Caroline Ellison sentenced while the SEC targets TUSD

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And that’s that

Former Alameda CEO Caroline Ellison was sentenced yesterday to 24 months in prison, ordered to forfeit $11 billion, and will face an additional three years of supervised release.

It’s not nothing, which is what Polymarket bettors favored going into the sentencing yesterday afternoon, but it’s arguably very light for a multi-billion dollar fraud scheme. She was facing a maximum of 110 years.

Somewhat ironically, former FTX CEO Sam Bankman-Fried and Ellison actually had the same guideline sentences, which are calculated via a formula and intended to help inform judge’s decisions. 

“I thought that was absurd,” Judge Lewis Kaplan said during the sentencing. “It was absurd [during Bankman-Fried’s sentencing] and it’s absurd here.” 

Plus, Kaplan said, Ellison did display what he believes to be genuine remorse unlike her former boss. 

“He’s sorry the gamble didn’t work out, and he’s really sorry he got caught,” Kaplan said of SBF. 

Though it’s only fair to point out just how much Ellison helped the prosecution going into the trial last November, which prosecutors called “extraordinary” ahead of Kaplan’s decision. 

Lead prosecutor Danielle Sassoon, who you may remember from our reporting on the FTX trial, said Ellison’s testimony was “important” in convicting Bankman-Fried, who’s now sharing a common room with Diddy in his New York jail, if reports are to be believed. 

Kaplan, while singing some praises during the hearing, noted that he couldn’t hand over a “get out of jail free” card for her cooperation.

According to our own Casey Wagner, who was in court, he also delivered quite the zinger, telling Ellison: “You’re a very strong person, Ms. Ellison, in a lot of ways … It’s hard for me to understand [Bankman-Fried’s hold on you].”  

Not to insert myself here, but if a judge — or anyone — ever made that comment about an ex, I would be forever embarrassed. 

Ellison, however, didn’t have a visible reaction when receiving her sentence, Wagner told us. She did cry delivering her personal statement to the court. 

Not everyone was thrilled about her sentencing.

Former FTX executive Ryan Salame, who faces 7.5 years in jail after being sentenced earlier this year, expressed discontent about Ellison’s sentencing. 

Salame, in multiple posts on X, insinuated that Ellison wasn’t wholly truthful on the stand or with prosecutors though he didn’t point to anything specific. 

Kaplan, based on what he said at the Tuesday hearing, would have to disagree. He said he could not recall one time Ellison presented “even the slightest inconsistency” in her story, both when she took the stand and during meetings with prosecutors. 

“Snitch is one thing, completely fabricating stuff and lying about other stuff is next level brilliant,” Salame said, on the other hand. 

Notably, Salame’s sentence is just a little over what the government initially asked for. They noted that Salame’s cooperation was “minor,” so he’s in a different boat compared to his former colleague, who was the star witness at their boss’s trial last year.  

Given what happened yesterday, there’s one thing we know for sure at this point: Everyone involved — including Nishad Singh and Gary Wang, who are set to be sentenced at the end of October and November — is most likely going to spend some time in a prison cell. 

Kaplan’s made it clear that the “outrageous” fraud merits punishments, even for those who cooperated. 

— Katherine Ross

Data Center

• Bitcoin’s holding on to $63,760, slightly higher in the past day. ETH’s lost some momentum, down 0.6% to $2,620.
• Total liquidations top $110 million in the past 24 hours, according to CoinGlass data, with 56% coming from shorts.
• Ethereum mainnet and Solana are neck-and-neck for DEX volume in the past three days: $3.468 billion to $3.207 billion.
• Bitcoin Ordinals and BRC-20 activity has spiked to near-monthly highs. 
• Daily data posted to blobs via Celestia is up 30% so far this month, from 1,200 MiB to around 1,500 MiB, per Blockworks Research data.

Funds were not SAFU

We learned a lot about the alleged inner workings of TrueUSD overnight — it apparently speed ran the gauntlet of everything you shouldn’t do when managing a stablecoin.

Phony attestation reports. Opaque ownership structures. Secretly investing the assets backing the token in risky, illiquid assets. 

All of this is “alleged” because we’re again left with an ambiguous SEC settlement that neither confirmed nor denied the charges. 

Very helpful, considering there’s still nearly half a billion dollars in TrueUSD circulating through the crypto ecosystem right now. That includes pairs on Binance, Bybit, Gate.io and Bitget, and dozens of other exchanges. Which is absurd — if the SEC’s complaint is all true.

