About Richard Paxton

CEO of the Alacer Group. Sharing the latest news in financial crimes and best practices that enable financial institutions to prevent money laundering.

Do Kwon is No Kenneth Lay, Not Yet Anyway

Regardless of the heinous crimes they are suspected of being guilty of committing, society’s gangsters and fraudsters have historically only lost their freedom because of money laundering charges. They are often the only charges that stick. It is what took down Al Capone, Meyer Lansky and John Gotti. Most recently, it is what took down the Crocodile of Wall Street. Now, apparently the South Korean government and the SEC have their eyes keenly focused on Terraform Labs, a decentralized price-stable cryptocurrency platform, its stable coin Terra(USD), its cryptocurrency Luna, and the man at the center of it all, founder Do Kwon.

Born in South Korea and a graduate of Stanford University, Mr. Kwon has gone from a crypto visionary to somewhat of a pariah in rapid time after Terra’s UST and LUNC tokens crashed in May, wiping out an estimated $40 billion (USD) in investor funds. In fact, Kwon is so deep he has recently been compared to Elizabeth Holmes of Theranos fame, and Enron’s Jeffrey Skilling and Kenneth Lay, by the cryptocurrency’s industry journal, Coindesk. Keep in mind, that title stemmed from an opinion piece, so you might want to take the following headline with a grain of salt. Too, I believe the subhead directly contradicts the headline…

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Ex OpenSea Exec Makes Money Laundering History

A former employee of the NFT marketplace OpenSea, Nathaniel Chastain of New York, was recently arrested and formally charged with wire fraud, money laundering and insider trading related to NFT launches that Chastain knew in-advance would be featured on OpenSea’s homepage, and therefore be good investments. How did he know which NFTs would be hot? Because he was the guy choosing the NFTs that got featured on the OpenSea homepage. It was his actual job!

This is the very first federal indictment for insider trading related to NFTs, setting a record that NFT fans and Chastain likely wish would disappear. Chastain doesn’t fit the profile of a career criminal, even if his crimes do. As the product manager the poor guy spent each day, all day surrounded by wild NFT success stories that make fortunes, like the Bored Ape Yacht Club before the thieving began. He had to post new NFTs to the homepage on a regular basis, most of which had successful launches as a result of the visibility provided by OpenSea’s homepage placement.

Chastain therefore knew ahead of time which NFTs were worth buying into. Yet he was not allowed to make investments in any of them. Such is the nature of a powerful position like his former gig. You can look at the merchandise, but you can’t touch it. Can you imagine the FOMO that man lived with? It is worse than working in a diamond mine.

According to the Department of Justice’s report, Chastain used an anonymous eWallet to conceal his NFT purchases and profits. That’s it — the entire scheme in a nutshell. He would typically buy dozens of a, soon-to-launch NFT’s tokens, right before he posted those NFTs on the OpenSea homepage. Afterwards he would sell the tokens and on average generated a profit of two to five times what he originally paid for them. Then he would cash out or use his crypto profits to buy more tokens.

I think Chastain, being a novice criminal, thought he was living on easy street and had it made. The problem was, he was using a money laundering tactic that even the FBI labeled as obsolete in its press release.

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NFT Thieves Turn Bored Ape Yacht Club into a Seedy Tavern

Things move so quickly in the decentralized world that one day a certain product or service is the hottest name in the market and then the next day, “poof!” Entire companies, crypto coins and crypto products, such as NFTs and crypto mixers become infested with financial fraud and either move to the Darkweb or disappear altogether as quickly as they arrived. As I have covered fairly extensively, the NFT is sort of the poster child for this market phenomenon. What was a star in the eyes of many is now so tarnished that the purchase of an NFT should come with a warning label.

