Thursday links: Private keys, non-compliance, token factories, relearning finance

Seal Team Crypto?

The Department of Justice is in possession of $15 billion worth of bitcoin seized from Chen Zhi, the Chinese national accused of running industrial-scale romance scams out of Cambodia.  

Notably, the haul of 127,271 bitcoin was “previously stored in unhosted cryptocurrency wallets whose private keys the defendant had in his possession.” 

“Those funds,” the statement adds, “are presently in the custody of the US government.” 

But Chen Zhi is not.

So the question is, how did they get his bitcoin???

Did the NSA hack into his laptop and install malware to interfere with his Chrome-extension crypto wallet? 

Probably not, because you’d hope that $15 billion of bitcoin would be airgapped from the internet. 

But maybe Mossad sold him a compromised, possibly exploding hardware wallet.

Or did Seal Team Six burst into his study and grab the piece of paper he had scribbled his seed phrase on?

But those keys were “in his possession”…so why didn’t they grab Chen as well???

The most appropriate alternative, of course, would be if the US government got him with a romance scam: I can’t wait to finally see you! I just need $15 billion sent to this Coinbase Prime account for the plane ticket…

It’s possible, because love — like justice — is blind.

Stablecoin non-compliance 

Crypto’s onchain watchdog, ZachXBT, reports that funds stolen in a high-profile hack have been moving around freely in stablecoins.

“Threat actor from the Coinbase breach swapped ~5M DAI for ~5M USDC that was sitting as USDC for 35 minutes,” ZachXBT posted on his Telegram channel this week. 

“Due to Circle not being compliant,” he added, “the funds were just bridged away.”

(The hackers responded by posting an onchain message calling ZachXBT a “bozo,” and linking to a video of UNC-great James Worthy smoking a self-congratulatory cigar.)

I’m not cynical enough to believe Circle is being deliberately non-compliant.

But the truth might be similarly bad: The stablecoin “compliance” regime of freezing suspect accounts is simply ineffective. 

Chainalysis, for example, recently reported that in 2024, a majority of illicit crypto transactions — 63%! — were conducted in stablecoins.

Would Chen Zhi’s pig butchering haul been safer in stablecoins then?

Probably not — a stash that large would not go overlooked.

But for more modest amounts, criminals appear to find the risk of having their ill-gotten funds frozen by a stablecoin issuer to be smaller than the benefit of keeping them in dollars.

CZ gets his pardon

Following today’s news that President Trump pardoned Binance founder Changpeng Zhao, White House press secretary Karoline Leavitt explained that CZ’s conviction for money laundering and sanctions evasion was the result of President Biden’s “war on cryptocurrency.”

His instructions to staff to let banned US users know “they can change their KYC on Binance.com and continue to use it” were apparently incidental to the conviction — as was his documented statement that “we are already doing a lot of things that are obviously not in line with the United States [banking laws].”

“Don’t leave anything in writing,” he added, in writing.

CZ’s pardon was reportedly motivated by the “political persecution” he suffered, and not, as some cynics might suspect, Binance’s central role in promoting the president’s crypto tokens, or the $2 billion of World Liberty’s stablecoin it unnecessarily holds.

CZ was simply a businessman who pushed the envelope of financial innovation a little too creatively.

“Better to ask for forgiveness than permission,” he once told Binance employees.

He was right!

Token factories

The only thing creating tokens faster than crypto is AI.

Billions of crypto tokens are minted on Solana every day: tens of thousands of new memecoins, spawning billions of units each.

But ChatGPT alone was trained on trillions of inference tokens.

You might be thinking these two things with the same name have as much in common as a river bank and an investment bank.

But Ribbit Capital argues the common use of “token” is more than linguistic coincidence — instead, it sees it as a profound sign of convergence.

What unites crypto and AI tokens is their shared purpose: making the world legible to machines through tokenization.

“Broadly construed,” Ribbit Capital writes, “tokenization is the process of rendering the world for computers.”

For AI, that means breaking down human language and knowledge into discrete, machine-readable units. 

For crypto, it means turning money, assets and identity into “machine-first” primitives.

In that sense, inference tokens and crypto tokens do the same job: They’re the fundamental units that make the human world actionable for software.

“Every business,” Ribbit Capital writes, “is becoming a supplier to, builder of, or orchestrator of token factories — digital engines that will transform money, knowledge, and power around the globe.”

This, it predicts, will create a “Token Revolution” that’s destined to break down the “barriers that the status quo uses to impede progress.”

Inspiring stuff!

Let’s just hope the factories really do make something good.

Reinventing TradFi

0xResearch reports that the upcoming public sale of MegaETH tokens is being deliberately underpriced, in-line with a recent trend of projects using discounted token sales as part of their “go-to-market strategy.”

This could be seen as a “community tax” — “the best way to build a community is to reward them early and give them something to believe in.”

Or it could be seen as the same thing that’s always happened in equities.

Crypto natives have always pointed to IPO discounts as evidence of big banks colluding to steal money from unwitting companies on behalf of their cunning institutional customers.

But the truth is more prosaic: Selling a small part of your equity at a discount has always been seen as a marketing cost.

Most things that happen in TradFi happen for a reason.

— Byron Gilliam

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