Regardless, what’s entirely frustrating is that, going by the timeline laid out in the SEC’s complaint, the showrunners behind TrueUSD had (allegedly) been fooling around with customer deposits behind their backs at every one of the coin’s major milestones.

What the SEC calls the “commodity fund” — which (allegedly) took dollars that had been sent to TrueUSD bank accounts in return for TUSD — starting in March 2020 (allegedly) invested in “trade finance, structured trade, export finance, import finance, supply chain financing, and project financing of entities.” 

FDUSD, which was a former treasury custodian for TrueUSD, is now Binance’s stablecoin of choice

At the same time, the team (allegedly) claimed over and over that every TUSD was backed 1-to-1 with US dollars or, at other times, cash and cash equivalents. 

In (alleged) reality, the “commodity fund” was ramping up its allocations (read: siphoning of user funds), to the point that 99% of the assets backing TUSD as of this month were really sitting in the illiquid commodity fund.

In August 2021, a16z, BlockTower and the ill-fated Alameda Research together invested $12.5 million in the firm’s governance token, TRU, about 18 months after the commodity fund (allegedly) started misappropriating user funds.

Binance.US listed TrueUSD just over a year after that. Four months later, the flagship global Binance exchange replaced its beleaguered branded stablecoin BUSD with TUSD and USDT in its “SAFU” fund, which was meant to safeguard user assets against losses.

Shortly after that, in March 2023, Binance made it so TUSD was the only stablecoin with fee-free trading — leading to another $1.5 billion in TUSD mints over the next few months. If what the SEC says is true, at no point were all those tokens fully backed, or easily redeemable.

Of course, legitimate stablecoin issuers also invest the cash meant to back their tokens in external vehicles, although it’s usually in short-dated US Treasurys, which are super liquid and considered cash equivalents. That’s the stablecoin business model, as popularized by Tether, Paxos, Circle and even MakerDAO, now Sky.

Parts of the crypto space, including traders and media outlets, were apparently right to be skeptical of TrueUSD. 

For all the SEC’s faults, it took a US regulatory agency to come in and show just how (allegedly) bad things were behind the scenes. 

My prescription: the bigger, more popular and widespread the project, the more scrutiny must be applied. Continuously so. Or else crypto will be forever stuck waiting for the SEC to clean up these kinds of messes in its stead. 

– David Canellis

The Works

• Sky’s not offloading wrapped BTC just yet, after a chat with BitGo’s Mike Belshe, CoinDesk reported. 
• BlackRock’s head of digital assets Robbie Mitchnick called bitcoin a ‘risk-off’ asset.
• Fortune broke down what crypto would need to see from presidential nominee Kamala Harris.
• Benchmark analysts said that MicroStrategy could generate yield by lending out its bitcoin.
• BNY Mellon could start custodying bitcoin for bitcoin ETFs after receiving a SAB 121 exception, Bloomberg reported.

The Riff

Q: Has crypto been ‘cleaned up’?

It’s true that the bad actors of the 2018 and 2021 market cycles are mostly dealt with, or will be sometime soon.

What’s uncomfortable is that instances of totally overt fraud could become increasingly rare over the coming years. Massive prison sentences and international manhunts are generally great deterrents.

Major cases like FTX, Alameda, Three Arrows, Terra and Celsius make for easy scapegoats after the fact. Same with the basic investment fraudsters that regularly get pinged by the SEC for their crypto-related crimes. It’s the low hanging fruit that’s been tidied up. 

But crypto has agency. Radical transparency — both on and offchain — can make a lasting impact on what the industry looks like moving forward, as long as we can drop the gimmicky attestations and other similarly flimsy proofs.

— David Canellis

Are we asking Gary Gensler or crypto? Because the two would have different answers. 

I think most of the Big Bads in the space have burnt themselves out and are properly receiving punishment served on a platter by karma (and at the hands of folks like ZachXBT, who has worked tirelessly to expose the bad actors).

The thing is, though, that it’s hard to eradicate everyone who has bad intentions. And that’s not only over here in cryptoland. Bad guys are bad guys, end of story. 

For every TUSD settlement, there’s also a Stoner Cats settlement. Meaning that there’s a settlement that’s arguably pointing out misuse, while another shuts down a legitimate (read: not fraudulent) project.

I guess you could say that crypto’s been “cleaned up” for now. But if it’s anything like my house then it’s going to get a little dirty sooner rather than later. 

— Katherine Ross

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