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Business

FTX Files for Bankruptcy, CEO Sam Bankman-Fried Resigns

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Beleaguered cryptocurrency platform FTX filed for bankruptcy protection Friday, and Chief Executive

Sam Bankman-Fried

resigned.

FTX and a bevy of affiliates said they had more than 100,000 creditors and tens of billions of dollars in assets and liabilities. It is the largest crypto-related bankruptcy ever, and a demise remarkable for its swiftness as well as its size.

Just a week ago, FTX was an industry titan, and Mr. Bankman-Fried its smiling public face. In January, FTX raised money from Silicon Valley’s most sophisticated investors, at a valuation of $32 billion. A few weeks ago, Mr. Bankman-Fried was publicly musing about raising more, to get even bigger.

That is all gone. The bankruptcy will likely wipe out billions of equity value, leaving investors including Sequoia Capital and Thoma Bravo with stiff losses. It will maroon the crypto and cash deposits belonging to a legion of customers. FTX faces investigations or asset freezes from regulators and prosecutors around the world.

It has also rattled the crypto world. Crypto lender BlockFi, which had obtained a financial lifeline from FTX in July—one of several companies FTX had rescued earlier in the year—paused withdrawals Thursday evening.

Among the affiliates filing for bankruptcy protection is FTX US, a smaller unit that operated in the U.S. Most of FTX’s business was offshore. FTX and its affiliates filed in federal bankruptcy court in Delaware, where the U.S. unit is registered.

Thursday morning, Mr. Bankman-Fried said the troubles at FTX were confined to its international operations. He tweeted that FTX US “was not financially impacted” and that “every user could fully withdraw.” Later that day, FTX US said it might stop trading. On Friday, FTX US filed for bankruptcy along with the rest of FTX.

Bitcoin slipped after the announcement to trade near $16,500.

At issue in the bankruptcy proceedings and the investigations is to determine what happened to the billions that FTX raised, that its customers deposited, and that it earned from operating what appeared—for a time—to be a successful cryptocurrency exchange.

FTX in 2021 also paid $250 million—a quarter of its revenue that year—to a “related party” for software royalties, according to documents viewed by The Wall Street Journal.

Mr. Bankman-Fried wrote on Twitter roughly an hour after the bankruptcy announcement that he was “shocked to see things unravel the way they did earlier this week.”

FTX’s troubles began last weekend, after rival exchange Binance said it would sell its holdings of an FTX equity-like token—spooked by a CoinDesk report showed the depth of the relationship between FTX and Alameda.

John J. Ray

III has been named the new CEO of FTX Group, the company said. The bankruptcy filing includes FTX Trading Ltd., the company presiding over the global trading website FTX.com, and Alameda Research, a trading firm founded by Mr. Bankman-Fried, in addition to FTX US.

Mr. Ray was chairman of Enron Corp.’s successor company, Enron Creditors Recovery Corp., and oversaw the energy-trading company’s liquidation after it filed for bankruptcy in late 2001. The recovery rate for Enron creditors as of 2008 was about 52 cents on the dollar, the company said at the time. Mr. Ray’s successes included securing a $1.7 billion settlement with

Citigroup

in 2008. He had accused the bank of helping Enron mislead investors.

Other noteworthy bankruptcy cases in which Mr. Ray served in similar roles include Nortel Networks Inc., Fruit of the Loom and

Overseas Shipholding Group Inc.

In the petition, Mr. Bankman-Fried said that

Stephen Neal

would be appointed as the chairman of the board of FTX Group if he is willing to serve. He also said that he is being advised by the law firm Paul, Weiss, Rifkind, Wharton & Garrison LLP.

FTX is the latest in a string of crypto companies seeking bankruptcy protection this year.



Photo:

Leon Neal/Getty Images

Bankruptcy means that it could be a long time before retail traders and others owed their funds are able to potentially recover any of them, if ever. Creditors to Mt. Gox, the Japanese crypto exchange that failed following a 2014 hack, are still waiting for their funds almost a decade later.

The collapse in digital-currency prices earlier this year triggered a rash of crypto-related bankruptcy filings, including Celsius Network LLC,

Voyager Digital Ltd.

and Three Arrows Capital.

Crypto investors may be confronted with an uphill battle to get their crypto deposits back in bankruptcy proceedings because their investments are likely to be treated as unsecured claims without collateral rights.

FTX’s bankruptcy also calls into question the fate of Voyager Digital. In September, the firm won the auction to buy the bankrupt lender’s assets with a purchase price of about $50 million, The Wall Street Journal has reported.

Voyager said Friday that the firm has reopened the bidding process for the company and is in active discussions with potential buyers. Voyager said it didn’t transfer any assets to FTX US, which previously submitted a $5 million good-faith deposit as part of the auction process. The funds are held in escrow, according to Voyager.

