January 23, 2024

Some catastrophes deserve a second eye, maybe a private one. Plus, the SEC got SIM swapped.

📉 Situational awareness: Bitcoin is trading under $40K 🫣

Today's newsletter is 1,314 words, a 5-minute read.

📂 1 big thing: Terraform Labs' Chapter 11

Illustration: Shoshana Gordon/Axios

Terraform Labs filed for Chapter 11 bankruptcy protection on Sunday, Crystal writes.

Why it matters: The company and founder at the heart of the 2022 crypto collapse have so far evaded the scrutiny that bankruptcy proceedings have brought to other crypto firms and executives that fell in its wake.

Catch up fast: Terraform was the company behind the terra usd stablecoin and its backstop LUNA — the twin disasters that have been fingered as the first domino in the crypto credit rout.

  • The company and its founder Do Kwon — now wanted in the U.S. and South Korea on allegations of fraud and financial crimes — even drew criticism from Sam Bankman-Fried back in 2022 for standing by the algorithmic stablecoin experiment that eventually failed so spectacularly.

The intrigue: Why Terraform would only now file for Chapter 11 protection, in an effort to preserve something of value, more than a year after its stablecoin's collapse, is an outstanding question.

  • First-day declaration filings will shed light on what precipitated the filing, but those have yet to land as of this afternoon.
  • FWIW, former COO and now CEO Chris Amani said it was a "strategic" decision and spoke of the Terra ecosystem's "unprecedented resilience" and recent acquisitions. (Winter is in thaw, clearly.)

The big picture: As Terraform and Kwon make it through the system, evidence that links Terraform to Three Arrows Capital, FTX and Digital Currency Group's Genesis will likely surface.

Zoom in: Kwon claimed innocence while on the run, and would continue to claim so, even after he was caught with a forged passport in March in Montenegro. (We suspect bankruptcy filings were not a priority before then.)

  • He is serving a four-month sentence for the document forgery and is expected to be extradited to the U.S. or South Korea after.

Details: Singapore-based Terraform has estimated assets and liabilities in the range of $100 million to $500 million, according to a court filing.

  • The number of creditors is estimated at 100 to 199. Not enough information has been submitted to say much more than that.

💭 Crystal's thought bubble: If Terraform has been holding crypto — and it's likely it has — those assets will be valued at Sunday's petition date, eliminating the issue creditors face today from earlier bankruptcies where assets are tied to lower prices from, say, 2022.

  • Terraform was a large holder of luna, and while that blockchain has a 2.0 version of itself, Terra Classic continues to exist.
  • The company likely has significant exposure to both blockchains, each of which has done a miraculous job of not evaporating — much to the world's surprise.

What we're watching: Chapter 11 tends to put civil lawsuits on ice. (The SEC is a listed unsecured creditor, with the placeholder "UNDETERMINED" for how much it is owed.)

🤳 2. SEC was SIM swapped

Illustration: Gabriella Turrisi/Axios

The SEC yesterday said the recent hack of its account on X, formerly known as Twitter, was the result of a hacker taking over the number tied to one of the agency's cell phones, Axios Cybersecurity reporter Sam Sabin writes.

  • The Jan. 9 attack resulted in a false tweet claiming national exchanges were approved at the time to list bitcoin ETFs — resulting in a spike in BTC.

What they're saying: "Two days after the incident, in consultation with the SEC's telecom carrier, the SEC determined that the unauthorized party obtained control of the SEC cell phone number associated with the account in an apparent 'SIM swap' attack," an SEC spokesperson said in a statement.

  • "Access to the phone number occurred via the telecom carrier, not via SEC systems," the agency spokesperson added. "SEC staff have not identified any evidence that the unauthorized party gained access to SEC systems, data, devices, or other social media accounts."

How it works: SIM swapping has become a go-to, simple hacking tactic.

