But recently cracks have been appearing in their façade of respectability, big enough that even the New York Times has noticed. The Humbling of Coinbase by David Yaffe-Bellany and Mike Isaac summarizes the situation:
Coinbase rose to prominence as one of the first major crypto companies, a gateway to the chaotic world of digital assets for amateur investors. But as it has grown from plucky start-up to publicly traded company, its status as an industry leader has been threatened by a series of missteps and a steep decline in the crypto market over the last six months.Below the fold I probe into some of these cracks.
Trying To Sell Unregistered SecuritiesLast September David Gerard described the Coinbase Lend fiasco:
Encouraged by BlockFi and now Celsuis’s complete lack of any issues with the authorities, popular crypto exchange Coinbase decided it would get into the crypto lending game too — with Coinbase Lend! Coinbase would make loans, and you could buy a share in the loans. [Coinbase, archive]
As it happens, this is a type of security called a “bond”, and it’s listed in the first page of the Securities Act of 1933.
The SEC sent Coinbase a Wells Notice — the letter they send before prosecuting. Coinbase haven’t put the letter up, but they did say it was the SEC threatening them with prosecution if they went ahead with Lend.
Coinbase’s CEO, Brian Armstrong, posted a Twitter thread about the SEC’s “really sketchy behavior,” and Chief Legal Officer Paul Grewal blogged about how “We don’t know why.” [Twitter; Medium]
The responses divided roughly into:
crypto people: darn that SEC and their vicious lack of regulatory clarity!The SEC tweeted a helpful thirty-second video explaining what a bond was. [Twitter]
non-crypto people: it’s clearly a bond, Coinbase can’t possibly be this stupid in real life.
Doomberg wondered how the Wells Notice could be about Lend, because it hadn’t launched yet — “you don’t get a Wells Notice for something you are considering doing, you get one for deeds you’ve already done.” But Coinbase filed an 8-K about the Wells Notice, saying it was for Lend. [Substack; SEC]
Coinbase insiders dumped a pile of stock the day they received the Wells Notice. Coinbase pointed out that the sale was scheduled in the proper manner — but you’d think a Wells Notice was a sufficiently material event to cancel such a dump. [Twitter; Medium]
Eventually, Coinbase realised that a public company blatantly violating the Securities Act after an SEC warning is probably not a winning move — even if it gets you clout on crypto Twitter. Lend is no longer being offered. The company plans to still argue the point, though. [Coinbase, archive; Twitter]
Fiasco In IndiaThe same week that Coinbase announced their launch in India:
Coinbase got some bad news. A government-backed group issued a statement suggesting that the company would be unable to use a crucial payments platform — a system that was supposed to allow Coinbase customers to convert their rupees into virtual currencies like Bitcoin and Ether. Not long after its grand opening, Coinbase halted much of its trading service in India.
Despite its early start, Coinbase has never had a strong hold over the international market, which is dominated by Binance. The company went into India despite widespread uncertainty about how the government would react, an approach that industry experts considered unwise.
Misleading Customers About Their Funds And KeysIn April David Gerard reported on panic among Coinbase's customers:
In April, the SEC put forward new accounting rules for holding cryptocurrencies on behalf of a customer: you should account these as liabilities. [SEC]It was clearly news to many Coinbase customers that they were not protected by SIPC, like customers of a real exchange, or FDIC, like customers of a real bank.
So Coinbase duly stated in their quarterly 10-Q SEC filing that: [SEC]
because custodially held crypto assets may be considered to be the property of a bankruptcy estate, in the event of a bankruptcy, the crypto assets we hold in custody on behalf of our customers could be subject to bankruptcy proceedings and such customers could be treated as our general unsecured creditors.Not just cryptos on deposit for trading — but cryptographic private keys that customers gave Coinbase to look after, because keeping your keys safe turns out to be super-hard.
Proper banks cannot rifle through the safe deposit boxes to pay their bills — but Coinbase isn’t a bank, it just wants to pretend it’s as safe as one, when it absolutely isn’t.