Voyager also recalled loans from Alameda Research for 6,500 bitcoin and 50,000 ether. The company currently has no loans outstanding with any borrower, it said. However, Voyager had about $3 million worth of cryptocurrencies stuck on FTX at the time of its bankruptcy filing.

—Jonathan Weil

contributed to this article.

Write to Caitlin Ostroff at caitlin.ostroff@wsj.com and Alexander Gladstone at alexander.gladstone@wsj.com

Corrections & Amplifications
Sam Bankman-Fried said he is being advised by the law firm Paul, Weiss, Rifkind, Wharton & Garrison LLP. An earlier version of this article incorrectly said FTX was being advised by the law firm. (Corrected on Nov. 11)

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Business

‘Bedazzled by money’: Democratic ties to Sam Bankman-Fried under scrutiny after FTX collapse

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Sam Bankman-Fried’s fall from grace has dealt an unprecedented blow to the crypto industry’s reputation — and some of this infamy may rub off on politicians who took his money, as well as on former regulators and Capitol Hill staffers who took well-paying jobs representing digital-asset companies before Congress.

Bankman-Fried, founder and CEO of the crumbling cryptocurrency exchange FTX, was one of the most generous donors to political causes during the 2022 election cycle, doling out $40 million, mostly to Democrats, with a particular focus on buoying crypto-friendly politicians in Democratic primaries.

FTX, like many other crypto firms, also aggressively recruited former federal regulators and Capitol Hill staffers, an often-criticized practice but one that has been common in the financial-services industry for decades.

Jeff Hauser, director of the left-leaning Revolving Door Project, said that Democratic politicians who worked closely with Bankman-Fried will have much to explain to the progressive wing of the party.

“A lot of people in the Democratic party got really close to Sam Bankman-Fried, and it reflects very badly on people who took this guy seriously,” he said. “People who in their past lives have taken on corporate power have been bedazzled by money seemingly being thrown their way.”

Bankman-Fried was the primary funder of the Protect Our Future PAC, which spent tens of millions of dollars in Democratic primaries this year. He also floated the idea of spending upwards of $1 billion in the 2024 presidential election to beat Donald Trump if he were the Republican nominee.

Promises of money on this scale likely tantalized many Democratic politicians, Hauser said, whether or not Bankman-Fried ever planned to go through with those contributions.

The crypto industry has also wielded influence by hiring former Capitol Hill staff and federal financial regulators to lobby and advise them on regulatory matters. The Campaign for Accountability, a nonpartisan anticorruption watchdog, published a report in February that found 240 examples of officials with key positions in the White House, Congress, federal regulatory agencies and national political campaigns moving into and out of the industry.

“The crypto industry is following the standard playbook for advancing special interests in Washington, including using all the levers of the influence industry,” Dennis Kelleher, president and CEO of the nonpartisan financial-reform organization Better Markets, told MarketWatch. “One of the most pernicious parts of that is the revolving door, where former officials essentially sell out their public service by using their access and influence on behalf of their private clients.”

Kelleher praised the performance of federal banking and securities regulators who have succeeded in keeping the carnage in the crypto markets segregated from the traditional financial system as popular tokens like bitcoin
BTCUSD,
-1.14%
and ether
ETHUSD,
-1.61%
lost more than 70% of their value over the past year.

Nevertheless, he believes crypto’s influence campaign has convinced lawmakers that what’s needed is to pass legislation that would tailor the financial-regulatory apparatus to be more friendly to the business models of digital-asset companies, rather than increasing funding for market regulators to enforce the regulations already on the books.

A bill put forward in June by Republican Sen. Cynthia Lummis of Wyoming and Democratic Sen. Kirsten Gillibrand of New York would do just that, granting regulatory authority for the most popular cryptocurrencies to the Commodity Futures Trading Commission, which critics of the bill say is more crypto-friendly than the Securities and Exchange Commission.

Another bipartisan bill from Senate Agriculture Committee Chairwoman Debbie Stabenow of Michigan, a Democrat, and Sen. John Bozeman of Arkansas, the committee’s ranking Republican, envisions a similar setup.

Kelleher said that these bills are the product of the crypto industry’s intense lobbying efforts, and without that push, lawmakers might see that what is needed is more funding to enforce securities laws that already exist.

“People need to realize that the crypto industry is basically lawless,” Kelleher said, adding that exchanges like FTX could have made the decision to register as a securities exchange with the SEC, whose supervision would have ensured that the company couldn’t engage in the type of activities that led to its downfall.

“The industry made the conscious decision to not comply with the law, to spend hundreds of millions of dollars on public officials to get a special law passed so they get special treatment,” he said.

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Business

Tech Stocks Lead Market Lower as Investors Await Inflation Data

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U.S. stock indexes were lower Tuesday as investors monitored earnings reports and economic data ahead of inflation figures due later in the week.

