September 1, 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: Binance froze a Russian gun maker's crypto assets, Helium thinks about shifting to the Solana blockchain and more.

I covered why fears about a possible bitcoin liquidation event are premature, after the Washington D.C. attorney general sued MicroStrategy's Michael Saylor for alleged tax evasion.

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– Daniel Kuhn

Today's must-reads

Top Shelf

MicroStrategy founder Michael Saylor sued by the District of Columbia for tax fraud: The District of Columbia alleged MicroStrategy founder and Executive Chairman Michael Saylor avoided paying more than $25 million in taxes in the district in the more than 10 years he has lived there.

In addition, the attorney general tweeted that his office is suing MicroStrategy "for conspiring to help him evade taxes he legally owes on hundreds of millions of dollars he's earned while living" in Washington, D.C.
Saylor is a bitcoin (BTC) maximalist, who recently stepped down as CEO of the company but remains on the board.

California Assembly passed landmark crypto regulation: California Gov. Gavin Newsom is set to sign a recently passed bill that would require digital asset exchanges and other crypto companies to obtain a license to operate in the state. It also increases oversight of banks that issue stablecoins.

The Digital Financial Assets Law, which is similar to New York's BitLicense, has been criticized by industry stakeholders.

Helium proposes shifting its entire network to Solana months after $200 million raise: The developers behind the decentralized telecommunications network cited faster transactions and "higher uptimes" for the proposed move. Helium has grown to over 1 million "hotspots" in recent months, developers said.

The proposal comes months after Helium raised $200 million in a Series D funding round at a $1.2 billion valuation in February in a round led by Tiger Global and FTX Ventures, who joined existing investors Multicoin Capital and a16z.
Helium has come under criticism recently for overstating relationships with major brands, including Lime and Salesforce.

Crypto lawyer Kyle Roche withdraws from Tether, Bitfinex, TRON and BitMEX lawsuits after the recent CryptoLeaks scandal: The founding partner of law firm Roche Freedman had been accused of starting frivolous class-action lawsuits to harm competitors of blockchain project Avalanche. The cases Roche is withdrawing from are all class-action suits that allege the crypto companies named defrauded retail customers.

Meanwhile, five top crypto lawyers have joined Brown Rudnick, the international law firm best known for successfully representing actor Johnny Depp in his recent defamation suit against ex-wife Amber Heard. All five came from rival firm Anderson Kill.

Binance froze a Russian gun maker's crypto assets, amid Ukrainian pressure: Binance, the world's largest crypto exchange by volume, froze a wallet related to Vladislav Lobaev, a Russian gun manufacturer who raised funds for the country's troops in Ukraine, according to an investigation by CoinDesk's Anna Baydakova. Binance did not discuss details of the case.

"Binance also protects its users and reserves the right to reject law enforcement requests that don't stand up to legal scrutiny," a spokesperson for Binance said.
The crypto exchange stopped accepting Russian bank cards this spring, following the international sanctions on Russia.

– Xinyi Luo

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Putting the news into perspective

The Takeaway

A Gentle Reminder to Pay Your Taxes

On Wednesday the first lawsuit using a new whistleblower rule was unsealed, showing that Michael Saylor, the founder and executive chairman of software intelligence firm MicroStrategy (MSTR), is being sued by the District of Columbia attorney general for allegedly trying to evade paying more than $25 million in taxes. The lawsuit, covered on network television news, has stirred concerns that MicroStrategy and/or Saylor may be forced to liquidate some of their bitcoin, putting downward pressure on the crypto's price.

"As MicroStrategy is one of the biggest Bitcoin holders, crypto investors began to panic about whether Michael Saylor would have to liquidate some Bitcoin to pay for the consequential fines," Marcus Sotiriou, an analyst at digital asset broker GlobalBlock, wrote in a note.

The fears seem overdone, for now, for a few reasons. But the action should serve as a reminder to crypto boosters that – even though they may hold non-confiscatable assets – they ought to pay their taxes in full. Tax avoidance schemes are legal loopholes, but require significant planning and commitment. (CoinDesk published a comprehensive guide to crypto taxes earlier this year.)

Further, now that the U.S. government is both signaling increased interest in overseeing the crypto industry and is revamping the Internal Revenue Service – it's reasonable to assume you're being watched.