Coinbase put on its “no risk of bankruptcy” shirt, which promptly raised a lot of questions answered by the shirt. [FT, paywalled; Twitter]
"Losing Money Running A Casino"In the same post Gerard added the wry note:
The 10-Q filing also revealed that Coinbase had somehow managed to lose buckets of money running a casino. Shares in Coinbase fell 23%. [Bloomberg]Coinbase Sinks After Warning the Slide in Volume to Worsen by Olga Kharif and Yueqi Yang provided more datils:
Coinbase Global Inc. shares tumbled after first-quarter revenue missed estimates and the largest U.S. cryptocurrency exchange warned that total trading volume in the current quarter will be lower than in the first.Note that when the story came out, BTC was trading at $31.5K, a month before Terra/Luna would start the slide to below $20K.
The company’s shares fell about 16% after the close of regular trading. Monthly transacting users fell to 9.2 million, below an estimate of 9.5 million. First-quarter revenue slumped to $1.17 billion, while analysts were expecting revenue of $1.48 billion, according to Bloomberg data.
Coinbase earns the bulk of its revenue from trading fees, and its shares have fallen to all-time lows -- down more than 70% from where they traded when the company went public a year ago.
NFT Marketplace FiascoCoinbase was late to the NFT bubble:
Coinbase hoped to unveil the marketplace in the first quarter of 2022, Mr. Saxena said in an interview. But it was delayed until late April. By that point, the broader NFT market had cratered: Sales were down more than 80 percent from the fall.
After its release, the marketplace got scathing reviews. In the last week of July, it generated about $24,000 a day in trades; its main competitor, OpenSea, which serves as a kind of eBay for NFTs, generated 600 times that amount.
Tolerating Insider TradingThe next issue arrived with Coinbase Insider Trading Arrest Highlights “Altcoin” Problem by Max Chafkin, who started by explaining Coinbase's notorious "pivot to shitcoins":
Shortly after taking his company public, Armstrong announced that Coinbase would expand the number of coins listed on its service to keep up with investor demand. ... Over the next year, the company would add more than 100 new tokens.How did the pivot work out?
This made a certain amount of sense. Up to that point, Coinbase had been more cautious than competitors, listing only Bitcoin, Ether, and a handful of other well-established tokens. These restrictions had mostly kept its customers from getting wrapped up in the scams, hacks, rug-pulls, and pump-and-dump schemes that have dogged crypto for years. But Coinbase’s restraint created an opportunity for competitors—especially Binance, which offered hundreds of tokens—to gain market share.
At first, the pivot to shitcoin seemed to work out for Coinbase, which saw its stock price climb in the months that followed as digital asset speculation approached its peak. But in hindsight, one could be forgiven for seeing the move as reckless. Last week, federal prosecutors arrested a former Coinbase product manager, Ishan Wahi, accusing him of insider trading.In "You Don't Own Web3": A Coinbase Curse and How VCs Sell Crypto to Retail, Fais Khan explained the opportunity for insider trading at Coinbase:
For years, being listed for trading on Coinbase has been the holy grail of crypto - the equivalent of an IPO on Wall Street. And like an IPO, that seems to come up with a “pop” - Messari, a crypto research firm, documented in a report that the average Coinbase listing leads to a 91% gain in 5 days, on average.
And in The Unstoppable Grift: How Coinbase and Binance Helped Turned Web3 into Venture3, Fais Khan explains how these price spikes led Coinbase to list shitcoins:
the average returns on Binance blew Coinbase out of the water - although the difference in the returns was staggering.Doubling in four days is quite the ROI, and thus quite the temptation. Not just for A16Z and the other VCs to run List And Dump Schemes, but also insiders:
And the thing is, I think Coinbase knows that. Because if you look at the direction they took in 2021, they made a sharp turn to not only add a lot more assets, but being first to list coins, even some on the first day.
That seems risky to me. These are coins with tiny floats that may have only been founded as little as a year prior, and now they’re in the hands of tens of millions of retail investors - who the data shows are often less sophisticated than investors in stocks.
Why else does it matter? It’s also clearly the direction all of the industry is going in: exchanges creating huge venture funds and then aggressively listing coins (often that they’ve invested in) faster and faster. All while they shovel tens of billions of dollars into web3 startups to create an “ecosystem” of more coins that they can use to generate trading revenues.