Danger: this product does not protect the buyer from fraud, identity theft, or financial ruin

The Bored Ape Yacht Club (BAYC)is my case in point for the week. Have you heard the avalanche of bad news surrounding this one time, must-have NFT? Investors in the BAYC’s collection of apes have been getting robbed left and right, and the media has been fairly loud about it, mostly because the owners of these valuable jpegs that were victimized are celebrities. The list of celebrity BAYC members who have been robbed is pretty long, but the theft of actor Seth Greene’s (Robot Chicken) collection of apes has taken front and center stage. As a result, his story is overplayed at this point, but since it is somewhat weird it stays in the news cycle.

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Radio Shack Returns as a Crypto Swap

One thing I love about cryptocurrency and the whole concept of decentralization, the metaverse and Web-3 is the creativity in which it is moving forward. Just consider the NFT for a second. NFTs are like any other financial investment or security, if you will, but when you purchase a token you get something cool in return, a rather rare piece of digital “art”.

The most famous NFT is the Bored Ape Yacht Club, a collection of 10,000 jpegs featuring bored looking apes in different poses. Some people have gotten extremely rich from selling their BAYC investments, but that is not what makes them so trendy. It is the added layer of a shareable, rare and unique piece of artwork.

The NFT is the decentralized world’s most creative way of trying to impose itself on the somewhat staid and traditional American financial and securities industry. However, this creative business trend is not limited to NFTs. Just take a trip through Decentraland and tell me it isn’t visually stunning and really engaging on a user level. There are bars owned by Miller Lite (the MetaLite Bar), for example, that actually look like a cool and trendy hangout. The creativity meter goes higher when you consider how the companies, platforms and organizations that dominate the decentralized world are named, launched or acquired — case in point, the new Radio Shack. Yes, I said the new Radio Shack!

What American over the age of 20 is not intimately familiar with the Radio Shack brand? At some point in all of our collective lives, we visited Radio Shack because it was the only electronics store in town that actually carried the one thing you needed to, for example, splice your cable. Sadly, Radio Shack died after a long, painful death in 2017, the result of a massively growing internet marketplace full of every possible tool or cable or junction a person trying to fix something could think of. Radio Shack was brick and mortar to the end. When Radio Shack finally closed its doors a lot of our hearts broke. It was the end of an era.

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Hong Kong Phooey: Virtual Money Laundering Syndicate Foiled

A crime syndicate based in Hong Kong(HK) paid ‘digital mules’ up to $1,000 each to have them open virtual bank accounts in their names, and then give access to those accounts to the gang, which then used those accounts to launder illicit funds. These mules were a mix of restaurant employees, housewives, transport workers, the underemployed and the unemployed; people living paycheck to paycheck and therefore easy marks.

Prior to 17 of the syndicate’s crew of digital mules being (unfairly?!) arrested last week for conspiracy to launder money, they had effectively laundered just over $12 million(USD) for the syndicate in just 16 weeks. They were indeed prolific, in spite of being overexposed.

“We discovered that some of the accounts had 1,000 transactions involving more than HK$100,000 in a single day,” Senior Inspector Tuen Yuk-hang of the Kowloon East regional crime unit reported to the South China Morning Post. “The investigation suggests the money involved was crime proceeds generated from illegal gambling, loan-shark activities, and online shopping scams.”

Here’s the kicker for the gang and what makes my head spin because it is also why they got caught— they laundered their illicit, fiat money in exchange for fiat, instead of fiat for cryptocurrency and then back to fiat after a quick tumble in a Tornado Mixer. Duh. It is such a proven process that the Feds in the US want to put an immediate clamp on crypto, while China has already banned the use of crypto outright. Doesn’t everyone know that crypto is where it’s at these days for money laundering? Bitcoin, Ethereum, et al, and crypto’s associated products like NFTs have, in fact, brought about what I have labeled the golden age of money laundering.

