In 2021, Jack Dorsey spearheaded the formation of the Crypto Open Patent Alliance (COPA) along with Coinbase chief legal officer Paul Grewal and used it to launch a significant legal assault on Dr. Craig Wright and his claim to the inventorship of Bitcoin. COPA’s formation and subsequent lawsuit were hailed by critics of Dr. Wright and Bitcoin as some sort of reckoning for Dr. Wright; however, in the months and years since, the opposite has proven to be true. One by one, COPA’s members—including those serving as the Alliance’s founding members—have been brought up on criminal or civil charges by various regulators, and many of those that have not been are reported to be under active investigation by one law enforcement agency or another.
The latest example of this came on Monday when the U.S. Securities and Exchange Commission (SEC) filed charges against Kraken exchange for illegally selling digital asset securities and comingling customer and corporate funds to the extent that Kraken was actively drawing from customer accounts in order to pay its operating expenses.
Among COPA’s membership, Kraken’s legal troubles are the rule rather than the exception. Kraken is just the latest member to be hit with regulatory charges, but as of 2023, half of the Alliance’s leading platinum members have faced or are currently facing investigations into their businesses for fraud, market manipulation, money laundering violations, or any number of other charges. Dr. Wright and BSV blockchain, notably, have emerged from the regulatory bloodletting fully unscathed.
So, how has COPA’s membership fared in the eyes of the law—particularly in the years since it sued Dr. Wright in 2021?
COPA board member 1: Coinbase
Let’s start with COPA’s so-called platinum members, who amount to the Alliance’s core leadership. Six companies are currently listed in this tier: Dorsey’s own Square (formerly Block), Coinbase (NASDAQ: COIN), Meta (NASDAQ: META), Microstrategy (NASDAQ: MSTR), Aquarius, and BtcTurk.
Half of these companies have in the past or are currently the target of serious law enforcement investigations.
The most obvious—and probably the most high profile of COPA’s upper echelon—is Coinbase. The world’s biggest exchange by volume in 2023, Coinbase has been unable to evade regulatory scrutiny.
In 2021, Coinbase was ordered to pay a $6.5 million fine to the Commodity Futures Trading Commission (CFTC) for false, misleading, or inaccurate reporting and wash trading. According to the SEC, between 2015 and 2018, the platform had recklessly delivered false reports concerning BTC transactions on its platform and, in particular, was operating two automated trading accounts that traded against one another on the Coinbase platform.
In January, Coinbase was forced to pay a $50 million fine to the New York Department of Financial Services (DFS). The New York financial regulator discovered that Coinbase had violated anti-money laundering laws by allowing customers to open accounts on the platform without being subjected to identity and background checks. Coinbase was also forced to invest $50 million in building out its compliance program, which had evidently been an abject failure until that point.
Amidst all this, reports began to surface that the SEC was quietly investigating the company for operating as an illegal securities exchange. To some, this was obvious: the SEC and other regulators began signaling in 2022 that it considered most assets listed on platforms like Coinbase to be illegal securities. The SEC went as far as sending a Wells Notice to Coinbase and other exchanges, warning them of exactly that fact—a warning that apparently went unheeded.
When the SEC finally made its move against Coinbase, it turned out to be worth the wait. In June 2023, the SEC formally charged Coinbase with operating an unregistered national securities exchange, broker, and clearing agency, as well as for failing to register its digital asset staking program as a securities offering.
The charges named a dozen or so assets listed by Coinbase that it said are, in fact, illegal securities, but it’s clear from the assets selected and the tone of the SEC’s filings that these are a representative of a much larger pool of securities being sold by Coinbase. Analysts predicted that based on the SEC’s view of digital asset securities, a full 37% of Coinbase’s net revenue was at risk of vanishing if the SEC succeeds in its case—and that’s based on the SEC’s tenuous assumption that BTC is not currently a security, something that is likely to change any day.
Despite Coinbase being hauled before regulators multiple times before the SEC brought down its own hammer, Coinbase still tries to argue that it had no idea its conduct was illegal.
That the COPA lawsuit kicked off a slow death for its members is as clear as can be in the case of Coinbase: the filing of the lawsuit coincided with Coinbase going public. Opening at $342 the week of the filing, COIN now sits at a relatively paltry $105.49 as insiders spent the last couple of years dumping their bags as the threat of inevitable regulatory action hung overhead.
Add their litigation battle with Dr. Wright—both as a member of COPA and as defendant in another case in which Dr. Wright argues that Coinbase and others are illegally passing off Bitcoin knock-offs (such as BTC) as the real thing—and Coinbase can fall a lot further before it hits the ground.
COPA board member 2: Jack Dorsey’s Block
There’s also Block itself, formerly known as Square. Block is Jack Dorsey’s fintech company, which initially focused on enabling payments for small and medium-sized businesses; it has since expanded to consumer payments by launching CashApp.