The S&P 500 slipped 0.7%, a day after the broad index finished with modest losses. The Dow Jones Industrial Average slid 0.4% while the technology-heavy Nasdaq Composite fell 1.5%.

Investors await consumer-price data on Wednesday that could set expectations for how the Federal Reserve will approach monetary policy at its coming meetings. In recent weeks, better-than-expected corporate earnings and strong labor-market data have eased concerns about an imminent U.S. recession, helping stock markets rebound from their lows. 

With inflation running at a multidecade high, investors say Wednesday’s consumer-price index update will be key to the outlook for rates and the direction of the market. 

“The market has enjoyed a risk-on environment since the lows of mid-June, and investors interpreted Chair [Jerome] Powell as more dovish than he had hoped at the last Federal Reserve meeting,” said Quincy Krosby, chief global strategist for LPL Financial. “But today’s market is tomorrow’s market—Wednesday’s inflation data will provide a clearer picture as to whether this bear market is truly behind us.”

According to Ms. Krosby, inflation is the No. 1 concern for the market, including not only whether it is subsiding, but how quickly.

Earnings season is winding down, though some major companies are still set to report figures. Roblox, Coinbase Global and Wynn Resorts will release results after markets close. Chip maker

Micron Technology

fell 4.7% Tuesday after issuing a revenue warning, just a day after

Nvidia

offered similar preliminary guidance.

Norwegian Cruise Line Holdings

fell 11% after reporting a wider-than-expected quarterly loss. Shares of peer cruise line

Carnival Corporation

fell 5.7% as the pockets of the travel sector struggle to recover from its pandemic lows.

Energy stocks gained 1.7% in the morning session, led by shares of Occidental Petroleum which advanced 4.4% on the back of news Monday that Warren Buffett’s Berkshire Hathaway took its stake in the company past the 20% mark.

Traders worked on the trading floor at the New York Stock Exchange on Monday.



Photo:

ANDREW KELLY/REUTERS

Brent crude prices flip-flopped in Tuesday trading, swinging 1.8% in either direction. Barrels of the crude benchmark lurched into positive territory early in the morning after Moscow cut the flow of oil through a pipeline to Europe, and last traded nearly flat at $96.62 per barrel.

“Oil prices are still driven by the near-term macroeconomic outlook,” said

Robert Thummel,

managing director and senior portfolio manager of TortoiseEcofin. “Concerns remain that the Federal Reserve will continue slowing the economy if Wednesday’s inflation data comes in higher than expected, but markets still see persistent undersupply and high demand as creating upward pressure on oil prices.

Data released Tuesday showed U.S. labor productivity declined for a second straight quarter while labor costs were more elevated than economists expected.

The yield on the benchmark 10-year U.S. Treasury note edged up to 2.800% from 2.763% on Monday, while the two-year yield rose to 3.263% from 3.214%. With shorter-term yields significantly above longer-term ones, the yield curve remains inverted, a key recession indicator.

Overseas, the Stoxx Europe 600 fell 0.7%, with losses led by travel and technology firms. In Asia, stock markets were mixed. In Japan, the Nikkei 225 fell 0.9% while in China, the Shanghai Composite Index rose 0.3%. In Hong Kong, the Hang Seng Index weakened by 0.2%.

Write to Will Horner at william.horner@wsj.com and Eric Wallerstein at eric.wallerstein@wsj.com

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Business

Bitcoin’s Price Falls Below $20,000

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The price of bitcoin lurched below $20,000, and below a level widely monitored by cryptocurrency enthusiasts, as a brutal selloff in crypto showed no signs of abating.

Bitcoin fell as low as $18,739.50 and stayed below $20,000 on Saturday, according to CoinDesk, losing 72% of its value from its high in November. Concerns about the Federal Reserve’s actions to tame higher-than-expected inflation have pushed both stocks and cryptocurrencies into a bear market. Big names in the industry, including

Coinbase Global Inc.,

the biggest cryptocurrency exchange in the U.S., have recently announced job cuts.

There is no specific significance to the $20,000 level, but the price slid below $19,783, a previous high water mark hit in 2017, according to Coinbase. Bitcoin bulls have long held that the cryptocurrency had in recent years entered a new stage of development and acceptance, and that it wouldn’t fall below that 2017 level.

“It will be a lot of pain for a lot of investors,” said Yuya Hasegawa, a market analyst at Japanese crypto exchange Bitbank Inc. People will lose confidence in the crypto market as a whole, but seasoned crypto investors and those who believe in its long-term prospects will see an opportunity to buy at discounted prices, he said.

Ether, another major cryptocurrency, fell below $1,000, briefly reaching $975.35 on Saturday, according to CoinDesk, its lowest level since January 2021.

Bitcoin’s slide from its record high of $67,802 in November has contributed to a roughly $2 trillion wipeout in the broader market. Crypto’s total market capitalization, which peaked in November at nearly $3 trillion, stood at around $840 billion Saturday—its lowest since January 2021, according to data provider CoinMarketCap.

