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A Crypto Micronation’s Future Hangs on a Border Dispute

A Crypto Micronation’s Future Hangs on a Border Dispute

Shooed away, the Liberty parked up on the opposite riverbank, on the Serbian side, just outside Liberland territory. Its passengers disembarked on a makeshift ramp made of planks and a ladder. The others had already arrived. “You haven’t been arrested yet?” said Štern-Vukotić. “Well, the day is still young.”

In spite of the police presence, the scene was a happy one; it was easy to forget, temporarily, the strangeness of the situation. Davide’s twins had built a fire on the bank and were toasting food on sticks. On the middle deck of Liberty, meats were barbecued and served with salads and bread. Liberland-branded wine, made from local grapes, was passed around.

After people finished eating, Jedlička called for attention. It was time to award the newest citizens their Liberland passports. The group applauded and hollered as the passports were handed over and presidential handshakes accepted, and broke into a chorus of “Lib, lib, lib, lib, lib, lib!”—a chant that came out whenever there was cause for celebration.

For the next month, Liberty remained parked on the opposite side of the river to Liberland, with someone stationed aboard to provide support for the settlers coming down the river from Hungary, and to relay Wi-Fi to any that managed to make camp inland.

The rest of the party returned to Apatin on the other boats, but not before another go at setting foot on Liberland. A small craft attempted the crossing, but a police boat shepherded it away from the shore, whipping water into the hull with sharp turns. On this occasion, the would-be settlers were easily repelled.

On the boat ride home, wrapped in a blanket to shelter from the wind, Rubio, the ex-pastor, sat ruminating. For all the celebrations, the weekend had left him worried about the future of Liberland. “Where are all the followers?” he asked.

It was a fair observation. Of the 70 to 80 people at the anniversary, few were not directly affiliated with the Liberland government. Once the president and his cabinet, the delegates, and the speakers were counted, Rubio was one of only a few “followers” that had made the journey. By Jedlička’s reckoning, only 300 or so people have ever set foot on Liberland soil.

Part of the problem is the emphasis on crypto, Rubio believes, which threatens to alienate those for whom Liberland is primarily a political endeavor. “I found the idea of Liberland attractive—the romantic idea of freedom and living in peace. But they are centering the message in technology,” said Rubio. “It’s part of the bones, the skeleton—but you need the heart.” If Jedlička aims to attract the support of libertarians, said Rubio, he should be preaching the new country’s values openly on social media. Nation-building requires activism, after all, and a careful topping-up of momentum.

But Liberland, like crypto projects before it, may not be able to count on its founder to carry it forward forever. Although Jedlička has promised to dedicate his full energy to Liberland at least until “things are really on track,” he has grander ambitions. “I’m quite excited about space exploration,” he said, “and the area of longevity.”

“I think Liberland would already survive without me. But of course it would lose momentum,” Jedlička continued. “I will do my best to make sure that Liberland gets internationally recognized first.”

As the boats headed back through Serbian waters, they passed the ruin of a larger boat, abandoned near the mouth of the Apatin marina. The fallen vessel, also owned by the Liberlandians, had caught fire, sunk, and been sold for scrap. The wreckage listed to the side, the lower deck almost fully submerged. Rubio gestured to the wreck: “I hope this is not a premonition for Liberland.”

This article appears in the September/October 2023 edition of WIRED UK.

Coinbase and Binance Lawsuits Put Crypto on Ice

Coinbase and Binance Lawsuits Put Crypto on Ice

For the second time in 24 hours, the US Securities and Exchange Commission has sued a major cryptocurrency exchange. Yesterday, the regulator filed charges against Binance and its CEO, Changpeng Zhao, with accusations of manipulative trading practices, mishandling customer assets, and failures of corporate control. Today, the SEC followed up with a suit against the Nasdaq-listed exchange Coinbase, alleging that it has violated securities laws.

The double salvo sends a clear message that the SEC is gunning for crypto. The upshot of this could be that US investors lose access to popular crypto assets. 

“We are reaching an end state where if the current regulatory crackdown in the US proceeds unchecked, then you’re basically banning most crypto activity in the US,” says Omid Malekan, an adjunct professor at Columbia Business School and author of Re-Architecting Trust: The Curse of History and the Crypto Cure for Money, Markets and Platforms

The SEC’s latest complaint doubles down on its long-standing assertion that many crypto tokens are simply securities, as defined under existing laws in the US. That means they fall under its purview, the regulator says. Based on that interpretation, the suit, filed in the Southern District of New York, accuses Coinbase of knowingly operating an unregistered securities exchange by selling tokens, including Sol, Ada, and Matic, to US investors. The SEC also accuses Coinbase of violating securities law in connection with its staking service, which lets customers earn profits on certain crypto holdings by pooling them and locking them up.

“You simply can’t ignore the rules because you don’t like them or because you’d prefer different ones: The consequences for the investing public are far too great,” said Gurbir S. Grewal, director of the SEC’s enforcement division, in a public statement. “Coinbase was fully aware of the applicability of the federal securities laws to its business activities, but deliberately refused to follow them.”