Despite being the de facto leader of COPA’s crusade against Dr. Wright, it is Block that has been put on the ropes since the COPA lawsuit was filed.
In March 2023, reputed short seller Hindenburg Research published the results of a two-year investigation based on “dozens of interviews with former employees, partners, and industry experts, extensive review of regulatory and litigation records, and [Freedom of Information Act] and public records requests.” It exposed Block for having “systematically taken advantage of the demographics it claims to be helping” and “dressing up predatory loans and fees as revolutionary products, avoiding regulation and embracing worst-of-breed compliance policies in order to profit from its facilitation of fraud against consumers and the government.”
According to Hindenberg, Block has been massively inflating its consumer activity figures, with as much as 75% of CashApp’s supposed 51 million active users coming from fake, fraudulent, or duplicate accounts.
If Block were compliant, such a drastic overestimation of its userbase would be extraordinarily difficult because Block should be subjecting new accounts to anti-money laundering and know-your-customer procedures, including by collecting social security numbers and monitoring accounts for suspicious activity.
Worse than that, CashApp appears to have actively used these lax controls to cultivate the fraudster demographic, further boosting accounts. Remarking on the number of accounts that appear to be linked to a single identity, a Block employee quoted by Hindenberg said that the users “must be doing something, you know, risky.”
According to Hindenburg, these compliance failures have created an environment of rampant fraud within the CashApp ecosystem, with fraudulent accounts being used to effect scams. The report provides an example of a Mississippi Church that mistakenly sent hundreds of dollars to fraudulent CashApp accounts, posing as the church’s pastor: CashApp apparently took no action despite being alerted to the fraud by the victims.
CashApp’s failure to take action against such fraud is apparently such a common occurrence that the Consumer Financial Protection Bureau (CFPB) opened an investigation into Block on the basis that it may have “failed to adequately address customer concerns regarding fraud.” In January, the CFBP was forced to secure a court order demanding that Block respond to its document requests after it said that their investigation was being “stymied by Block’s slow-walking.”
Around the same time, the Bank of Lithuania reprimanded Block for “serious and systematic infringements of the prevention of money laundering and terrorist financing.” The reprimand was accompanied by a $250,000 fine.
Block stock has yet to recover from the decline initiated by the Hindenburg report, which initially saw the stock lose 20% of its value the morning of the expose.
COPA board member 3: Microstrategy
Microstrategy makes for a conspicuous member of COPA’s upper membership. Headed by Michael Saylor.
Microstrategy and Saylor have a storied history of brushing up against the law. One of the oldest Microstrategy headlines available comes from a 2000 SEC press release, announcing that it had settled a case against three Microstrategy executives—Saylor included—for accounting fraud. Under Saylor, the company had “materially overstated its revenues and earnings from the sales of software and information services contrary to Generally Accepted Accounting Principles.”
In effect, Microstrategy was cooking its books to hide the fact that the firm was losing money rather than making it. The overstatement was enough that when Microstrategy announced it intended to restate its financial results for the relevant fiscal years, Microstrategy stock dropped from a high of $333 to $86.
Each of the three executives was ordered to pay a disgorgement of $10,000,000—the majority of which had to be paid by Saylor ($8,280,000). Each was also forced to pay a $350,000 civil penalty.
After such a successful episode for the company, entering the BTC racket must have felt like a natural next step. In 2020, Saylor announced that Microstrategy would be converting its entire corporate treasury into BTC—tying the company’s fortune to that of BTC (perhaps fatally if its recent earnings are to be believed).
Regardless, Saylor did end up in hot water with the SEC, again over questionable accounting practices. As tied to BTC as Microstrategy was— and is—the company was pulled up by the SEC in 2022 for improperly adjusting the valuation of its BTC to mitigate the apparent effects of short-term drops in BTC prices.
Saylor’s tax woes continued later in 2022 when the District of Columbia sued him and Microstrategy for $25 million in unpaid taxes.
NEW: Today, we’re suing Michael Saylor – a billionaire tech executive who has lived in the District for more than a decade but has never paid any DC income taxes – for tax fraud.
— Archive: AG Karl A. Racine (@AGKarlRacine) August 31, 2022
According to the suit, Saylor evaded income taxes by fraudulently pretending that he lived in lower-tax states such as Florida or Virginia despite having lived in D.C. for over a decade. Microstrategy allegedly corroborated the fraud by reporting to the IRS that Saylor’s primary address was in Florida despite knowing that it was, in fact, a D.C. address.
Between the back taxes and the penalties being sought by D.C., Microstrategy and Saylor could collectively be on the hook for $100 million. The defendants tried and failed to have the suit thrown out in February, and the case is still ongoing.