Bitcoin traded around the $30,000 mark for most of May before dropping sharply again in June after a fresh inflation shock and worries about rising U.S. interest rates. Investors have been unloading assets seen as risky, such as cryptocurrencies and technology stocks.

Individual investors have received margin calls, with about $260 million of collateral pledged by about 80,000 retail traders liquidated over the past 24 hours, according to data provider CoinGlass. That compares with $1 billion earlier this week.

A growing number of previously highflying crypto firms have been feeling the pain in what has been dubbed a “crypto winter.” Cryptocurrency lender Babel Finance told customers Friday that it was suspending redemptions and withdrawals from all products, citing “unusual liquidity pressures.” One of the largest crypto lenders, Celsius Network LLC, hasn’t let users withdraw funds for roughly a week, citing extreme market conditions.

Cryptocurrency-focused hedge fund Three Arrows Capital Ltd. has hired legal and financial advisers to help work out a solution for its investors and lenders after suffering heavy losses from a broad market selloff in digital assets, the firm’s founders told The Wall Street Journal.

The surge in cryptocurrency valuations over the last two years was aided by big-name investments from companies such as

Tesla Inc.

and a period of lower interest rates during the pandemic that encouraged individuals stuck at home to buy riskier assets in the hopes of greater returns.

Interest-rate increases now being enacted by the Fed come at a time when blowups in some crypto projects have rippled across the ecosystem. So-called stablecoin TerraUSD broke from its $1 peg last month following intense selling pressure, leaving it and its original sister cryptocurrency Luna now nearly worthless. As its developers sought to defend TerraUSD’s peg, they sold bitcoin reserves, weighing on the price of it and other assets.

Crypto investors more recently have become concerned about a derivative of the cryptocurrency ether that is locked up until the Ethereum network transitions to a less energy-intensive model. So-called Lido-staked ether has been trading at a discount to ether itself recently.

“Crypto has enough problems. It doesn’t need the macro,” said Noelle Acheson, head of market insights at crypto lender Genesis Global Trading, in reference to rising interest rates and inflation concerns.

Write to Elaine Yu at elaine.yu@wsj.com and Caitlin Ostroff at caitlin.ostroff@wsj.com

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Business

Bitcoin Price Dips Below $21,000 as Crypto Firms Announce Layoffs

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The price of bitcoin continued to fall Tuesday as the crypto industry struggles with fallout from the extended selloff.

Bitcoin traded as low as $20,834 earlier on Tuesday, according to CoinDesk. The original cryptocurrency hasn’t traded under $20,000 since December 2020.

For the day, bitcoin fell 5.4% to $21,991.89, its lowest close since Dec. 16, 2020, according to Dow Jones Market Data. It is down about 68% from its all-time high in November last year at $67,802.

Coinbase Global Inc.,

one of the largest and most valuable crypto exchanges, said Tuesday that it was laying off 18% of its staff, a move that comes roughly a month after the company imposed a hiring freeze. Two other prominent crypto companies, Crypto.com and BlockFi, have also announced layoffs.

Coinbase shares closed down 0.8% at $51.58. The stock has fallen about 80% year to date.

WSJ’s Dion Rabouin explains why Wall Street is now betting big on crypto and what that means for the new asset class and its future. Photo composite: Elizabeth Smelov

Cryptocurrencies have been sinking along with other higher-risk assets as the Federal Reserve steadily reverses the aggressive monetary policies it adopted earlier in the coronavirus pandemic. Lately, its efforts to raise interest rates to combat surging inflation have further dented investors’ risk appetite.

The market value of the entire crypto sector has fallen to less than $1 trillion from about $3 trillion in November, according to CoinMarketCap. Those falls reflect a significant drop in trading activity and momentum, and until that turns around, industry players like Coinbase are likely to remain under pressure, said KBW Managing Director

Kyle Voigt.

Coinbase Chief Executive

Brian Armstrong

said the company had grown too quickly, expanding from about 1,250 employees at the start of last year to around 5,000 currently.

“We saw the opportunities but we needed to massively scale our team to be positioned to compete in a broad array of bets,” he wrote in a note to staff. “While we tried our best to get this just right, in this case it is now clear to me that we over-hired.”

The price of ether, the in-house currency of the Ethereum network, fell 4.5% to $1,187.30, its lowest close since Jan. 21, 2021. Over the weekend, the price fell below $1,360, the early 2019 high from the previous cycle.

Other cryptocurrencies were mixed. Cardano fell 1.9%, but Solana was up 1.3% and Stellar was up 0.5%.

Write to Paul Vigna at paul.vigna@wsj.com

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Business

Elon Musk Gets $7 Billion in Fresh Financing for Twitter Deal

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Tesla Inc.’s chief executive has received letters committing about $7.14 billion from a group of 19 investors. The biggest contribution comes from

Prince al-Waleed bin Talal

of Saudi Arabia, who agreed to retain his nearly $1.9 billion stake in Twitter following Mr. Musk’s takeover, the disclosure said.

