Keep Your Crypto Funds & Treasury Safe

SBF arrested, Binance $6B withdrawals, and Do Kwon in Serbia

December 14, 2022

GM👋🏻 - SBF is finally arrested. He's denied bail and is currently in the world's top 5 worst prisons. Extradition doesn't seem too bad now. Crazy to think how much can change in a year. In other news, John Ray did his testimony. Let's just say that he's a freaking chad. For now, it seems like the FTX saga is closing down.

In Today's Email:

  • What Matters: Binance's $6 billion outflows 📉

  • Case Study: The Block's ex-CEO dealings with SBF 📰

  • Features: CoW Swap limit orders 🐮

WHAT MATTERS

Binance's $6 Billion Outflow

State of play: The attention has shifted from FTX to Binance, the world's largest crypto exchange. Binance released its Proof-of-Reserves but the users aren't satisfied. This is because the report has a narrow scope, doesn't provide the full picture, and isn't really an "audit".

  • The report was done by Mazars based on "agreed-upon procedures requested by Binance", which means that Mazars "makes no representation regarding the appropriateness” of the procedures.

  • Mazars isn't vouching for the numbers. Since it wasn't an audit, the report didn't address Binance's financial-reporting controls and Mazars didn't express any opinion or assurance of the conclusion.

  • The report was addressed to a Binance's entity in the British Virgin Islands, although it's not clear whether the assets being counted are held by that entity.

As a result, users are withdrawing money out of Binance, resulting in more than $6 billion being withdrawn in under 24 hours. There was a slight delay in USDC withdrawals due to US banking partner active hours, which has been resolved.

  • Paxos' Head of Portfolio Management has since published a blog explaining what happened, including the delay caused by banking settlements' active hours.

Why it matters: FTX's downfall caused PTSD. It's not surprising that Binance and many other centralized exchanges will be facing a withdrawal stress test, one way or another, sometime soon. Although things have settled at Binance, the market is right to scrutinize the exchange's level of transparency, including demanding a more solid audit report. When a company reaches such a global scale and size, and if it deals with money, it needs to adhere to much stronger control frameworks.

For builders: Never keep your treasury in one centralized exchange. Always remember the importance of risk management by keeping your treasury in a decentralized and distributed manner (Gnosis Safe, self-custody, spread across centralized custody firms, etc.). Remember, centralized exchanges are not banks.

For investors: Always be mindful of your counterparty risks. Unless you need to trade liquid tokens in the open market, there's no reason to keep all of your capital with one counterparty. Utilize regulated prime brokerage in "strong" jurisdictions such as the US and EU if you require sophisticated market access.

CASE STUDY

SBF Secretly Funded The Block

First of all, our heart goes out to the folks at The Block. We stand with the employees and think that they were genuinely unaware of the disgraced former CEO's personal dealings with SBF.

What is The Block: The Block is a crypto media and research company.

State of play: Axios reported that The Block's former CEO Michael McCaffrey has been receiving secret funding from SBF for over a year. No other employees of The Block are aware of the engagement. Michael McCaffrey has since resigned but remains the majority owner of the company.

  • The Block’s Chief Revenue Officer Bobby Moran named CEO as the company is working to add two members to join Moran on the expanded group.

By the numbers: In total, McCaffrey borrowed $43M from SBF 🤯

  • $12M to do a buyout of The Block's old investors.

  • $15M for day-to-day operations.

  • $16M for a personal penthouse in the Bahamas 🤦🏻‍♂️

For builders: Understanding the power of media is important. In the past, founders focused on business first and then build their distribution channels. These days, it's vice-versa. Those with the largest distribution (MrBeast) can sell anything that he wants. In crypto, distribution is even more important because of the community component in a decentralized world.

For investors: It's important to take a step back and think whether a business makes sense. The Block is a great company, but there should've been more alarm bells ringing given its headcount. The Axios news reported that The Block is expecting around $20M in revenue in 2022, yet still isn't profitable. Although that reporting might not be entirely accurate, the company currently has 215 employees on LinkedIn. At a $70,000 annual average salary, that amounts to $15M per year. A digital-first media company can be profitable a lot sooner.

FEATURES & GOVERNANCE UPDATE

CoW Swap Limit Orders

DeFi protocol CoW Swap has launched its limit orders feature. A limit order is a type of trade execution where users can buy or sell tokens at a specified price. Although a ubiquitous feature for centralized exchanges, limit order functionality is fairly new for decentralized exchanges 🐄

Why it matters: CoW Swap's limit orders feature is unique. It improves on the existing limit orders model for DEXs. Traders can use it without paying any gas fees, and there's no limit to the number of limit orders that can be placed. This makes it the most-flexible limit order experience in DeFi.

Other notable feature updates:

QUICK BITES

MEME & NOTEWORTHY READS

  • Zee Prime Capital's blog on useful crypto products.

  • Andre Cronje's blog on the decentralized CEO.

  • 21Shares' Dune Dashboard on Exchanges' Proof-of-Reserves.

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Disclaimer: All the information presented in this publication and its affiliates is strictly for educational purposes only. It should not be construed or taken as financial, legal, investment, or any other form of advice.