Prosecutors said that starting last June, Wahi tipped off his brother and a friend about new listings, which allowed them to make about $1.5 million in profit by buying lightly traded cryptocurrencies ahead of new listings.Chafkin points out that the insider trading wasn't exactly secret:
The incident hardly suggests rigor on Coinbase’s part, however. The alleged insider trading seems to have been first spotted by a crypto influencer, Jordan Fish, who tweets under the pseudonym Cobie (short for Crypto Cobain) and who said he’d been complaining publicly for months about insider trading on Coinbase. That Coinbase investigated his Twitter tip is to the company’s credit. On the other hand, as Cobie put it, “surely Coinbase should have found this before randoms on Twitter did?”Coffeezilla interviewed Cobie, who pointed out that it was even worse (my transcript):
Cobie: Coinbase has had listings front-running issues for a while. Originally they only listed like Bitcoin and they had this policy like they were only going to list the best of the best. And then as time passed and they got to like the last couple of years, meme stocks became a thing and obviously they went public, they started losing market share. They sort of changed their policy and started listing like real, real, real garbage but at the same time they started having a lot of issues around people buying the garbage they were listing beforehand. Then they published this blog post about how they're going to change all their listing processes so that this stuff cannot happen in the future and they can get better controls around it. And the very next listing, every single coin got front-run once again.How did Cobie know?:
Cobie: I'm in a little group of like crypto people who like look at interesting blockchain stuff and one sent this Etherscan link and said "hey, has anyone looked into this, I think these things are going to get listed on Coinbase because they all got bought again by a person who front-run successfully last time. Does anyone know what any of these are? Some of them seem like really, really garbage". I think one of them was called "The Food" or something. I looked at the link, I waited for the coins to get added, about 80% of the ones that were bought on this day were added. So then I tweeted the screenshot of everything he purchased and the blog post like a few weeks ago saying we're tightening up our controls just to say like Coinbase is clearly incompetent at these issues, they're unable to stop it. They've just done this whole song and dance about how much they're going to improve the ecosystem and how much they care about like getting these things right and the very next coin listing has been front-run.Wahi was a Coinbase employee. He was part of the team responsible for listing new coins. He had been front-running for 18 months. Coinbase didn't notice this until Cobie tweeted about it. He was arrested at the airport as he tried to flee to India.
Actually Selling Unregistered SecuritiesThe very same day Allyson Versprille and Lydia Beyoud reported that Coinbase Faces SEC Probe on Crypto Listings; Shares Tumble:
Coinbase Global Inc. is facing a US probe into whether it improperly let Americans trade digital assets that should have been registered as securities, according to three people familiar with the matter. The company’s shares dropped 21%.The "digital assets that should have been registered as securities" are the shitcoins to which Coinbase pivoted in an attempt to catch up to Binance.
The US Securities and Exchange Commission’s scrutiny of Coinbase has increased since the platform expanded the number of tokens in which it offers trading, said two of the people, who asked not to be named because the inquiry hasn’t been disclosed publicly. The probe by the SEC’s enforcement unit predates the agency’s investigation into an alleged insider trading scheme that led the regulator last week to sue a former Coinbase manager and two other people.
Forcing Arbitration On CustomersGreg Stohr's Coinbase Asks Supreme Court to Halt Account-Holder Suits shows how Coinbase thinks unhappy customers' disputes should be handled:
Coinbase Global Inc. asked the US Supreme Court to halt two lawsuits by users of the cryptocurrency exchange platform while the company presses appeals that seek to send the cases to arbitration.How likely is it that an arbitrator will rule for the little guy?
In one case, a man says Coinbase should compensate him for $31,000 he lost after he gave remote access to his account to a scammer. In the other, Coinbase is accused of violating California consumer law by holding a $1.2 million Dogecoin sweepstakes without adequately disclosing that entrants didn’t have to buy or sell the cryptocurrency. Both suits seek class action status.
Federal trial judges in both cases rejected Coinbase’s bid to send the disputes to arbitration, which the company says is required under its user agreements.
Staking Customer's CoinsYueqi Yang's Coinbase Under SEC Scrutiny Over Its Crypto-Staking Programs reveals:
Coinbase Global Inc. said it’s being probed by the US Securities and Exchange Commission over its staking programs, which allow users to earn rewards for holding certain cryptocurrencies.
The company “has received investigative subpoenas and requests from the SEC for documents and information about certain customer programs, operations and existing and intended future products,” according to a quarterly regulatory filing. The requests relate to Coinbase’s staking programs, asset-listing process, classification of assets and stablecoin products, the company said.