The new money will cut in half the amount Mr. Musk needs to borrow against his Tesla stake, and will slightly reduce the balance of cash he needs to put up personally, to just under $20 billion.

Oracle Corp. co-founder Larry Ellison, who sits on Tesla’s board, agreed to put in $1 billion. Cryptocurrency exchange Binance.com, controlled by billionaire developer

Changpeng Zhao,

promised $500 million. Other contributors include $850 million from venture capital stalwarts Sequoia Capital. Arms of asset managers Fidelity Investments and

Brookfield Asset Management Inc.

BAM 2.69%

will also take part.

Twitter will become a private company if Elon Musk’s $44 billion takeover bid is approved. The move would allow Musk to make changes to the site. WSJ’s Dan Gallagher explains Musk’s proposed changes and the challenges he might face enacting them. Illustration: Jordan Kranse

Binance said its involvement is “as a supporter of Elon Musk’s plans for Twitter and an investor,” a spokesman said. Mr. Zhao tweeted that the investment was “a small contribution to the cause.”

Mr. Musk said he is in talks to bring more current Twitter shareholders, including co-founder

Jack Dorsey,

into the company after the buyout. Mr. Musk has told potential investors in Twitter that he could return the company to public markets after a few years of ownership, The Wall Street Journal reported earlier this week.

By assembling a roster of big money backers, Mr. Musk will effectively reduce the amount of risk he has to personally take to close the $44 billion deal. The world’s richest man, by some measures, Mr. Musk leveraged a wide network of associates to come on board for his plans.

He has said that he wants the social-media company to be less censorious in content moderation, but has otherwise given few details about his exact plans. At one point he said he doesn’t care whether he makes money on the deal. Mr. Musk has a history of missing his timelines and targets at Tesla, the electric-car company.

Twitter shares jumped 2% in premarket trading to around $49, edging toward Mr. Musk’s $54.20 a share offer price. The closer the stock gets to the offer price, the higher likelihood that investors put on the deal going through.

As a result of the new financing commitments, Mr. Musk said the $12.5 billion margin loan he had received to buy Twitter has been reduced to $6.25 billion and the takeover will be financed now by $27.25 billion in equity and cash.

Mr. Musk’s heavy borrowing against his shares has weighed on Tesla’s stock in recent weeks. The shares were flat in premarket trading.

Other prominent backers of the deal include Dubai-based investment firm VyCapital, which is on the hook for $700 million, and venture capital firm Andreessen Horowitz has thrown in $400 million.

Qatar Holding LLC, founded in 2006 by the Qatar Investment Authority, has also pitched in $375 million and Aliya Capital Partners LLC, run by Chief Executive Ari Shrage, has committed $360 million.

Other new financiers of the deal include familiar faces in Mr. Musk’s past. Bamco Inc., founded by prominent Tesla investor Ron Baron, has committed $100 million. Draper Fisher Jurvetson, SpaceX board member Steve Jurvetson’s former venture capital firm, has committed another $100 million.

Capital LLC and Witkoff Capital are also backers.

Tech-focused financial adviser Key Wealth Advisors LLC, private-equity firm A.M. Management & Consulting and Chicago-based Litani Ventures, which is the family office of RXBAR founder Peter Rahal, are also coming in on the deal.

Other companies listed are Peter Avellone-founded Cartenna Capital LP, which committed $8.5 million, and David Fiszel-founded Honeycomb Asset Management LP, which threw in $5 million.

—Caitlin Ostroff and Patricia Kowsmann contributed to this article.

Write to Will Feuer at will.feuer@wsj.com

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Business

Citigroup Sales Hit European Stock Markets With ‘Flash Crash’

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Several European stock markets suffered a “flash crash” on Monday morning following sell orders by

Citigroup Inc.,

C 1.04%

according to people familiar with the matter.

Trading was halted momentarily in several markets after major stock indexes plunged for a few minutes just before 10 a.m. Central European time. Stocks in the Nordic region were hit the hardest, though other European stocks also tumbled briefly on a day when share prices around the globe declined.

Nasdaq and

Euronext

NV, which operate stock exchanges across the region, said they are investigating the cause. Nasdaq said it hasn’t seen any reason to cancel trades.

The nature and extent of the sales by

Citi

group weren’t immediately clear. Citi declined to comment.

Investors thought the incident may have been caused by human error, known in industry parlance as a “fat finger.” 

The trading floor of the Amsterdam Stock Exchange, which is operated by Euronext.



Photo:

Yuriko Nakao/Bloomberg News

Sweden’s benchmark index, the OMX Stockholm All-Share, fell nearly 8% before largely rebounding. Denmark’s equivalent index fell over 6% around the same time and also mostly recovered. Both closed down around 2%.