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I Want My, I Want My NFT…Money Back, Please

Imaging applying Moore’s Law to the NFT. It would have been hard to imagine if, in 2020, you had told me that over the next two years the tech industry would introduce a cool technology innovation that would capture the public’s attention to the point of creating widespread FOMO. If you would have also told me it would be a creative, art product that would instantly be billed as one of ‘the hottest investments ever’ and would therefore be infested with huge amounts of money and endorsed by people of influence, such as the GOAT, Tom Brady, I would have laughed.

Why? Because everyone in my business circle knows that anything that sounds too good to be true financially always is, because in life and like Vegas, the house always wins when the players start winning too much. The short life of the NFT exemplifies that statement. I say short because although every influential brand, athlete or celebrity about to launch a lame NFT series wants you to believe that NFTs can still make you rich on a $30 investment, the reality is the NFT is in hospice care. The NFT is on life support and has been that way since the 2022 Crypto Super Bowl.

If you don’t believe me, just take the time to read the news. It is not pretty out there, as you can see from the following headlines, all generated in the last month. And no, this is not even the complete list:

G.O.A.T. token developer rug pulls for $260,000

Day of Defeat project rug pulls for $1.35 million

Hunter defi project rug pulls for $1.2 million

Pragma defi protocol developers rug pull for $1.5 million

How Did This Evolution Happen (so fast)?

I can’t explain the rapid life and death of the NFT to you from a technology perspective, nor could I explain it to Mr. Moore. I too, am in awe of the speed at which the NFT grew from a ‘tech insider’ thing that rapidly produced vast amounts of wealth for a lucky few, with just scant amounts of investment, to suddenly being the ‘thing’ for the wealthy and even you and I, to dump our dockets into as investments. That ‘get rich quick’ noise, of course, also attracted criminals. Not only were they looking for a soft spot to launder illicit funds, they also opened up channels for the widespread financial fraud, theft and corruption that is ultimately killing the NFT.

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NASDAQ Article Says Regulation Won’t Affect Crypto’s Core Values

Meanwhile the SEC Expands its Crypto Enforcement Unit

On Monday the SEC issued a press release announcing it had added 20 new positions to its Cyber Unit, which has been renamed the Division of Enforcement’s Crypto Assets and Cyber Unit. I like the name ‘Cyber Unit’ much better, especially from a branding perspective, but more importantly this news shows concrete evidence of federal resource investment in regards to regulating and ultimately, centralizing the cryptocurrency market.

Gurbir S. Grewal, the Director of the SEC’s Division of Enforcement was quoted in the press release stating that, “the bolstered Crypto Assets and Cyber Unit will be at the forefront of protecting investors and ensuring fair and orderly markets in the face of these critical challenges.”

I highlighted those words for obvious reasons. In the language of the SEC terms like, ‘fair and orderly markets’ allude to regulated markets. If you are an investor in Bitcoin, have no fear though, even if centralization of crypto is your biggest financial fear. A faction of crypto influencers actually think you should embrace regulation. In fact, the headline of an article written by a crypto market player and published by Nasdaq News the day after the SEC’s press release states, Regulation is No Threat to the Ethos of Crypto.

That’s kind of a bold statement, especially coming from Nasdaq. The article, if possible, should be read through an objective lens, simply because it was an opinion piece written by a guest contributor, rather than a Nasdaq News staff writer, who is the CEO of a company that provides privacy protocols for the public blockchain. He is also the founder of a Web 3.0 credit lending company that is on a mission to democratize affordable credit for under served communities, plus an award-winning international reggae and hip hop artist. In essence, he is your average crypto market superstar!

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What Happens When Your Virtual Twin Robs an NFT Pool?

The old saying, when one door closes another one opens, is remarkably true, especially if you are a 21st century criminal in constant search of new and more efficient methods to launder the proceeds of your illicit behaviors. For months now I have labeled the cryptocurrency era The Golden Age of money laundering because of the door of opportunity cryptocurrency and its associated products and services opened for cyber crooks. They took full advantage of that opportunity too, laundering an estimated $33 billion (USD) worth of crypto through that open door in the last five years.

