.
And the "Big Four" accounting firms--Deloitte, Ernst & Young, KPMG and PricewaterhouseCoopers--are “currently unwilling” to conduct a proof-of-reserves audit for a private crypto company, a Binance spokesperson told Blockworks.
"In summary, post-FTX bankruptcy, none of the big firms are yet willing to step up," Ma said. "The industry is left wondering who might fill the gap in the space."
Core Scientific Files for Chapter 11.
Bitcoin was essentially flat at $16,781.99 on Dec. 22, according to data firm CoinGecko. Ether, the native currency of the ethereum blockchain, was off slightly to $1,209.75, while dogecoin lost 1.1% to $0.076512.
James Edwards, a crypto specialist with Finder, said that it's very possible that Bitcoin is selling below production value as another miner – Core Scientific – files for Chapter 11.
"Troubled miners have a tendency to spook the market as they can signal big sell offs on the horizon," Edwards said. "Although Core Scientific has already filed for Chapter 11, one would imagine they’ve already liquidated holdings to fight off bankruptcy as long as they could."
That being said, he added, "there is still plenty of uncertainty, with another mining outfit, Greenidge, also signaling it's in distress."
"Given that two behemoths of the industry are still pursued by solvency rumors – Digital Currency Group (DCG) and Binance – it seems unlikely that traders will go long any time soon until there's a concrete resolution in either direction," Edwards said. "Until then I expected prices to be suppressed while traders look for confirmation."
Edwards noted that cryptocurrency assets linked to DCG's investment portfolio, such as FLOW, FIL, and MANA all had a pronounced sell-off this week, "which either indicates substantial market fear in DCGs solvency, or that DCG themselves are liquidating assets to shore up their treasury."
Canadian Crypto Exchange Mystery
Heading north, David Lesperance, managing partner of immigration and tax adviser with Lesperance & Associates, said that more than 100 bitcoins tied to the defunct Canadian crypto exchange QuadrigaCX were transferred this past week out of cold wallets after sitting dormant for more than three years.
"What makes this interesting is that these wallets were thought to be beyond anyone’s control," he said. "QuadrigaCX abruptly closed in February 2019, leaving millions in customer funds stranded in apparently inaccessible offline cold wallets. The exchange’s late CEO, Gerald Cotten, had sole responsibility for moving funds offline."
Lesperance said this was a feature he called “cold storage”, but what he failed to mention was that the addresses of the cold wallets were apparently known only to him.
"The exchange’s sudden closure and the death of Cotten in India were the subject of multiple investigations and rampant conspiracy theories," he said. "Investigators eventually discovered that the missing funds were largely not stranded in cold wallets but had been gambled away by Cotten, who operated the exchange as a Ponzi scheme and personal piggy bank."
Lesperance said Ernst and Young, the company's bankruptcy trustee, has confirmed that they did not initiate the transfers.
EY said in February 2019 that it lost control of about 100 BTC after mistakenly sending the coins to cold wallets that they said it couldn’t access.
"EY said that Cotten, as the sole proprietor of Quadriga in its waning days, was the only person who could access its funds," Lesperance said. "So the crypto world is wondering if Cotton [has] risen from the dead after three years?"