Markets run by Amsterdam-based Euronext also tumbled before largely recovering. The Dutch AEX index fell 3% and Belgium’s BEL20 declined over 5%. France’s CAC40 fell 3%. These indexes ended the day down more than 1%. 

Euronext temporarily halted trading to try to lower the impact on markets, according to a spokesman. Nasdaq said it used circuit breakers in the immediate aftermath of the crash on major stocks on Nordic exchanges, including

Kone

Oyj and

Stora Enso

Oyj.  

Fat finger trades can be costly. In 2009, an oil trader on a bender placed around $520 million of trades for crude oil, saddling his company with $10 million in losses. In 2012, financial services firm Knight Capital lost $440 million from a computer-trading glitch that entered millions of trades in less than an hour.

Citigroup

C 1.04%

has a history of untimely errors. In 2020, it was ordered by regulators to clean up systems meant to safeguard the bank and its clients and fined $400 million. It is spending billions of dollars to transform its technology and inner workings, a cost that has investors anxious. Chief Executive

Jane Fraser

has said it is the bank’s top priority to get it right.

The most recent pratfall came in August 2020, when Citigroup bankers accidentally paid the bondholders of client

Revlon Inc.

nearly $900 million.

On Monday, Citigroup shares were up fractionally in New York at $48.48.

Write to Anna Hirtenstein at anna.hirtenstein@wsj.com and David Benoit at David.Benoit@wsj.com

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Business

Justice Department Says It Seized $3.6 Billion Worth of Bitcoin Stolen in 2016 Hack

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WASHINGTON—The Justice Department said Tuesday it seized over $3.6 billion worth of digital currency stolen during a hack of a cryptocurrency exchange and arrested two suspects for allegedly trying to launder the proceeds.

The value of the cryptocurrency at the time it was seized last week marks the largest financial seizure ever by the Justice Department, officials said.

Ilya Lichtenstein,

34 years old, and his wife,

Heather Morgan,

31, were both arrested without incident Tuesday morning in Manhattan, the department said. They have promoted themselves on social media as entrepreneurs with deep knowledge of tech and a love of travel.

According to court documents, the suspects allegedly conspired to launder nearly 120,000 bitcoin stolen from Bitfinex’s platform in 2016 after a hacker breached the exchange’s systems and initiated more than 2,000 unauthorized transactions. The transactions included the use of computer programs to rapidly automate bitcoin movements and deposits to try to conceal their origin, with some of the funds eventually landing in financial accounts tied to the couple, federal prosecutors said.

“Today’s arrests, and the department’s largest financial seizure ever, show that cryptocurrency is not a safe haven for criminals,” said Deputy Attorney General

Lisa Monaco.

“In a futile effort to maintain digital anonymity, the defendants laundered stolen funds through a labyrinth of cryptocurrency transactions.”

While the SEC hasn’t announced major actions against big crypto exchanges, the commission has threatened to sue companies offering crypto lending. WSJ’s Dion Rabouin explains why this one part of the crypto market has drawn such a strong reaction. Photo: Mark Lennihan/Associated Press

At the couple’s appearance in Manhattan court Tuesday, U.S. Magistrate Judge Debra Freeman set bond at $5 million for Mr. Lichtenstein and $3 million for Ms. Morgan, requiring that their parents’ homes be posted as security. The judge also ordered that they not have devices with internet access and prohibited them from conducting cryptocurrency transactions.

Anirudh Bansal, a lawyer for Mr. Lichtenstein and Ms. Morgan, told the judge that his clients had been aware of the government’s investigation since November and hadn’t tried to flee the country. Mr. Bansal declined to comment further.

Mr. Lichtenstein and Ms. Morgan face charges relating to conspiracy to commit money laundering and conspiracy to defraud the U.S. They weren’t charged with carrying out the hack of Bitfinex. The Justice Department’s investigation is ongoing, officials said.

Hong Kong-based digital-currency exchange Bitfinex said it was hacked in 2016, causing the price of bitcoin to sharply drop. At the time, the value of the stolen bitcoin was valued at around $70 million, officials said.

Bitcoin, like many virtual currencies, can fluctuate wildly in price and has soared enormously since 2016. The $3.6 billion recovered by the Justice Department is the value of the bitcoin at the time of seizure, which occurred last week, officials said. Overall the current value of the stolen bitcoin linked to the hack is valued today at about $4.5 billion, officials said, but only about 94,000 of the roughly 119,754 stolen bitcoin were recovered.

Bitcoin is a popular type of so-called cryptocurrency, a kind of digital currency that exists as open-source computer code and that is maintained by the operations of a vast world-wide network of computers. Officials said the fact that blockchain—the inalterable ledger that records bitcoin transactions—is public was helpful in their investigation.

