Alameda Research transfers spark suspicions as SBF denies involvement

Alameda Research transfers spark suspicions as SBF denies involvement

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In this issue

  1. Alameda Research: Follow the money
  2. Tax loss harvesting: Crypto loophole
  3. Blockchain in China: Full steam ahead

From the Editor’s Desk

Dear Reader,

What will 2023 bring to the world of Web3?

That’s often a question we pose at the beginning of any new year, but for this industry very specifically, it takes on greater weight. It was this time last year when dizzying crypto prices dominated the headlines, with Bitcoin hovering around US$45,000, off an all-time high set just two months earlier. And then the first shoe dropped… with the cascade of contagion that followed, and wrapped the year with the FTX saga that has ushered in 2023.

So what’s next? What are the lessons learned that will spark new resolve for this brand new year? 

One thing we’ve learned is that opacity is still high in an industry for which a defining characteristic ought to be transparency. And Sam Bankman-Fried unfortunately retains a high profile in the media, thanks to the polarity that he enjoyed just a year ago. He has denied any involvement in recent transfers from wallets linked to Alameda Research, the trading arm of his bust exchange, FTX, but the fund flows have aroused suspicions in the crypto community, thanks in part to the fact that the funds were channeled through mixers, which are used to conceal transaction information.

The FTX debacle has been a case of “so far, so ugly,” and will remain so for an extended period as the business is wound up. But there will be further casualties. The FTX contagion will continue to play out in 2023. It will be years before funds are restored to its victims, and even then likely only at a fraction of what they entrusted to FTX. The real victim, however, is the industry as a whole — and I include the broader financial industry here. With faith in the financial system having been eroded for an entire generation that trusted it could grow its wealth in crypto in a decentralized and accessible way, 2023 will very much be a year centered on recovering that trust — and it may not be easy to win back.

Ultimately, lessons continue to be learned in the wake of the FTX collapse, and as regulation is beefed up to hold crypto companies to the same standards that are applied to the rest of the finance sector — notably such issues as custody, know-your-customer and clarity on taxation — I dare say it is an exciting time to be in the industry. Because what doesn’t kill us makes us stronger. Every stakeholder, including governments and corporations, must understand that it is not us vs. them. Everyone has a part to play in the technological innovation that can lift us all.  

These lessons will doubtless form the focus of much discussion at this year’s World Economic Forum in Davos, which gets under way in a little under two weeks from now. I will be there, alongside many other blockchain leaders and builders. We have not shied away. Instead, we remain steadfast and resilient in our path toward a digital financial world that’s accessible for everyone. That’s a resolution I and Forkast will be keeping this year, and for years to come. I hope you’ll join us. 

Until the next time,

Angie Lau,
Founder and Editor-in-Chief
Forkast


1. Money moves

Crypto transfers from wallets linked to Alameda Research, the trading arm of FTX, were made into wallets held by unidentified parties. Image: LinkedIn/Canva

By the numbers: Alameda Research — over 5,000% increase in Google search volume.

Cryptocurrency wallets linked to Alameda Research, the trading arm of collapsed crypto exchange FTX, resumed activity last week for the first time since the beginning of December, triggering “major alarm bells” among industry watchers. 

  • Last Wednesday, several wallets associated with Alameda Research came back to life, moving various Ethereum-based tokens into two wallets belonging to unidentified owners. The assets were then swapped for Ethereum (ETH) and stablecoin Tether (USDT), and sent to multiple wallets and decentralized cryptocurrency exchanges such as FixedFloat and ChangeNow, according to Martin Lee, a data journalist at blockchain analytics firm Nansen.
  • The two wallets together received more than US$1.6 million worth of crypto, half of which came from Alameda-linked wallets, while the remainder of the funds were moved from unidentified accounts, Lee told Forkast in an email. 
  • Last Thursday, a second batch of transactions was made from wallets connected to Alameda Research, which was likely executed by liquidators in charge of FTX’s bankruptcy, according to Nansen.
  • The transactions appeared days after FTX founder Sam Bankman-Fried was sprung from jail on bail of US$250 million, raising suspicions that he may have been connected to them. Last Saturday, Bankman-Fried wrote on Twitter that he was not behind the transactions involving the Alameda Research wallets, saying he no longer had access to them.
  • According to crypto intelligence company Arkham, some of the funds in the first set of transactions went to crypto mixers, tools often used by cyber-criminals to obscure crypto transaction history. “The assets here are certainly getting ‘liquidated’ — but this doesn’t seem like the work of a liquidator,” Arkham wrote in a Twitter thread. “Directly sending funds to mixing services is never a good sign.” 
  • FTX, once the world’s third-largest cryptocurrency trading platform, filed for bankruptcy in November, alongside Alameda Research and dozens of affiliated companies. Last Tuesday, former FTX customers filed a class action lawsuit against the exchange and its top executives, including Bankman-Fried, seeking priority rights to repayment before any non-customer creditors.

