August 30, 2022

The biggest crypto news and ideas of the day

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Good morning, and welcome to The Node. I'm Daniel Kuhn here to take you through the latest in crypto news and why it matters. In today's newsletter: a report about Nexo's token buyback scheme and why South Korea's central bank wants to reverse the country's ban on initial coin offerings (ICOs).

Read on for my essay about the problems with the so-called Avalanche whistleblower report as well as Ava Lab's initial response.

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– Daniel Kuhn

Today's must-reads

Top Shelf

Crypto Lender Nexo Allocates Additional $50 Million for Token Buyback Initiative: The Switzerland-based lender will purchase $50 million worth of its native token over the next six months, according to a press release.

This follows a previous buyback when it accumulated $100 million between November and May. The buyback will help support the growth and stability in the value of its native token listed for secondary trading.
Nexo has thus far managed to avoid the troubles experienced by crypto lending rivals due to the grueling market downturn this year.

FBI Warns Investors Against the Vulnerabilities in DeFi Platforms: The Federal Bureau of Investigation (FBI) asked decentralized finance (DeFi) platforms to increase security measures after a slew of hacks this year.

Between January and March 2022, cyber criminals stole $1.3 billion in cryptocurrencies, almost 97% of which was stolen from DeFi platforms, according to a report from blockchain analysis firm Chainalysis.
Earlier this year, the FBI had joined with LinkedIn (LNKD) to fight fraudsters using the professional networking platform to lure investors into cryptocurrency schemes.

Crypto Lender Hodlnaut Is Placed Under Interim Judicial Management by Singapore Court: The troubled crypto lender has been placed under a form of creditor protection, three weeks after it froze withdrawals due to "difficult market conditions."

The company will be protected from legal proceedings from third parties.

Indonesia's Biggest Tech Firm Enters Crypto With Purchase of Local Exchange: GoTo Gojek Tokopedia (GOTO), Indonesia's biggest tech company, bought Kripto Maksima Koin, a local crypto exchange, for 124.84 billion rupiah (US$8.38 million).

The tech company raised over $1 billion in an initial public offering in April and claims to contribute more than 2% to Indonesia's GDP of $1 trillion.

South Korea Must Reverse Ineffective Ban on Crypto ICOs, Central Bank Says: The Bank of Korea is asking regulators to re-institutionalize initial coin offerings (ICO), which were banned in the country in 2017, saying the policy has failed and led to even more market insecurity.

According to a Monday report, the bank believes domestic companies like stablecoin issuer Terra were able to circumvent the ICO ban and sell digital tokens to locals by setting up corporations overseas. It would be easier to regulate such offerings, the bank said.
The bank also said it is necessary to review the country's developing crypto regulatory framework, called the Digital Asset Basic Act, with reference to relevant examples from the EU's MiCA.

– Xinyi Luo

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Putting the news into perspective

The Takeaway

What to Make of the Avalanche Whistleblower Report

Ava Labs, the crypto development group behind the Avalanche blockchain and AVAX token, is under fire after a supposed investigative report showed how the firm allegedly staged a series of class-action lawsuits to attack competitors.

On Aug. 26, so-described whistleblower site Crypto Leaks posted a lengthy expose that claims Ava Labs paid crypto-focused law firm Freedman Roche in tokens and equity to file this adversarial litigation. Ava CEO Emin Gün Sirer has called the allegations "categorically false."

The post includes short, surreptitiously recorded videos of the law firm's founder, Kyle Roche, describing how he used the U.S. legal system to draw regulatory attention like a "magnet" against alternative layer 1 blockchains including Solana and Dfinity and protect Avalanche's interests. He also discussed his close professional and personal relationships with Ava and its founders, as well as his financial stake in Avalanche.

The report, if true, is damning and shows that anti-competitive behavior is alive and well in crypto. There are, however, several reasons to remain skeptical about the allegations. Right now, the pursuit of truth has reached a he-said-she-said stage – where it seems like all parties are withholding some facts – that only tarnishes crypto's reputation.

The central claims of the investigation cannot be disproven by a third party – that Ava weaponized the legal system may well be true – and need further verification. But some aspects of the report show clear bias. Whether you think that reduces the reporting to mudslinging is up to you, but there are clear factual problems.

