On Monday, Judge Brendan Shannon of the U.S. Bankruptcy Court for the District of Delaware approved the Seattle-based Bittrex’s plan to wind down its U.S. operations following a series of dust-ups with U.S. federal authorities. The move doesn’t impact operations at the Liechtenstein-based Bittrex Global, which caters to non-U.S. customers.
Bittrex filed for Chapter 11 bankruptcy protection of its U.S. operations in May after the U.S. Securities and Exchange Commission (SEC) filed civil charges for offering securities to U.S. customers while failing to register with the SEC as a broker-dealer, exchange, and clearing agency. The SEC alleged that the activity had been ongoing since Bittrex made its U.S. debut in 2014.
A few weeks before those charges were filed, Bittrex announced plans to suspend trading at its U.S. exchange ahead of a full shutdown by April 30. Bittrex cited “continued regulatory uncertainty” as the reason for the cessation of operations. Bittrex and its co-founder/ex-CEO, William Shihara, reached a settlement with the SEC in August, agreeing to pay $24 million to forego further investigation.
That wasn’t Bittrex’s first unfortunate brush with U.S. authorities, having been penalized $29.3 million by the Department of the Treasury’s Office of Foreign Assets Control (OFAC) in October 2022. The OFAC penalty stemmed from “deficiencies related to Bittrex’s sanctions compliance procedures,” specifically related to customers in Cuba, Iran, Sudan, Syria, and Ukraine’s Crimea region.
May’s bankruptcy filing also impacted Bittrex’s Malta-based operations, which previously served as its international-facing exchange until 2019, when the Liechtenstein unit was established. However, Bittrex kept its Malta-licensed businesses active, and Bittrex said in May that “a few” of its Malta customers had failed to transfer their assets following that transition.
In September, Bittrex said customers had withdrawn around $423 million worth of digital assets between its shutdown announcement and the April 30 halt of operations. A further $143 million was withdrawn by 35,972 customers while Bittrex was in bankruptcy protection.
But Bittrex said those nearly 36,000 customers represented only three percent of its 1.6 million total customers, leading to questions as to why the overwhelming bulk of customers appeared disinterested in claiming their rightful property. Even Judge Shannon acknowledged the “unusual features” of this case.
Know your customer[‘s pressure points]
In September, Bittrex attorney Patty Tomasco told the bankruptcy court that 77% of the unclaimed balances were under $100, and most of these accounts had been inactive for over a year. Based on information she’d gleaned from Bittrex-specific Twitter (X) and Reddit channels, Tomasco said the prevailing sentiment among these account holders was “I don’t want to give you all that information” in order to reclaim less than a hundred bucks.
“All that information” in this case was standard “know your customer” (KYC) protocols, including date of birth, social security or Employer Identification Numbers, and driver’s license or passport data. This means that such information either hadn’t been collected when customers originally signed up for their accounts, or customers were simply unwilling to provide updated data (for reasons either understandable or unsavory).
However, a Michigan customer who requested anonymity “because they work in crypto” told Axios they found the claims process “super slow and disjointed.” This customer gave up trying to recover the $300 in their Bittrex account based on the level of frustration they experienced. But other customers Axios spoke to were able to successfully complete this process without undue grief.
Regardless, the abandoned sums mean Bittrex will likely emerge from bankruptcy with a healthy profit, even after accounting for bankruptcy costs. Tomasco told the court that some of these remaining funds would be used to pay off the “significant” regulatory penalties levied against Bittrex by U.S. authorities.
(While this strategy wouldn’t have helped Sam Bankman-Fried plug the $8 billion hole in his FTX exchange, we suspect that Binance’s criminal customer base would be seriously KYC-phobic, regardless of how many millions might be in their exchange accounts. Then again, Binance has the type of customers that would likely come after Changpeng ‘CZ’ Zhao with thumbscrews if he tried to stiff them, so maybe not.)
Secret Customer Service
Interestingly, one of Bittrex’s major U.S. customers was none other than the U.S. Secret Service, which Tomasco told the court had “one of our largest accounts, at $6.2 million.” To no one’s surprise, the government actually provided the necessary information to complete the KYC’d withdrawal.
What’s more interesting is why the Secret Service had a seven-figure stash on the exchange in the first place, given that its primary role is protecting the President and other public figures. However, the Secret Service does have an active cybercrime investigative unit, and familiarity with digital assets has been known to help in such investigations.
For instance, the Secret Service helped Seattle-based tech investor Gregg Bennett recover around 100 BTC tokens that were stolen from his Bittrex account in 2019 by Graham Clark, who was only 16 at the time. Clark, who in 2020 conducted the infamous Twitter account hijacking, originally stole 164 BTC from Bennett, but the other 64 BTC were reportedly never recovered. Hmmm…
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