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Crypto Open Patent Alliance is rotten to the core

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 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.

According to the suit, Saylor evaded income taxes by fraudulently pretending that he lived in lower-tax states such as Florida or…

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