When judging the veracity or authenticity of something, small facts matter. I think it's significant that Crypto Leak's investigation had to be updated to reflect that Gün Sirer, a former Cornell professor, had left the university. This was announced publicly months ago, when the computer scientist decided to go full time on his private ventures.

That update further alleges that Gün Sirer possibly left under nefarious circumstances, which is unsubstantiated. This matters because the whistleblower is building a profile of Gün Sirer who was supposedly bitter for not achieving tenure, suffered from "Satoshi envy" and … is possibly "a sociopath."

(Image credit: Nicolas Cool/Unsplash, modified by CoinDesk)

You cannot fault a whistleblower for dramatics. But instead of leaning on the actual spy-cam footage, it brings in circumstantial evidence that only undermines its believability. The reporter thinks it's significant that Roche has failed to update his LinkedIn page to reflect he's living in Miami – possibly as a tax dodge – or that he works with Ava Labs.

Small examples of motivated reasoning add up, and should cast a shadow of doubt. However, for this same reason, you have to be skeptical of Ava's immediate defense – which hangs on the investigation being funded by rival blockchain project Dfinity. (Roche Freedman has sued a Dfinity linked organization for "securities violations" and insider trading.)

There's circumstantial evidence that suggests a relationship exists between "The Internet Computer" and Crypto Leaks, including that its previous reports were defenses of Dfinity against Solana and the New York Times, but there are no clear financial flows.

It's also significant that in their responses to the investigation, Ava Labs, Emin Gün Sirer and Roche have yet to acknowledge Ava's support of Roche's "tokenized litigation" platform Ryval – which undercuts claims that Ava only worked with the law firm in its early days. The platform was designed to cryptofy lawsuits, allowing people to invest in the outcome of cases, and was publicly supported by Ava Labs in late 2020.

We're left with a series of highly edited videos, filmed by an unknown party and acquired through unknown means, showing a lawyer making braggadocious claims about his practice and peer group. We have a lawyer who claims to have been deceived and "intoxicated" by a Norwegian venture capitalist and crypto founder that is downplaying his relationship to his lawyer.

Both Roche and Emin Gün Sirer have stated Ava Labs had no insight into Roche's "plaintiff side practice," which doesn't entirely waive away the possibility they were more closely related than they claim. But you have to ask what benefit would it bring for Ava or Roche to sue Binance, or other crypto exchanges like Coinbase (COIN) and Kraken, as planned?

Roche's words speak for themselves. He sued "for sport" and for insider information, a fact that only came to light after loose-lipped talking. And his career is likely finished, his reputation burned for getting himself in this mess. He cannot deny appearing on film, over multiple days, even if he was duped into speaking under false pretenses.

Then there's the question of strategy: Did Ava actually think it could benefit ultimately by getting regulators to investigate their rivals for securities violations, despite basically running the same token game? The situation suggests self-cannibalization across-the-board, including the probability that Dfinity is funding mudslinging against its rivals.

Of course, this is all really just speculation based on speculation. Of course, lawyers do not always put their client's interests first. And of course, crypto projects do not always act with honor and distinction. No claims in this sordid little drama seem out of the question.

The story is developing, more information will come to light. Question it all. And maybe rue the fact that even if Avalanche unethically paid lawyers to attack its competitors the project is bigger than the egos behind it, who might win either way. AVAX dropped 11% in intraday trading Monday, and has since rebounded significantly.

– D.K.

Overheard on CoinDesk TV...

Sound Bites

"Prediction markets and betting exchanges are exactly the same."

– Co-founder of decentralized sports betting protocol BetDEX Labs Nigel Eccles, explaining why users that engage in sports gambling are essentially trading based on the future of an uncertain event, on CoinDesk TV's "First Mover"

Off-Chain Signals

What others are writing

Bored Ape, Doodles, and Other NFTs Star in 'Real World' Metaverse Parody Show (Decrypt)
As a fresh tale of conspiracy grips crypto, Ava Labs denies wrongdoing (The Block)
Crypto will become an inflation hedge — just not yet (Cointelegraph)

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