Bhutan, Gensler, Silk Road – We’ve Covered it All

Last week in the crypto world we saw Bhutan emerge as the world’s first nation to hold crypto on behalf of the country, a multi-billion dollar Silk Road hacker gets a year in prison, and Gary Gensler get grilled by angry politicians over his running of the Securities and Exchange Commission.

Bhutan Crypto Experiment is World’s First

The country of Bhutan may have been the first in the world to own cryptocurrencies through a sovereign fund, legal filings have revealed. Bhutan’s Druk Holding & Investments, which was established in 2007 by King Jigme Khesar Namgyel Wangchuck to protect the country’s wealth for “the long-term benefit of its shareholders, the people of Bhutan,” was a customer of both Celsius and BlockFi, borrowing and trading tens of millions of dollars worth of crypto assets in 2022. However, its activities have ended in legal issues with both platforms.

According to Celsius, Druk Holding & Investments made numerous transactions between April and June 2022, depositing, withdrawing, and borrowing a combined $83 million during the three-month period. As part of its bankruptcy process, Celsius’ lawyers intend to seek “clawbacks” of any deposits made within 90 days of its bankruptcy, into which Druk’s holdings fall, although the fund has failed to acknowledge any of Celsius’ claims.

Druk is also in trouble with BlockFi, which lent the fund $30 million in the stablecoin USDC in February 2022. However, Druk defaulted on the loan, racking up debts of $76.5 million in the process, with Blockfi saying that Druk “failed and refused” to pay the loan back in full, resulting in an outstanding balance of $820,000.

While this may not be the most auspicious debut for crypto on the sovereign fund stage, it nevertheless represents another important domino that has fallen.

Gary Gensler Savaged Over Performance

Securities and Exchange Commission (SEC) Chair Gary Gensler endured a torrid few hours last week before the House Financial Services Committee, where everything from the agency’s Blitzkrieg approach to enforcement to low staff morale was laid at his door.

Things have gotten so bad under the Gensler regime that one committee member even tabled a bill to remove the position of SEC Chair altogether and replace it with an executive director reporting to a board, a clear example of the anger at the perceived damage that Gensler is causing to the U.S. market.

Gensler started by claiming that the regulations around securities are very clear, but this was quickly pulled apart by Committee head Patrick McHenry who demanded that Gensler clarify whether Ethereum, which has been used as a medium by which the SEC has sued exchanges over unlicensed securities sales, is a security or not. Gensler tried to deflect and say that he couldn’t comment on certain coins, before McHenry reminded him that he had recently singled out Bitcoin as the only cryptocurrency that could be considered a commodity. Still, Gensler demured, even when comments from his own staff in legal filings were read out.

Texas representative Pete Sessions was the next to criticize Gensler, this time over the SEC’s refusal to engage entities over alleged securities breaches and then suing them. This issue was particularly prescient, given that the Bittrex exchange had been sued by the SEC 48 hours before the hearing over the sale of unlicensed securities, with the exchange saying that the agency had refused to tell them which coins it considered securities so it could remove them.

Oklahoma representative Frank Lucas was next up, criticizing the SEC’s rulemaking and enforcement bonanza, which he said risked bleeding into other asset classes and having unforeseen complications. He also criticized the reduced public comment time on proposed rule changes allowed under the present SEC operations and noted the low staff morale within the SEC and the high turnover, especially among senior figures.

If Gensler thought the worst was over, he was wrong. Majority Whip of the United States House of Representatives, Tom Emmer, demanded yes and no answers from Gensler on a range of topics, cutting Gensler off when he tried to embark on long-winded answers to simple questions that implicated him. Emmer took Gensler to task over his failure to protect FTX customers, especially given his meetings with former CEO Sam Bankman-Fried, and even led Gensler to disagree with the sentiment behind a quote on the SEC’s own website.

The coup de grace was carried out by Ohio representative Warren Davidson, who seethed at the fact that the SEC asked crypto companies to talk to them but then didn’t listen or respond, that the agency claimed to offer clarity in the market but sent out mixed signals, and that this approach was driving blockchain adoption to China. He then produced a bill demanding the removal of the position of SEC chair and replacing it with a board and executive director that would report to it.

The approach taken by these committee members shows just how wrongheaded the SEC’s approach to tackling crypto regulations has been, and the sector can now at least be satisfied that it has strong and growing support in important places.

Billion-dollar Silk Road Hacker Sentenced

Last week saw the conclusion of an extraordinary story involving the multi-billion dollar proceeds from a hack on the Silk Road website in 2012. James Zhong, who tricked the exchange into giving him 50,000 bitcoin more than a decade ago, was this week sentenced to one year in prison and forced to hand over $1.5 billion worth of assets discovered in his house at the time of his arrest.

In September 2012, when online illicit marketplace Silk Road was in its heyday, Zhong managed to trick the website’s servers into transferring approximately 50,000 bitcoin into the multiple accounts he had created solely for the purpose. Zhong subsequently transferred the bitcoin out of the site and into various addresses under his control, where they lay untouched for years.

By mid-2017 the value of Zhong’s Silk Road haul had ballooned from $500,000 to around $110 million, giving Zhong a headache; the only way he could realize the value of the bitcoin was to sell it, but selling even a fraction of his vast holdings would attract unwanted attention. The situation became more complicated when, in July 2017, Bitcoin forked into Bitcoin and Bitcoin Cash, whereupon every bitcoin holder was automatically awarded one BCH coin for every bitcoin they held. Suddenly, Zhong was sitting on an additional 50,000 BCH tokens, which quickly became worth north of $1,000 each.

Thinking that it was finally time to cash in, Zhong sent these BCH tokens (which shared the same address as the stolen bitcoin) to an overseas exchange and swapped them for 3,500 more bitcoin, thinking that he couldn’t be traced. This, however, proved to be his undoing. The Inland Revenue Service, in tandem with blockchain forensics firm Chainalysis, managed to trace the BCH sale to the Bitcoin wallet and, using Zhong’s credentials and IP address logs from the exchange, tracked him down to an address in Gainesville, Georgia.

On November 9, 2021, law enforcement agents carried out a raid on Zhong’s house, where they discovered approximately 50,500 bitcoin in an underground floor safe and on a single-board computer submerged under blankets in a popcorn tin stored in a bathroom closet. Police also recovered $662,000 in cash, 25 Casascius coins (physical coins with a dedicated bitcoin holding) with an approximate value of 174 bitcoin, a further 11 bitcoin, and a selection of silver and gold coins and bars. The value of the haul at the time of Zhong’s arrest was a staggering $3.36 billion.

Zhong pleaded guilty to one count of wire fraud a year after his arrest, and was sentenced to a year and a day in prison last week, as well as the formal confiscation of all his seized assets. While Zhong may be cursing the fact that he never made the most of his loot, the likelihood is that once Silk Road was shuttered by the FBI in 2013, any attempt he made to sell the coins would likely have ended the same way eventually, so at least he was able to enjoy billionaire status for a few years, at least theoretically.

Trending stories

• Coinbase has been granted a license to operate in Bermuda, days after its CEO Brian Armstrong warned that crypto exchanges might move offshore if regulations don’t become clearer
• Do Kwon has been charged with using a fake passport by prosecutors in Montenegro and faces up to five years in prison
• The EU is set to implement the sweeping MiCA crypto regulations, the biggest of its kind yet imposed anywhere in the world

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