At Coinbase, blockchain-rewards revenue, primarily from staking, accounted for 8.5% of net revenue in the second quarter. It fell 16% sequentially to $68.4 million during the quarter, less than the decline in trading revenue.
And The Result IsCoinbase Falls After Second-Quarter Revenue Misses Estimates by Olga Kharif and Yueqi Yang reports on the outcome:
Shares of the company, which were first listed last April, dropped about 4% after the close of regular trading. Coinbase has slumped 65% so far this year
Revenue declined to $808.3 million, missing the $854.8 million estimate from analysts polled by Bloomberg. Monthly transacting users dropped to 9 million in the second quarter, a 2% decline from prior quarter.
Coinbase lost $1.1 billion in the three months ended June 30, including a $446 million non-cash impairment charges related to investments and ventures, making it the largest amount since it became a public company.
They're Not AloneAnother example of a supposedly trustworthy US exchange heavily into cryptocurrencies is Robinhood. Robinhood Crypto Unit Fined $30 Million by New York Regulator by Annie Massa reveals that:
Robinhood Markets Inc.’s cryptocurrency arm was fined $30 million by New York’s financial regulator after the brokerage was accused of violating anti-money-laundering and cybersecurity rules.
The unit must enlist an independent consultant to monitor compliance, according to an order filed Tuesday. The firm disclosed last year that it expected to pay the penalty.
The enforcement action by the New York State Department of Financial Services underscores the continued regulatory scrutiny Robinhood faces, even as it pushes a message to investors that it’s taking a “safety first” stance toward digital tokens.
Not directly related to cryptocurrencies, but Jody Godoy and Hannah Lang's Robinhood must face U.S. market manipulation claims over 'meme stock' rally, judge rules continues the trend:
"Stock trading platform Robinhood Markets Inc (HOOD.O) must face market manipulation claims over restrictions it placed on trading during last year's "meme stock" rally, a U.S. judge ruled on Thursday.
U.S. District Court Judge Cecilia Altonaga in Miami said in the ruling that investors in GameStop Corp (GME.N), AMC Entertainment Holdings Inc (AMC.N) and seven other stocks can proceed with a proposed class action lawsuit alleging the restrictions artificially depressed share prices."
Frances Coppola explains Why Coinbase's balance sheet has massively inflated:
"A note to the financial statements explains that as of June 2022, Coinbase has taken all customer assets on to its own balance sheet. It was already recording customer cash balances on its balance sheet, but now it is also recording customer crypto holdings. The size of the "safeguarding" liability is far too large for it to represent assets in Coinbase's custody service. It must include assets in ordinary wallets. So Coinbase is no longer simply hosting wallets and providing a platform for peer-to-peer transactions. It is taking custodial responsibility for every customer asset on its platform."
This is a result of the SEC issuing "SAB 121":
"The SEC, it seems, is not satisfied that keeping customer assets off the platform's own balance sheet and those of its agents necessarily means the assets are either bankruptcy remote or protected from fraud, theft, technological failure or other losses beyond the customer's control. So, in the interests of protecting customers from these risks, it has simply decided to make the platforms and their agents liable for everything."
This is a big deal:
"The accounting itself is simple enough. But the implications for exchanges and platforms are far-reaching. No longer can the costs of hacks, security failures, bugs and exploits, rug pulls, scams and frauds be dumped on customers by means of coercive deposit haircuts and token issuance. Exchanges and platforms will have to hold sufficient crypto assets of the right quality to be able to reimburse customers for any and all losses from events like these. And if there is a shortfall, that must be borne by their owners and shareholders, not by their customers."
Lawrence Abrams reports that Hackers steal crypto from Bitcoin ATMs by exploiting zero-day bug:
"Hackers have exploited a zero-day vulnerability in General Bytes Bitcoin ATM servers to steal cryptocurrency from customers.