The Justice Department last year created a team to prosecute criminals that rely on cryptocurrency and recover illicit proceeds



Photo:

Ariel Zambelich/The Wall Street Journal

Ari Redbord, a former senior Treasury Department official now at the blockchain analytics firm TRM Labs, said the arrests show the developing capabilities of investigators to trace cryptocurrency flows, including years after illicit transactions occurred.

“As the obfuscation techniques evolve, so do the tools authorities have to track them,” said Mr. Redbord. “The blockchain is forever.”

The case also helps law enforcement understand the strategies hackers, terrorists and other criminals are using in digital-currency markets to try to move illicit funds, he said.

The Justice Department created a National Cryptocurrency Enforcement Team last October to prosecute criminals that rely on cryptocurrency and recover illicit proceeds.

Last year, authorities were able to claw back about $2.3 million in bitcoin that was paid by Colonial Pipeline Co. to a Russian ransomware gang that hacked the major conduit, causing a shutdown that lasted for days on the pipeline that runs from the Gulf Coast to New Jersey.

The couple arrested Tuesday, Mr. Lichtenstein and Ms. Morgan, allegedly used their laundered proceeds to purchase a variety of material goods and assets, including gold, nonfungible tokens and

Walmart

gift cards, officials said.

Only a small portion of the stolen money had been spent by the time of their arrest, according to officials.

Federal prosecutors unsuccessfully requested at Tuesday’s proceeding that the Ms. Morgan and Mr. Lichtenstein be held without bond, saying they were a flight risk.

During a search of the couple’s Manhattan home this month, federal agents found a bag of burner phones, $40,000 in cash and a device with an electronic file that had fake identities used to open bitcoin accounts, Assistant U.S. Attorney Maggie Lynaugh said. Another file found in the search, she said, had information on how to purchase passports on the dark web.

The couple is also believed to have access to $330 million in bitcoin that the federal government hasn’t located, Ms. Lynaugh said.

Ms. Morgan and Mr. Lichtenstein, who also goes by the nickname Dutch, have promoted themselves as veteran tech and crypto entrepreneurs, according to their social-media posts. Their enterprises include co-founding Demandpath, a venture-capital fund; Endpass, a cryptocurrency wallet; and SalesFolk, a marketing firm.

All three companies were used by the couple to justify some of their cryptocurrency transactions, Christopher Janczewski, special agent for the Internal Revenue Service’s criminal investigation division, said in a court filing.

On Medium, a publishing platform, Mr. Lichtenstein’s profile describes him as a “tech entrepreneur, explorer, and occasional magician.” His profile on LinkedIn, the professional networking platform, says he is a “coder and investor interested in blockchain technology, automation, and big data.”

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Ms. Morgan’s profile on Forbes.com, where her articles are posted under the site’s ForbesWomen banner, says she is an international economist and serial entrepreneur specializing in software development.

“When she’s not reverse-engineering black markets to think of better ways to combat fraud and cybercrime, she enjoys rapping and designing streetwear fashion,” her Forbes.com bio reads. Her LinkedIn page links to a personal website, in which she refers to herself as rapper Razzlekhan, with a “fearless entrepreneurial spirit and hacker mindset.”

A friend of Ms. Morgan said the couple, while planning to buy a $2 million apartment in New York, didn’t live a lavish lifestyle and weren’t splashy spenders. The friend said their wedding in November was modest and the couple said they often used air miles to fly.

Bitfinex, the exchange platform that was hacked in 2016, said it had been cooperating with the Justice Department since its investigation began and said it would “follow appropriate legal processes to establish our rights to a return of the stolen bitcoin.” Updates on the return of stolen bitcoin would be forthcoming, the company said.

Some financial crime experts said the seizure and others in the past several years show that cryptocurrency markets can be increasingly monitored by law enforcement. Top law-enforcement officials whose agencies investigate cryptocurrency crimes, including the U.S. Secret Service, have said the blockchain ledger provides a digital trail for their probes, but have urged policy makers to strengthen reporting rules on the identities of users.

Corrections & Amplifications
Ari Redbord is a former senior Treasury Department official now at the blockchain analytics firm TRM Labs. An earlier version of this article incorrectly spelled his last name as Redboard. (Corrected on Feb. 8)

—James Fanelli contributed to this article.

Write to Dustin Volz at dustin.volz@wsj.com and Ian Talley at ian.talley@wsj.com

Copyright ©2022 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8

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Business

Turkish Lira, Stocks Sink Amid Inflation Concerns

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Istanbul’s stock market was twice forced to halt trading and the Turkish lira continued to fall Friday as concerns deepened that recent interest-rate cuts could cause an inflationary spiral.

Turkey’s benchmark Borsa Istanbul 100 index sank 8.5% Friday in its worst day since March, triggering two circuit breakers that halted trades. The lira lost as much as 8% of its value against the dollar, despite Turkey’s central bank intervening to arrest the decline in the country’s currency.