  • In this scenario, hackers persuade a telecom carrier to switch a mobile phone number to a SIM card that the hacker has.
  • After gaining control of the phone number, the hacker can change the passwords for accounts associated with that phone number.

Details: Law enforcement is still investigating how the hacker tricked the unidentified telecom carrier into changing the SIM for the account and how they knew which phone number to target.

Of note: The SEC also said that it asked X to turn off multifactor authentication for its account in July — which removes a level of security — "due to issues accessing the account."

  • "Once access was reestablished, MFA remained disabled until staff reenabled it after the account was compromised on January 9," the spokesperson said. "MFA currently is enabled for all SEC social media accounts that offer it."

Go deeper

🕵️ 3. FTX will get an independent examiner

Illustration: Sarah Grillo/Axios

The story of how FTX fell is so big that it probably gets one more narrator, Crystal writes.

  • The Third Circuit Court of Appeals on Friday said FTX's bankruptcy proceeding required the appointment of an independent examiner, overturning a decision made one year ago by a bankruptcy judge to forego it.

The impact: There won't likely be a big one. The decision matters more to bankruptcy practitioners than anyone else, according to Mark Pfeiffer, an insolvency lawyer and litigator at Buchanan Ingersoll & Rooney.

  • "From a creditors' perspective, I'm not sure this would be in the interest of them."

Zoom in: The decision was mainly about adherence to bankruptcy code. The Justice Department appealed the earlier decision and won.

Between the lines: Bankruptcy code states a court must appoint such an examiner in cases where total debt exceeds $5 million, according to the appeals court judges.

  • They added that having a report would better enable a bankruptcy court to consider "greater public interest" before approving a reorganization plan.

The other side: The FTX bankruptcy estate successfully argued against the appointment of an independent examiner in January 2023.

  • John Ray III, who was charged to lead FTX's restructuring, said that independent examiner reports in other cases he was involved with were costly. He also said such an investigation would be redundant.

Yes, but: Neither cost nor redundancy were relevant, the appeals judges ruled Friday, because the code doesn't allow for a discretionary opinion on an independent examiner.

Quick take: After at least a year's worth of FTX perusing by Ray & Co., plus the criminal trial of Sam Bankman-Fried, it would be amazing if an independent examiner uncovered something we didn't already know.

What's next: There will be a status conference on the order for the appointment of an independent examiner at 2pm tomorrow in Delaware.

  • FTX's new leadership has 14 days to petition the federal appeals court to reconsider the ruling.

⏰ 4. Catch up quick

Illustration: Annelise Capossela/Axios

🤳 There have been 40,000 pre-orders for the second Solana Mobile device. (Solana)

ğŸŽ®Â  The Ronin sidechain — the same one North Korea robbed — is doing great as other games adopt it. (Decrypt)

🍊 Risk off is the prevailing sentiment right now, helping to explain the dip in bitcoin price. (Blockworks)

💸 5. SafeMoon CEO is in jail, out of cash

Illustration: Brendan Lynch/Axios

SafeMoon was a cryptocurrency designed to discourage its holders from selling, Brady writes.

  • The Feds decided it was a fraud, and the company's CEO has been in jail in Utah since the fall awaiting trial in New York.

The latest: A filing from yesterday says the attorneys for SafeMoon CEO John Karony are backing out over unpaid legal bills.

What they're saying: "A limited retainer payment was made on behalf of Mr. Karony to the Firm, and that payment has been exhausted by legal fees incurred to date," Adam H. Schuman wrote in a letter to the court on behalf of the law firm Petrillo Klein & Boxer.

  • They thought he would have more money, but the state seized the proceeds from the sale of his house, the letter explains.

Be smart: The core idea of SafeMoon was charging holders a fee when they sold the coin. The fee went in part to other holders of SafeMoon.

This newsletter was edited by Pete Gannon and copy edited by Carolyn DiPaolo.

Crypto market is bleeding today — ouch. —C & B.