When customers would deposit or purchase cryptocurrency via the ATM, the funds would instead be siphoned off by the hackers"
Kari McMahon posted Crypto Careers: Chiefs of Vibes Help Projects Navigate Web 3.0 about the role of "directors of vibes" in crypto companies. Ed Zitron's When Vibes Aren't Enough is a devastating takedown:
"The correct term for this nebulous role is ‘evangelist,’ or ‘judas goat.’ These people are con-artists, working for con-artists, helping con people by telling them that things will be alright when “alright” is dictated by the whims of the ultra-rich people controlling the industry. If you require a role to “make people feel better about the markets,” and you do not control the markets, all you are doing is trying to convince people to invest in (or not exit) a market so that you don’t lose money. While the same could be said of many other roles, in the case of cryptocurrency, these people exist entirely to keep people from leaving the system. They are unlicensed therapists with the worst possible agenda - propping up the interests of rich people that have constructed a system where they profit almost entirely from exploiting those under them.
This is a great time to say that if cryptocurrency had a real utility or purpose, there would be no need for a “director of vibes.” There is no need for a Business Insider article about a job that mostly appears to be posting memes and being saccharine as the world falls apart"
Alison Jimenez asks What can we learn from CFPB Consumer Cryptocurrency Complaints?. One thing we learn is:
"Coinbase is the firm identified in 61% of the complaints"
Coinbase denies a report in the WSJ that, according to Molly White, Wall Street Journal suggests that Coinbase tested proprietary trading:
"According to a report in the Wall Street Journal, US-based cryptocurrency exchange Coinbase tested a group to speculate on cryptocurrencies in hopes of earning funds for the business. The WSJ said they performed a $100 million "test trade" before ending the initiative. Some Coinbase employees described the project as proprietary trading—something Coinbase has testified in front of Congress to say they don't do. Prop trading is controversial because of the potential conflicts of interest, in which firms can end up effectively trading against their own customers."
Michael Bellusci's Crypto Exchange Coinbase Sued Over Patent Infringement reports that:
"Coinbase Global (COIN) is being sued by Veritaseum Capital LLC, which alleges that the crypto exchange has infringed on a patent awarded to Veritaseum founder Reggie Middleton.
According to Veritaseum, Coinbase has used the patent for some of its blockchain infrastructure, and the company is seeking at least $350 million in damages."
Molly White reports Coinbase experiences major outage related to U.S. bank accounts:
"The largest crypto exchange in the U.S., Coinbase, suffered a six-hour-long outage in which they couldn't take payments or make withdrawals involving U.S. bank accounts."
It isn't just Coinbase. Molly White reports that Bittrex fined $29 million for sanctions violations:
"The OFAC sanction was imposed due to 116,421 reported sanctions violations in which Bittrex failed to prevent people in Crimea, Cuba, Iran, Sudan, and Syria from using their service. In total, these prohibited individuals performed more than $263 million in transactions on the platform.
The FinCEN fine was imposed due to "willful violations" of the Bank Secrecy Act's requirements pertaining to anti-money laundering (AML) and suspicious activity reports."
Jeremy B. Merrill and Steven Zeitchik report that Crypto scam victims seek to hold Coinbase responsible for losses:
"Over the past year, thousands of people have lost tens, if not hundreds, of millions in cryptocurrency when gangs of sophisticated scammers whisked their money out of their accounts, which are managed by an app from the publicly traded cryptocurrency giant Coinbase.
Now those victims are fighting back. Nearly 100 people are trying to hold Coinbase accountable, saying the company didn't do enough to protect them. Scam victims says they notified the company, begging it to fix defects in its Coinbase Wallet software that had allowed the victims unknowingly to grant the scammers access to their accounts."
Sketchy as Coinbase is, there are many exchanges far sketchier. Probably the sketchiest is Binance, whose efforts to evade US regulators are described in Tom Wilson and Angus Berwick's must-read How Binance CEO and aides plotted to dodge regulators in U.S. and UK:
"new reporting by Reuters reveals fresh details about Binance’s strategy for keeping regulators at arm’s length and continuing disarray in its compliance programme. The reporting includes interviews with around 30 former employees, advisers and business partners and a review of thousands of company messages, emails and documents dated between 2017 and early 2022.
It shows that in 2018, Zhao approved a plan by lieutenants to “insulate” Binance from scrutiny by U.S. authorities by setting up a new American exchange. The new exchange would draw regulators’ attention away from the main platform by serving as a “regulatory inquiry clearing house,” according to the proposal. Executives went on to set the plan in motion, company messages show.
In public, Zhao said the new U.S. exchange – called Binance.US – was a “fully independent entity.” In reality, Zhao controlled Binance.US, directing its management from abroad, according to regulatory filings from 2020, company messages and interviews with former team members."