The crash followed another decision by the central bank on Thursday to cut interest rates under pressure from President

Recep Tayyip Erdogan,

who favors lower rates as a part of a vision to grow the Turkish economy. Mainstream economists have urged the government to raise interest rates to control Turkey’s rising inflation, which reached more than 21% last month, according to official statistics.

The lira’s continuing decline is increasingly squeezing ordinary Turks, who have seen their savings evaporate. It is also adding to pressure on the banking system, which has high levels of foreign-currency-denominated loans to repay within the next 12 months. As of September, the loans equaled about 11% of Turkey’s gross domestic product, according to Capital Economics.

“We are astonished to watch the central bank releasing its precious foreign exchange resources to the market today after it cut rates yesterday,” said

Erdal Bahcivan,

chairman of the board of the Istanbul Chamber of Industry, in a tweet.

Friday’s decision to intervene in the currency market was the fifth time that the central bank has stepped in to prop up the lira this month. It cited “unhealthy price formations in exchange rates,” in a statement declaring the intervention.

Economists estimate that Turkey’s central bank has more foreign-currency liabilities than assets, giving it little firepower to steady the lira through intervention. Despite the central bank selling assets Friday after the lira fell past 17 to the dollar, the currency began to slide again hours later.

“The diminishing impact of intervention is really telling,” said

Paul McNamara,

an emerging-market fund manager at GAM. “With this kind of intervention, the trouble is the market knows the level of reserves they have. It’s not like Russia or Brazil—countries that really have a lot of foreign currency they can throw at this.”

The lira has lost more than half its purchasing power against the dollar this year, much of that decline in the past month, a dramatic unraveling reminiscent of past emerging-market crises in places such as Argentina and Lebanon.

The plummeting lira makes it more likely that Turkey will need to implement capital controls—measures to restrict or even prohibit the flow of money out of the country—to keep the lira from being heavily sold, Mr. McNamara said.

Turkey’s ability to impose such controls is complicated by the country’s consistent need for foreign currencies as banks and companies need to repay or service debts. Investors see few other options for Turkey to stabilize the lira, expecting that Mr. Erdogan won’t want to raise interest rates. The Turkish president has fired a series of central bank governors and other senior officials who opposed his unorthodox view of the economy.

The loss of confidence in Turkey’s monetary policy has also put pressure on other parts of the market.

Turkish stocks had seen a strong run before Friday. Locals might have preferred to put their savings into stocks rather than other assets as inflation has risen, investors said, because companies can increase prices alongside inflation, boosting returns.

“Generally, a little bit of inflation is good for equities,” said

Daniel Wood,

a portfolio manager at William Blair Investment Management. “Once you get concerned about hyperinflation, that’s bad for companies.”

Shortly after Thursday’s rate raise, Mr. Erdogan also announced an increase in Turkey’s minimum wage, which could also stoke inflation, Mr. Wood said. Concerns over unbridled inflation might have prompted some investors to sell shares.

The cost of insuring against default on $10,000 of five-year Turkish dollar-denominated bonds using derivatives contracts called credit default swaps climbed to about $525 a year Friday, from about $380 a year at the end of June, according to FactSet. Investors buy these swaps if they think the price for insuring against a default will rise further.

“The upheaval in the markets and the level that foreign currencies reached worries many of our companies and affects them negatively,” said

Rifat Hisarciklioglu,

president of the Union of Chambers and Commodity Exchanges of Turkey.

As the Federal Reserve and other central banks around the world deal with rising inflation amid the economic recovery from the pandemic, Turkey — where the rate is currently over 20% — offers a warning. Soaring inflation has led to economic turmoil after years of broad growth. Photo: Sedat Suna/Shutterstock

Write to Caitlin Ostroff at caitlin.ostroff@wsj.com and Jared Malsin at jared.malsin@wsj.com

Copyright ©2021 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8

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Business

Nasdaq to Spin Out Market for Pre-IPO Shares in Deal With Banks

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Nasdaq Inc. is teaming up with a group of banks including Goldman Sachs Group Inc. and Morgan Stanley to spin out its marketplace for shares of private companies.

The deal could help drive more transactions to Nasdaq Private Market, the New York-based exchange operator’s trading platform for shares of companies that haven’t yet had an initial public offering.

Trading in pre-IPO shares has heated up in recent years as startups have waited longer to go public. Employees of such companies often seek to cash out of their shares, while investors may want to get in on a fast-growing technology startup.

Under the deal, Nasdaq Private Market will be moved into a separate, stand-alone company that will receive investments from a group of banks. The group includes Citigroup Inc., Goldman, Morgan Stanley and SVB Financial Group , owner of Silicon Valley Bank. The companies announced the deal Tuesday after it was first reported by The Wall Street Journal.

Terms of the transaction weren’t disclosed. Nasdaq said it would remain the joint venture’s largest shareholder.

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