Like Binance yesterday, Coinbase turned the finger of blame back on the regulator, claiming the SEC has failed to mark out a road to compliance for crypto businesses. “The SEC’s reliance on an enforcement-only approach in the absence of clear rules for the digital asset industry is hurting America’s economic competitiveness,” says Paul Grewal, the company’s chief legal officer. Coinbase has “demonstrated commitment to compliance,” he claims, and will continue to operate as usual while it defends against the complaint.

This tension—over the interpretation of existing securities laws and whether they apply to crypto—will form the center of the case to come, says Noelle Acheson, an independent crypto analyst. “It’s very much game on,” Acheson says.

With the filings against Coinbase and Binance, the SEC has now formally alleged that seven of the top 15 largest cryptocurrencies are securities. Bitcoin is considered an exception, and the SEC has not rendered a clear verdict on Ether, but the agency “seems to be using a broad rubric by which to classify these tokens as securities,” says Molly White, author of crypto-skeptic blog Web3 Is Going Just Great

Bankrupt Crypto Companies Are Fighting Over a Dwindling Pot of Money

Bankrupt Crypto Companies Are Fighting Over a Dwindling Pot of Money

Legal experts, though, say they’re skeptical of FTX’s chances. Marc Powers, adjunct professor of law at Florida International University, who acted as counsel in the liquidation of Bernie Madoff’s infamous Ponzi scheme, says that the exchange is attempting to “jump ahead of the other creditors” in the GGC bankruptcy. “Why should the FTX bankruptcy, or FTX as a potential creditor of Genesis, be more important than any other?” he asks.

The largest of those GGC creditors is Gemini, the crypto exchange founded by Cameron and Tyler Winklevoss. The firm’s yield farming service, Gemini Earn, which allowed customers to earn interest on their crypto, fed into GGC’s loan book. When the lender filed for bankruptcy, $900 million of Gemini customers’ assets were locked inside.

Gemini has already liquidated $280 million worth of collateral posted in August by GGC to make back some of the funds lost. But should FTX be successful in its clawback, the 340,000 Gemini Earn customers will be left significantly out of pocket. Gemini did not respond to a request for comment.

“I don’t think the Genesis bankruptcy court will grant the motion of FTX,” Powers says. “Given the size of the claim, I think it would be extremely disruptive.”

Yet in the event the motion is granted, things will get messy. There would effectively be two judges, from different jurisdictions, involved to some degree in both bankruptcies, says Powers. “That’s generally not good.”

If the case proceeds, GGC will likely argue that the $1.8 billion in loan repayments were made in the ordinary course of business, which would exempt them from being recalled. There are also questions, Powers and others point out, posed by FTX’s failure to specify the dates of the withdrawals in its filing.

But it’s not guaranteed that, even if the New York judge allows FTX’s claim to continue, the dispute will ever get to court. The likelihood that clawback cases make it all the way to litigation, says Alan Rosenberg, partner at law firm MRTH and member of the American Bankruptcy Institute, is low—they almost always end in settlement. And FTX can use this fact to its advantage. “The truth is, there’s an economic consideration to be taken into account when defending [against clawbacks],” says Rosenberg. “Even if you have a great defense, it’s going to cost money to litigate. So you have to make a decision as to whether it’s more cost-effective to pay an amount to get rid of the claim.”

The only mercy for creditors, says Rosenberg, is that both FTX and GGC—as bankrupt entities—have a fiduciary duty to reach an agreement as quickly as possible. “Everybody’s goal is to make a distribution to creditors. The more you fight, the more it will deplete the estate,” he says. “Both parties have an interest in reaching a resolution swiftly.”

Ahluwalia doesn’t share the same optimism. He says the likely result would be a protracted negotiation between the lawyers of FTX and GGC over the validity and scope of the clawback claim—all of which will be paid for on the creditors’ dime.

Settling these issues will take time. But the longer the legal conflict goes on, the more money leaks from the creditors’ pot into the pockets of the law firms. “I don’t think the FTX claim is valid. I think it’s a stretch,” says Ahluwalia. “I think John Ray is billing creditors for a remote possibility. And who is making out like bandits? The lawyers.”

China’s Metaverse Is All About Work

China’s Metaverse Is All About Work

That ban helped set the path for the development of the Chinese metaverse, experts say, since it decoupled virtual spaces from digital assets. “The key difference [in the metaverse] between China and the rest of the world is it’d be heavily regulated in a centralized manner,” says Zhengyuan Bo, a partner at China-focused research firm Plenum. “And there’s only limited space for growth without [digital assets] for monetization.”

It isn’t just crypto that the government has cracked down on. Gaming—which has formed a pillar of the metaverse in the West—has also come under pressure from the top. Amid fears that young people were becoming addicted to online games, state media dubbed the industry “spiritual opium.” Between  2018 and 2022, the government froze the issuance of licenses for new games for 17 months in total and, in 2021, limited minors to three hours of gaming time per week.