Hannah Miller's Crypto Startup Chia’s New CEO Isn’t Giving Up on IPO Goals suggests a little distance from reality:
"Hoffman said Chia will file with the Securities and Exchange Commission for a traditional initial public offering soon, but that the company does not plan to make its public debut this year. “We are very realistic that this market is not going to be open for us,” he said.
Hoffman said the company, which now employs about 80 people, is open to getting new funding, despite the market downturn. “We’re always looking at options to be able to raise additional capital,” he said."
Coinbase Posts $557 Million Quarterly Loss as Revenue Slumps 75% by Yueqi Yang and Olga Kharif illustrates the problem for exchanges caused by the Greater Fool Supply-Chain Crisis:
"Coinbase Global Inc., the biggest US cryptocurrency exchange, posted a $557 million loss and saw revenue tumble 75% in the fourth quarter as trading volumes plunged amid a series of prominent industry bankruptcies and scandals.
While the $629 million in revenue for the three-months ended in December was higher than the average analyst estimate of $581 million, it was about a quarter of the $2.5 billion registered in the year-earlier period. The loss, which was equal to $2.46 a share, was compared with net income of $840 million, or $3.32, in the 2022 quarter, the company said in a statement Tuesday. Trading volume missed estimates. The company expects first-quarter subscription and services revenue between $300 million and $325 million.
The loss was the fourth consecutive one for Coinbase, which has suffered from the wild fluctuations of crypto prices."
Stephen Council reports on Coinbase's customer service in ‘Unscrupulous’: Man sues Coinbase in San Francisco after scammers take $96,000:
"Jared Ferguson had $96,000 stolen from his Coinbase wallet last May and holds the cryptocurrency platform responsible, according to a complaint he filed Monday in San Francisco’s U.S. District Court. The company, the complaint said, completely denied wrongdoing."
He got SIM-swapped then:
"He messaged Coinbase immediately about the unauthorized transfers, the complaint said, but the company eventually told him, “Please note you are solely responsible for the security of your e-mail, your passwords, your 2FA codes, and your devices.”
In the complaint, he harangues Coinbase for authorizing the transfers and for not providing him with the documentation of how it decided to deny his dispute."
Coinbase Gets SEC Notice Signaling Intent to Sue Over Crypto Offerings by Allyson Versprille, Yueqi Yang and Sonali Basak reports on the Wells notice Coinbase received:
"Coinbase said the so-called Wells notice regards aspects of its exchange including an undefined segment of its listed digital assets as well as the staking service Coinbase Earn and Coinbase Wallet.
This isn’t the first time Coinbase has received a Wells notice. The SEC warned the company in 2021 that it considered the company’s proposed “Lend” product, which would have allowed users to earn interest by lending out their crypto holdings, to be a security. The exchange later canceled the launch."
Dirty Bubble Media's Brother, can you spare a COIN? makes a convincing case for shorting Coinbase:
"So Coinbase is a shrinking business expected to lose money for at least the next two years WITHOUT any significant changes to its business model. And guess what? These obvious financial issues are only the icing on top of more foundational concerns. It turns out that Coinbase’s entire business model is at risk of annihilation at the hands of regulators…"
Coinbase Senior Director Is Leaving to Start New Crypto Project by Muyao Shen supports the short thesis:
"Vishal Gupta, a Goldman Sachs veteran who was most recently senior director of product management at digital-asset trading platform Coinbase Global Inc., is leaving the company to work on a new project, according to a person familiar with the matter.
Before Coinbase, he was at Circle Internet Financial Ltd., in charge of launching the company’s flagship USD Coin, the stablecoin that trades under the ticker USDC. He also spent eight years at Goldman Sachs Group Inc. as vice president and head of US listed options."
In Coinbase Sued for Privacy Violations Over Customer Biometrics Robert Burnson reports that:
"Coinbase Inc. illegally collects face templates and fingerprints of its customers in violation of Illinois’ biometric privacy law, according to a proposed class-action lawsuit.
The cryptocurrency exchange harvests facial data from copies of government-issued IDs and selfies that users are required to upload when they sign up for an account, according to the suit filed Monday in federal court in San Francisco.
Subsequently, Coinbase harvests fingerprint data when customers log into their accounts using the required fingerprint scanning technology, accord to the suit."
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