COPA’s general members: birds of a feather flock together…
When 50% of COPA’s managing members are locking horns with regulators and law enforcement on what seems to be a regular basis, it’s not so surprising that its general membership is similarly afflicted with an unwillingness to abide by the law.
Kraken is the most obvious example of this. The most recent charges from the SEC are similar to those aimed at Coinbase: illegally offering digital asset securities without registering with the SEC. But the Kraken allegations include new wrinkles, including specific allegations that the company commingled customer funds and freely drew from its customer asset chest to cover its operating expenses. Such a flagrant disregard for corporate controls puts Kraken in a similar position to FTX and Alameda pre-crash.
Kraken’s initial response contains a rather flimsy defense on this point, which is to say that Kraken argued that the SEC was not alleging that such commingling led to the loss of any customer funds.
That defense would be laughable at the best of times, but considering Kraken has already been charged (and effectively fined) by the SEC for illegal securities offerings, the company is unlikely to receive much goodwill from either the SEC or the courts. Earlier in 2023, Kraken was forced to settle SEC charges in relation to its digital asset staking program, which the SEC said was an illegal securities offering. The company paid a total of $30 million in disgorgement, interest, and civil penalties.
However, Kraken isn’t the only constituent of COPA’s general membership to find themselves on the wrong side of the law. In 2021, Bittpay, another member, was forced to pay a $500,000 USD settlement to the U.S. Treasury for 2,102 ‘apparent violations of multiple sanctions programs.’ According to the settlement, BitPay processed transactions to and from Crimea, Cuba, North Korea, Iran, Sudan, and Syria despite provably having access to location information with respect to each transaction.
Not content to hand over a mere 500k, Bitpay later agreed on another settlement in April 2023, this time to the New York Department of Financial Services. The NYDFS accused Bitpay of failing to implement proper cybersecurity and anti-money laundering controls on its platform between 2018 and 2021. This time, Bitpay would pay $11 million.
Blockstream is another COPA general member. Blockstream, founded by Adam Back, is itself a nexus of shady digital asset companies. By Back’s own words, Blockstream’s purpose is to “sell sidechains to enterprises, charging a fixed monthly fee, taking the transaction fees and even selling hardware”—in other words, it has a vested interest in keeping actual transactions off the blockchain so it can be paid to manage those transactions itself.
Take Blockstream’s Liquid side-chain, which works by replacing BTC’s on-chain proof-of-work model with a system whereby Blockstream chooses a small group of digital asset exchanges to validate the transactions themselves and then submit them in batches to the main chain. Those chosen to serve as Liquid Federation Members tell a story on their own: it includes Bitfinex, which is owned by the same parent (iFinex) that owns Tether. These names should be familiar to anyone watching the industry closely because it was Tether that helped Bitfinex cover up enormous financial losses using the funds that were supposed to be backing the Tether stablecoin. A New York Attorney General investigation into this incident exposed Tether for lying about its backing and ultimately led to Bitfinex being banned from operating in New York.
The list goes on. Huobi, another Liquid Federation member, was recently added to the U.K.’s Financial Conduct Authority warning list for marketing its services to U.K. customers without authorization violating the law. BitMEX is also a member, despite BitMEX’s founders all being indicted for willfully failing to implement money laundering controls in the company as required by the Bank Secrecy Act.
A reckoning for COPA
The sheer volume of regulatory penalties, law enforcement actions, and civil suits shared between COPA’s members—even counting only those that arose after it sued Dr. Wright in 2021—put the idea of COPA somehow bringing a reckoning to Satoshi’s doorstep in a rather laughable light. In reality, there has been a reckoning in the time since COPA was formed— it’s just that it’s been a reckoning for the non-compliant side of the digital asset industry, of which a large portion of COPA’s membership seems to be a part.
The cherry on top of this dessert of fraudsters and market manipulators is that the man they made their own enemy number one—Dr. Wright—has been predicting their current legal troubles all along. Take a look at this blogpost from January 2021—immediately before COPA formed with Coinbase as one of its founding members.
“In discussing XRP, I was told that it was ‘crypto,’ so it wouldn’t be a security. Basically, the executives at Coinbase did not care. They were informed of the nature of XRP and of the action with BTC and its copying of the Bitcoin database and the creation of a new system. Coinbase, though, doesn’t care about reality. They care about ensuring that their clients lose money trading. Overall, trading is a zero-sum game. But, some of the fees go to Coinbase.”
COPA, Coinbase included, would sue Dr. Wright mere months after this post. And some years later, Coinbase would, in fact, be charged for knowingly and illegally listing digital asset securities. They can’t say they weren’t warned.
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Ethereum, FTX and Tether—who have co-opted the digital asset revolution and turned the industry into a minefield for naïve (and even experienced) players in the market.
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