The lawsuit alleges that Saylor perpetrated a scheme for the past decade to avoid taxes to Washington, D.C., claiming he was a resident of Virginia and Florida, two lower-tax jurisdictions. The investigators came to the opposite conclusion, after being tipped off, by tracking Saylor's private jet flight records, social media posts and from unattributed conversations with Saylor's peers, in which he supposedly said people were "fools" for paying their income taxes.

The court document doesn't provide a full amount Saylor, if found guilty, may have to cough up. But he'd owe all unpaid Washington, D.C., taxes for eight years, compounded annual 10% interest payments, a separate civil penalty of $11,000 for each violation and other fines for fraud. That could total upwards of a $100 million, according to the Office of the Attorney General.

(Danny Nelson/CoinDesk)

The fear that this action could somehow lead to a liquidation crisis in bitcoin (BTC) are a bit unfounded, and tend to confuse the former MicroStrategy CEO (he stepped down last month) with his company. First, the government has to win its case, which might involve unfairly applying the recently passed False Claims Act, one expert cited by the Wall Street Journal said.

It also assumes Saylor couldn't cover a multimillion-dollar liability, that he'd liquidate his BTC rather than any of the mansions or yachts he owns, and also dump it on the market rather than selling in tranches to avoid slippage. The government must also prove MicroStrategy is implicated in Saylor's scheme.

Apparently, in 2014, the attorney general claims, MicroStrategy's then-chief financial officer was "uneasy with this chicanery" and confronted Saylor about the potential corporate liability for his personal tax evasion. In a response, MicroStrategy called the lawsuit Saylor's "personal tax matter" and said it had no responsibility for "his day-to-day affairs."

Saylor also denied the claims, and reiterated he lives in Florida, not in a historic Georgetown mansion or on a yacht docked on the Potomac River, as claimed.

The fears, similar to rumors that forthcoming payouts for Mt. Gox depositors will crater bitcoin's price, stem from MicroStrategy's systemic importance in bitcoin. The company spent about $4 billion acquiring BTC, which turned its stock into a bona fide bitcoin exchange-trade fund (ETF). But the company is still well-capitalized and has been generating cash for years. The liquidation price for its bitcoin is around $3,000, company reps said.

Is any of this out of the question for a former CEO that was convicted of accounting fraud? That recommended people sell their homes to buy bitcoin? That leveraged up on his company's bitcoin stockpile? I mean, let the courts, not social media, decide. But it is funny that Saylor apparently called the District of Columbia "the most powerful city on Earth." The man has a penchant for overstatement.

The worst case scenario is that bitcoin sees greater than average selling pressure, but that seems unlikely given Saylor's known commitment to the network. This fear, not exactly widespread, seems like the type of pessimism seen during bear markets – where investors are on edge and begin assuming some other crisis is sure to happen.

One thing is certain, for anyone else who isn't bordering on megalomania is to… just pay your taxes. Or look into flag theory.

– D.K.

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Overheard on CoinDesk TV...

Sound Bites

"We have banks who are coming out being incredibly bullish about decentralization."

– Michael Bacina, partner at law firm Piper Alderman, discussing the recent launch of Australia's digital asset research program, on CoinDesk TV's "First Mover"

Off-Chain Signals

What others are writing

Andreessen Horowitz unveiled a licensing system for NFTs, call the "Can't Be Evil" standard (a16z)
Escape Hatches: Migration, Bitcoin, and the Ability to Get Out (American Institute for Economic Research)
Janice McAfee Does Not Believe John McAfee Faked His Death (Decrypt)
When crypto cults collide with influence operations, XRP edition (The Blind Spot)

Which institutes are most impacting the blockchain world? Tell us your thoughts in a five-minute survey. We're welcoming responses until Sept. 7. Take the survey here.

'Dream Idols' Launches Into the Metaverse

The new entry from X World Games proves blockchain's power to unify technology and fandom.

The web's landscape looked bleak in its earliest days: great new strides in protocols, a wealth of available data, an infrastructure that was still evolving but headed in the right direction … but where was the content? Once you heard that satisfying sonic handshake telling you that your modem had connected to cyberspace, where could you realistically go? CERN? FermiLab?

That's the state of the metaverse now. Exercise videos and travelogs are great, but is that all there is to the metaverse? If so, we shouldn't have wasted all that money on the gear. There needs to be an immersive experience to go with the immersive sensations.

Continue reading here

*This is sponsored content from X World Games.