But the government is willing to back pieces of the metaverse that it feels could be directly beneficial to the economy. Digital twins were included in Beijing’s 14th Five Year plan, the enormous economic strategy document that sets the national agenda from 2021 to 2025. An action plan published late last year by five ministries, including the Ministry of Industry and Information Technology, promised to grow the virtual reality industry to 350 billion yuan ($51 billion).

The high-level plan identified innovations they’d like to see more of, including near-eye display (a way to project images onto a user’s eye); rendering processing (turning 2D or 3D models into realistic images), sensory interaction, and network transition.

But support from the government is conditional—Beijing has a vision for what metaverse tech is going to do for China. That means, instead of a virtual world where people can socialize, work, and play, the metaverse needs to serve China’s physical economy.

“At the current stage, everyone emphasizes industrial applications from education, medical, travel and industrial development,” says Siri Chen, HiAR’s marketing director, speaking from the company’s headquarters in Shanghai’s Zhangjiang Hi-Tech Park. In a demo for WIRED, a HiAR employee acted as a factory worker in a HiAR headset and was remotely asked to fix a valve.

Other metaverse-related companies have pivoted in anticipation of investment from the government. For Eric Liu, cofounder and CTO of Shanghai-based digital twin company Digitwin Technologies, the 14th Five Year Plan has helped underpin his company’s shift to focus on energy and manufacturing—“a field that previously wasn’t ready” for this kind of tech, he says.

While the Chinese government’s desire to shape the metaverse may limit its scope, state support may mean it doesn’t fall victim to the notoriously fickle tech sector, which moves on from trends at great speed. Startups often try to be “in the middle of a whirlwind,” meaning the right trend with an explosive growth potential.

“If anything gets buzzy in China, you see companies swarm into the space,” says Jingshu Chen, cofounder of VR company VeeR. “However, if growth isn’t as fast as their expectation, more companies are also likely to pivot.”

The Hunt for the FTX Thieves Has Begun

The Hunt for the FTX Thieves Has Begun

That means it will be very difficult for the thieves to abscond with their profits in a spendable form without being identified, says Michelle Lai, a cryptocurrency privacy advocate, investor, and consultant who says she’s been tracking the movements of the stolen FTX funds with “morbid fascination.” But the real question, Lai says, is whether identifying the thieves will offer any recourse: After all, many of the most prolific cryptocurrency thieves are Russians or North Koreans operating in non-extradition countries, beyond the reach of Western law enforcement. “It’s not a question of whether they’ll know who did it. It’s whether it will be actionable,” says Lai. “Whether they’re onshore.”

In the meantime, Lai and many other crypto-watchers have been closely eyeing one Ethereum address that is currently holding around $192 million worth of the funds. The account has been sending small sums of Ethereum-based tokens—some of which appear to have little to no value—to a variety of exchange accounts, as well as Ethereum inventor Vitalik Buterin and Ukrainian cryptocurrency fundraiser accounts. But Lai guesses that these transactions are likely meant to simply complicate the picture for law enforcement or other observers before any real attempt to launder or cash out the money.

The pilfering of FTX—whether the theft totals $338 million or $477 million—hardly represents an unprecedented haul in the world of cryptocurrency crime. In the late-March hack of the Ronin bridge, a gaming cryptocurrency exchange, North Korean thieves took $540 million. And earlier this year, cryptocurrency tracing led to the bust of a New York couple accused of laundering $4.5 billion in crypto.

But in the case of the high-profile FTX theft and the exchange’s overall collapse, tracing the errant funds might help put to rest—or confirm—swirling suspicions that someone within FTX was responsible for the theft. The company’s Bahamas-based CEO, Sam Bankman-Fried, who resigned Friday, lost virtually his entire $16 billion fortune in the collapse. According to an unconfirmed report from CoinTelegraph, he and two other FTX executives are “under supervision” in the Bahamas, preventing them from leaving the country. Reuters also reported late last week that Bankman-Fried possessed a “back door” that was built into FTX’s compliance system, allowing him to withdraw funds without alerting others at the company.

Despite those suspicions, TRM Labs’ Janczewski points out that the chaos of FTX’s meltdown might have provided an opportunity for hackers to exploit panicked employees and trick them into, say, clicking on a phishing email. Or, as Michelle Lai notes, bankrupted insider employees might have collaborated with hackers as a means to recover some of their own lost assets.

As the questions mount over whether—or to what degree—FTX’s own management might be responsible for the theft, the case has begun to resemble, more than any recent crypto heist, a very old one: the theft of a half billion dollars worth of bitcoins, discovered in 2014, from Mt. Gox, the first cryptocurrency exchange. In that case, blockchain analysis carried out by cryptocurrency tracing firm Chainalysis, along with law enforcement, helped to pin the theft on external hackers rather than Mt. Gox’s own staff. Eventually, Alexander Vinnik, a Russian man, was arrested in Greece in 2017 and later convicted of laundering the stolen Mt. Gox funds, exonerating Mt. Gox’s embattled executives.

Whether history will repeat itself, and cryptocurrency tracing will prove the innocence of FTX’s staff, remains far from clear. But as more eyes than ever scour the cryptocurrency economy’s blockchains, it’s a surer bet that the whodunit behind the FTX theft will, sooner or later, produce an answer.