FT Cryptofinance: Michael Saylor’s tax troubles

Hello and welcome to the FT’s Cryptofinance newsletter. This week we’re taking a look at Michael Saylor, one of the world’s loudest bitcoin supporters.

Some people become inextricably linked to defining eras of market manias.

The names of Jack Grubman and Henry Blodget, Wall Street analysts, help tell the story of the dotcom era. Dick Fuld, Chuck Prince and Jimmy Cayne, heads of Lehman Brothers, Citigroup and Bear Stearns, are etched into narrative of the 2008 financial crisis. For the cryptocurrency boom and bust of 2021-22, Michael Saylor is one of the best-known names. Just as bitcoin is having a year to forget, the 57-year-old software executive is too.

A quick reminder for the uninitiated: Saylor was the chief executive of MicroStrategy, a business software company, but became bitcoin’s chief evangelist in the boom. He tried to wrap the technology in gnomic phrases such as “Bitcoin is the most universally desirable property in space and time” while ploughing company money into the original and biggest cryptocurrency. In June of this year, filings showed MicroStrategy held about $4bn worth of bitcoin, down from $5.7bn at the end of 2021.

Then came the crash. Bitcoin’s value has plummeted over 50 per cent year to date, and has shown little sign of recovery. After watching his company’s financial resources dwindle on the wrong side of the bet, last month he stepped down as MicroStrategy’s CEO to become executive chair with responsibilities for its “bitcoin acquisition strategy”. Hmm.

Things got even worse for Saylor this week. The District of Columbia attorney-general sued him for tax evasion, alleging he’d avoided paying more than $25mn in taxes in the US capital by pretending to live in Florida, when he really resided in Washington DC.

The suit is a fascinating read, if only to see how the AG office — with a whistleblower’s help — trawled social media posts, yacht photos, local newspapers and private jet flight logs to build its case.

Saylor said he disagreed with the lawsuit and that he lives in Florida.

Saylor’s high profile may be a warning shot to others. The lawsuit cites an interview Saylor gave in January 2021 in which he said bitcoin was an ideal tool for evading taxes.

Where next for one of crypto’s more colourful personalities? MicroStrategy says the suit is a “personal tax matter” for Saylor, even as the regulator named the company as a defendant, alleging that it conspired to help him evade the taxes he owes. The firm added that “the District of Columbia’s claims against the company are false and we will defend aggressively against this over-reach”.

Yet writing valedictory pieces may be premature. As a recent portrait of Saylor by my colleague Richard Waters noted, he has rock-solid self-assurance.

Indeed, a man willing to declare in public that “Bitcoin is a swarm of cyber hornets serving the goddess of wisdom, feeding on the fire of trust, exponentially growing ever smarter, faster and stronger behind a wall of encrypted energy” is not one lacking in confidence.

He has also resurfaced from losing vast amounts of wealth and brushes with authorities before. In March 2000 he saw more than $6bn wiped from his personal wealth in a single day in when MicroStrategy adjusted its accounting and restated two years of revenue. He then paid a penalty of $8.3mn to settle a later Securities and Exchange Commission investigation into the accounting, without admitting or denying wrongdoing.

One thing is unlikely to change, irrespective of Saylor’s upcoming legal battle. My colleague Jemima Kelly asked him a few weeks ago what the consequences would be if it turned out he was fundamentally wrong on bitcoin. “We would already be out of business if we hadn’t done it, and I don’t think we’re wrong,” he said.

On Thursday, hours after the AG filed its suit, he was out tweeting: “Bitcoin is good energy.”

Have thoughts on what you’d like to read in this newsletter? Email me at scott.chipolina@ft.com.

The week’s highlights

• Some failures are more amusingly unfortunate than others, and the disappearance of OptiFi does not disappoint. It was a decentralised exchange powered by Solana until Monday, when a developer working on an upgrade accidentally shut down the entire project beyond recovery. In their defence, the developers fronted up as best they could but it’s not a tale that covers them in glory. Optimistically, they asked their users: “How can we do better?” On the blockchain, it’s not just transactions that are immutable. Your mistakes are too.

• Traditional finance has some failsafes for stupid errors. Crypto.com won a court order in Australia for the return of its funds after it accidentally transferred A$10.5mn to an Australian woman, instead of a A$100 refund. The company then failed to notice for seven months. She spent some of it on a house but the court has ordered her to sell the property and repay the money.

• Ukrainian police are cracking down on crypto. A search of alleged call centres uncovered a criminal scheme allegedly misappropriating funds of citizens across Ukraine and the EU under the guise of crypto, securities, gold and oil trading.

• Sam Bankman-Fried, chief executive of crypto exchange FTX, has some lofty ambitions but buying rival exchange Huobi isn’t one of them. This week, he tweeted “Just to be explicit because apparently a lot of people are saying this: No, we are not planning to acquire Huobi.”

Soundbite of the week: Congressman takes aim at crypto scammers

Congressman Raja Krishnamoorthi, who also serves as chair of the subcommittee on economic and consumer policy, sent letters to Binance, Coinbase, FTX, Kraken and KuCoin asking for information about how they combat crypto fraud. The Treasury Department and Securities and Exchange Commission were also on the list of recipients.

“The lack of a central authority to flag suspicious transactions in many situations, the irreversibility of transactions, and the limited understanding many consumers and investors have of the underlying technology make cryptocurrency a preferred transaction method for scammers.”

Data mining

A few weeks ago in this newsletter we looked at the Merge, a long-awaited upgrade to the Ethereum blockchain that aims to drastically reduce its carbon footprint.

At the time of writing, it’s still likely to take place around September 15-19 but developers haven’t set a hard deadline.

Nobody really knows what it means for the price of ether, the native currency to Ethereum, because a change this significant to such a major blockchain is unprecedented in crypto’s short history. Over the past month ether has gone on a round trip from $1,500 to $2,000 and back again.

In the past three months there has also been a 65 per cent decline in active Ethereum wallet addresses, according to data from the FT Wilshire Digital Assets Dashboard. Typically, an increase in unique wallet activity signals broadly positive market sentiment.

The futures market, which is widely used to bet on the price of cryptocurrencies, suggests many traders are preparing for the unexpected. The number of ether futures contracts, denominated in ether, is at an all-time high, according to Kaiko research, and most bets are positioned for a fall.

That could just as easily be insurance as much as speculation. Collectively, the signals suggest investors are covering the possibility of both rapid gains and sudden drops in coming weeks.

That’s it for this week. See you at the same time next Friday. Have a great weekend!