However, as I have also mentioned over the past few months, those freewheeling days are numbered. Most governments around the world are aware of the rampant financial fraud taking place with not only crypto, but also NFTs. As a result, at least in America, a clamp down in the form of regulation and centralization of crypto and its associated products is on its way. Those crypto products and services that specialize in cleaning cash, such as mixers and tumblers, will most likely be outlawed. Cyber criminals will have to kiss them and some of their other ‘Darknet’ founded tools goodbye. Door closes?

What type of door opens however when Web(3), the metaverse and decentralization become integral to each of our daily lives? In the not too distant future many of our experiences in virtual arenas such as the metaverse will be played out by our unique avatars, or what have been labeled our ‘virtual twins’. The virtual twin, or what I like to call my digital doppelganger, is sort of the embodiment of the Web(3), metaverse user experience, right? Isn’t the metaverse basically Minecraft for adults? Sounds like fun and potentially profitable from a land grab standpoint, but the existence of millions of virtual twins also opens the door for criminal activity on a massive, never-seen-before scale. How?

Let’s say a crook hacks into your avatar and assumes your unique identity, and then rips off a series of crimes in the metaverse? For example, maybe you have your avatar set to autopilot for paying bills? For fun, instead of paying the rent on your virtual cannabis shop via direct withdrawal you have your avatar visit the bank, which is just across the street.

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Crypto Mining, the Environment & China’s Crystal Ball

A debate is simmering below the surface of the constant hype surrounding cryptocurrency. Is cryptocurrency and especially crypto mining harmful to the environment, or not? The science and the data supporting the argument that crypto mining and trading is harmful is fairly solid and we are starting to see more use cases published in reputable publications, such as MIT’s Technology Review, that support that side of the argument.

However, cryptocurrency industry influencers, investors and sideline fans are pushing back with rational arguments of their own. Where does the rubber meet the road? I am going to make it really simple — inequality. If we take two recent examples into consideration, perhaps I can better illustrate my point.

Plattsburgh and Messena, NY: did you know that upstate New York had some of the cheapest power rates in the US during the last decade? Cryptocurrency miners did, and as a result they infiltrated American communities where power prices were cheap, and basically destroyed them in pursuit of crypto wealth. According to a case study published in the MIT Technology Review, “crypto mining in upstate New York increased annual electric bills by about $165 million for small businesses and $79 million for individuals during the years 2016–2018.”

Crypto mining requires large spaces for storing massive server farms, which typically generate an extreme amount of heat. These server farms therefore require extensive cooling and ventilation systems in order to avoid shutoffs. So, in addition to increasing the prices of each resident’s energy bill in Plattsburgh, the crypto miners also caused noise and sound pollution. They were accused of using cooling fans that, according to Plattsburgh’s building inspector, “generated a constant, high-frequency whine, like a small-engine plane getting ready to take off. It registers at this weird level, like a toothache that won’t go away.”

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Bitcoin Will Be a Regulated Security by 2024

The White House recently issued an executive order that, in essence, said the federal government will spend the next few months studying how to address the decentralized and therefore unregulated cryptocurrency market. That EO is essentially like foreshadowing in a novel. If you are invested in crypto, beware. The government is coming for its cut and will get it before Bitcoin can reach its nirvana; the prophesied $100k per coin price.

I suspect we could see the beginnings of crypto centralization before the end of 2022, and complete centralization by 2024. Holding, at this point, is a misguided game of hubris and arrogance.

In spite of this warning and others, many cryptocurrency enthusiasts will act shocked when it happens and engage in social media meltdowns, screaming to the ether that centralization is unfair and an attack on their freedoms. A new subreddit will emerge that could overtake the famous Wall Street Bets in site popularity as the ‘crypto uninformed’ become informed by pseudo experts and longtime crypto fans, all of them voicing their advice, snake oil and rage in the world’s best echo chamber. And it won’t affect the government’s centralization plans in the slightest.

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