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Good Morning,
This week's signal cuts through the noise on multiple fronts: a high-profile investor war at WLFI, a governance blowup on Bittensor, record crypto fraud losses from the FBI, and a sovereign wealth fund quietly offloading bitcoin. The throughline is trust, and right now, it's eroding fast across projects, protocols, and institutions alike.
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In Today's Email:
What Matters: Justin Sun Accuses WLFI of Hidden Backdoor 👀
Product of the Week: Covenant AI Quits Bittensor🔎
Charts: Crypto Fraud Hit $11.4B, Bhutan Continues Offloading BTC 📊
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Narratives: Trust Under Pressure
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WHAT MATTERS
Justin Sun Accuses WLFI of Hidden Backdoor
State of play: Justin Sun, WLFI's largest outside backer, went public with fraud allegations against the Trump-backed project, claiming a hidden blacklisting function in the token contract was used to freeze his 545M tokens, now down over $80M in value.
Sun alleges WLFI embedded an undisclosed backdoor giving the team unilateral power to freeze and confiscate any holder's assets without notice or recourse.
Sun's wallet has been frozen since September 2025 after he moved roughly $9M of WLFI between addresses, a move WLFI never publicly justified at the time.
Sun, who invested $75M in WLFI and $100M in the TRUMP memecoin, carefully framed his attack as against "bad actors at WLFI" rather than Trump personally.
WLFI fired back calling the allegations a cover for Sun's own misconduct, signaling it is prepared to litigate with "See you in court pal."
The fallout lands as WLFI trades at a record low of $0.08, compounded by separate scrutiny over its $75M Dolomite borrow position.
Why it matters: If the backdoor claim holds, it exposes how permissioned admin functions in "decentralized" token contracts can be quietly weaponized against holders at scale.
Our take: Sun didn't go public after months of silence by accident. The timing alongside the Dolomite controversy suggests WLFI's problems are converging faster than FUD dismissals and court threats can contain.
For builders and investors: Audit for blacklist and freeze functions before deploying capital. Governance opacity in DeFi-adjacent projects is a red flag, regardless of political branding.
PRODUCT OF THE WEEK
Covenant AI Quits Bittensor Over Governance Concerns
Covenant AI, one of Bittensor's most prominent subnet developers, publicly exited the network citing concerns over co-founder Jacob Steeves' alleged unilateral control over a protocol marketed as decentralized, sending TAO down 15% in two hours.
Bittensor's "triumvirate" governance is allegedly a facade, with Steeves retaining effective control and deploying network changes without community consensus.
Steeves allegedly suspended Covenant's subnet emissions, stripped its moderation rights, and deprecated its infrastructure as the team grew more prominent.
Dare also claimed Steeves applied economic pressure through large TAO token sales timed to coincide with operational disputes.
Covenant's exit is a notable signal that the network may struggle to retain serious builders under its current governance model.
Steeves responded indirectly by announcing a lock-based subnet ownership model, without addressing Covenant's core allegations.
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Felix, a HyperEVM native lending protocol.
Grove Finance, a protocol focusing on institutional credit.
Axis, a synthetic dollar backed by a market-neutral arbitrage.
Seamless Protocol, a lending and leverage token protocol on Base.
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CHARTS OF THE WEEK
Crypto Fraud Hit Record $11.4B in 2025
Source: FBI
State of play: Crypto-related fraud losses jumped 22% to a record $11.4B in 2025, accounting for more than half of all internet crime losses tracked by the FBI, with seniors and AI-assisted scams emerging as the most alarming trends.
Americans 60 and older reported $4.4B in crypto losses across 44,555 complaints, a 56% increase from 2024 and nearly double the next-closest age group.
Crypto investment fraud was the single largest driver at $7.2B in losses, with most schemes attributed to organized criminal enterprises operating out of scam compounds in Southeast Asia.
Crypto ATM and kiosk scams surged 58% to $389M, prompting state-level crackdowns including a suspension of Bitcoin Depot's operating license in Connecticut.
The FBI flagged AI as a distinct fraud category for the first time, with $893M in AI-related losses, of which $658.7M also involved crypto, suggesting deep overlap between the two vectors.
The IC3's Recovery Asset Team froze $679M of $1.16B in attempted theft, while its proactive scam notification program prevented an estimated $225.9M in losses and triggered 38 suicide intervention referrals.
Our take: $11.4B in a single year is no longer a niche problem. With AI now amplifying the scale and targeting of scams, and seniors bearing a disproportionate share of losses, this is becoming a systemic liability for the industry's mainstream credibility push.
Bhutan Continues Offloading Bitcoin Holdings
Source: Arkham
State of play: Bhutan's Royal Government moved another 250 BTC worth $18M to a newly created wallet, extending a steady run of outflows that has drained over 70% of its peak holdings since October 2024.
Bhutan's total tracked holdings have fallen to 3,774 BTC, down sharply from a peak of nearly 13,000 BTC in October 2024.
The country has moved roughly $233.75M worth of bitcoin out of known government addresses in 2026 alone.
The purpose of the latest transfer remains unconfirmed, though large government wallet movements are typically associated with potential asset sales.
Our take: A 70% drawdown from peak holdings with no official explanation is a meaningful signal. Whether this is fiscal management or quiet distribution, Bhutan is no longer the sovereign accumulation story it was in 2024.
QUICK BITES
ECB backs EU plan to centralize crypto supervision.
Aave DAO approves $25M Aave Labs funding grant.
US down to 'last chance' to pass CLARITY Act before 2030.
FBI says crypto-related fraud losses hit record $11.4B in 2025.
Federal court blocks Arizona crackdown on Kalshi’s event contracts.
WLFI threatens Justin Sun after he alleges hidden blacklist backdoor.
Bitcoin slides to $71,000 after Trump's blockade order in Strait of Hormuz.
NOTEWORTHY READS & MEME
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