Forkast.Insights | What does it mean?

Despite FTX and its affiliate companies being under the watchful eye of U.S. authorities, money is moving out of accounts linked to it apparently without permission. 

The high-risk move by whomever with the keys to the Alameda wallets suggests they can move the money in such a way as to avoid being caught. Breaking up stolen loot and sending chunks of it through mixers has long been the favored method for money laundering in crypto. 

Lazarus Group, the collective of cyber criminals connected to the government of North Korea, has long employed this tactic. Although historically it has been an effective method of obfuscating crypto fund flows, last year taught us that law enforcement has upped its game when it comes to tracking and tracing stolen money. 

Whether it was the infamous takedown of Razzlekhan, an Estonian crypto laundering group, or Interpol’s manhunt for Do Kwon, the creator of TerraUSD, it’s getting harder to hide stolen crypto. That’s a good thing. 

While the culprits behind the Alameda crypto wallet fund transfers remain at large, crypto’s immutable nature has made it harder to launder money than stealing cash

Given the high-profile nature of the FTX/Alameda saga, it likely won’t be long before the perpetrators are caught. 


2. Crypto tax relief

Crypto tax relief
Wash trading rules in the U.S. tax system don’t currently apply to crypto, offering investors a loophole to claim tax deductions on loss-making token sales. Image: Canva

By the numbers: Tax loss harvesting — over 5,000% increase in Google search volume.

A loophole in U.S. tax rules could allow crypto investors to make deductions from capital gains tax by selling their digital assets at a loss, then immediately buying back those same assets, a tax expert has told Forkast.

  • The U.S. Internal Revenue Service (IRS) gives investors in the country who sold assets for a net loss at the end of the tax year a deduction on capital gains tax worth up to US$3,000, with additional losses carried forward into the following year. 
  • However, an IRS policy called the “wash rule” prevents investors from taking advantage of that tax deduction if they buy back within 30 days the same assets that they sold. The rule does not apply to cryptocurrencies, which are currently considered an asset rather than a security, according to Benjamin Goldburd, a tax lawyer at the Goldburd McCone law firm in New York City.
  • U.S. software company MicroStrategy, the largest corporate holder of Bitcoin reserves, has seemingly taken advantage of wash sales and tax loss harvesting, selling more than US$11 million of its Bitcoin holdings last month and then repurchasing even more Bitcoin, according to a filing to the U.S. Securities and Exchange Commission. Collapsed crypto exchange FTX was also reported to have utilized the strategy to avoid tax, according to Quartz, the news site. 
  • The IRS has defined a digital asset tax category that included cryptocurrencies, stablecoins and NFTs, and ruled that digital assets should be treated as property for federal tax purposes. Under current regulations, the U.S. Congress’s Joint Committee on Taxation estimated that subjecting crypto to wash sale rules would raise US$16.8 billion over the next decade. 
  • The loophole has caught the attention of U.S. regulators. According to reports, the Senate Finance Committee last month considered ending the tax loss harvesting opportunity offered by crypto wash sales. An early version of U.S. President Joe Biden’s trademark Build Back Better Act had also been intended to close the loophole, but the provision was dropped before the legislation passed the Senate.

Forkast.Insights | What does it mean?

Tax avoidance is hardly a new subject — governments worldwide lose as much as US$600 billion annually in unpaid corporate taxes alone — and it’s unsurprising to learn crypto has gotten in on the act. 

Crypto tokens have, for the most part, avoided being defined as securities, which in most countries would render them eligible for taxation and also proper regulatory scrutiny. But that’s changing. 

U.S. Securities and Exchange Commission chief Gary Gensler has long been a vocal advocate of classifying all digital currencies as securities, and later this year, the U.S. Treasury Department is expected to complete an “illicit finance risk assessment” of decentralized finance and non-fungible tokens that will probably pave the way for more regulation.

Although some criticize regulation for slowing the pace of innovation, it’s likely to lead to the opposite. Clearer regulation provides confidence for businesses and investors that crypto is a safe place to put their money. A lack of trust in the sector is one of the biggest obstacles to growth. 

Protecting investments and allowing legal recourse against scams means that in the event of a loss, there is a clear path to recovering funds. Clear taxation rules also make buying and holding crypto less of a headache for accountants. The longer crypto lurks in regulatory gray areas, the longer it will take for the Crypto Winter to thaw. 


3. Blockchain bet

Blockchain bet
China’s blockchain development, unlike elsewhere, is characterized by a high degree of centralized supervision and control. Image: LinkedIn/Canva

The China Academy for Information and Communications Technology (CAICT) has published a document titled The Blockchain White Paper (2022), demonstrating the Chinese government’s keen interest in investing in and developing blockchain technology, despite its ban on cryptocurrency mining and trading.

  • CAICT is an influential Chinese state-owned think tank for government innovation and a development platform for the country’s information technology industry. The academy has been publishing annual blockchain white papers since 2018.
  • The white paper identifies the potential of blockchain technology in two main areas: the digitalization of the real economy based on permissioned blockchains, and the creation of a digital-native ecosystem based on digital assets and public blockchains.
  • As of last month, Chinese authorities had put 10 batches of blockchain firms on their registration lists — which is how the country’s cyberspace authority keeps track of blockchain-related business entities — or a total of more than 2,000 individual companies. Among their projects, the three most common applications of blockchain technology were finance (17%), internet (10%) and traceability (10%), with digital collectibles and digital assets taking up 8% and 3% of the applications, respectively.
  • According to the white paper, the U.S., China and Singapore are the three most popular domiciles for blockchain companies. As of May 2022, a total of 48 Chinese post-secondary education institutions had introduced blockchain engineering-related degrees and certifications. 
  • Non-fungible tokens (NFTs) have generated some controversy in China, but the white paper praises the potential of the asset class, calling it “the most innovative application of public blockchain technology” and hailing its potential for capitalizing on data and intellectual property, and as a boost for cultural industries.
  • Despite the government’s outlawing of cryptocurrency mining and transactions, China has shown considerable interest in developing other uses for blockchain technology. The nation’s latest five-year plan in 2021 includes provision for developing blockchain technology as part of its digital transformation strategy. The Chinese government has also been building a nationwide blockchain-based service network (BSN) to facilitate the use of blockchain by private enterprises. On the first day of 2023, the “China Digital Asset Trading Platform” was launched in Beijing, becoming the country’s first state-backed NFT trading platform.

Forkast.Insights | What does it mean?

The China Academy for Information and Communications Technology’s latest white paper reflects the Chinese Communist Party’s core vision to “build an internationally competitive digital industry cluster” — as the academy puts it.  

As it pushes for the development of blockchain, Beijing is making sure domestic industry players are building a Web3 industry with Chinese characteristics — with a strong focus on consortium blockchains rather than public chains such as Ethereum that are dominant outside China. Such consortium blockchain infrastructure comes with permissioned access and compliance, making it easier for the authorities to monitor, control and regulate.

The academy has acknowledged that industry regulation is still lacking and that uncertainty surrounding rules has limited the industry’s development. But significantly, the state-owned think tank praises NFTs as an acceptable use of blockchain and touts the technology’s potential.

Although China has yet to issue specific NFT regulation, the launch of the nation’s first state-backed NFT trading platform is further evidence of the government’s embrace of “digital collectibles,” as NFTs are known in China, and its desire to be involved in the development and growth of that market.

China’s domestic blockchain industry is expected to grow to a value of US$2.5 billion in 2024, with a five-year growth rate of nearly 55%, according to research firm IDC data, cited in the academy’s report. But before that happens, Chinese authorities will likely need to put in place clearer, industry-wide trading rules for NFTs and other parts of the Web3 economy, to legally distinguish their use from cryptocurrency transactions, which China banned in September 2021. 

It’s likely just a matter of time before China grows its blockchain industry to a point where it’s too big to ignore, and, as experts have told Forkast, it may face reputational challenges linked to concerns over privacy and surveillance — just as Chinese internet giants have when they have expanded globally. Two things are certain: the Chinese government is fueling and shaping its Web3 infrastructure development, and its consortium chain path will likely mean a large measure of centralized control of the sector into the future.





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