Review of Crypto Crackdown in the United States

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Welcome to the latest edition of this week’s Cryptofinance newsletter, where we took stock of Binances’ rocky start to 2023.

One of the consequences of the collapse of crypto markets last year is that the survivors have become bigger and more central.

With scale comes scrutiny, as Binance finds out. So let’s do a recap of the year so far for the non-headquartered exchange.

In the first week of 2023, the Securities and Exchange Commission intervened in a bid by the exchange’s US subsidiary to buy the assets owned by bankrupt crypto lender Voyager.

Then, financial crime agency Fincen named Binance as a counterparty to Bitzlato, an obscure crypto exchange allegedly linked to illicit crypto funds and the darknet. The order was the first of its kind under a powerful new section of legislation introduced to combat Russian money laundering. Binance said it was happy to support law enforcement in their investigation. A spokesperson added that it has a team of more than 750 people in global compliance roles as well as a team of former federal law enforcement officers working around the clock to supporting cases against organizations like Bitzlato.

At the end of the month, I revealed that Binance had brought in the same Washington lobbyists as its US subsidiary. Coupled with the fact that CEO Changpeng Zhao is the ultimate beneficial owner of Binance US, this undermines the offshore groups’ claim that the two trading platforms operate separately.

The government considers the same beneficial owner of both companies and considers them a single entity, said a Washington lobbyist who had previously been approached by Binance for employment.

So it was in January. Until February: Binance temporarily halted US dollar bank transfers, without giving a reason for the suspension.

Mid-month, financial regulators in New York halted the issuance of BUSD, a Binance-branded stablecoin that just a few months ago accounted for 40% of trading volume on the exchange.

Zhao said BUSD has never been a big deal for the exchange, but the data is not on his side.

Binance believes that the void left by the token, whose market capitalization has plummeted, will be replaced by other stablecoins. But analysts told me earlier this week that the exchange wouldn’t necessarily come out unscathed.

The exchange has gone to great lengths to clean up its image, making big-name compliance hires over time, including former IRS and US Treasury heavyweights Tigran Gambaryan and Greg Monahan respectively.

They have literally hired a dream team of illicit finance investigators, a person familiar with the workings of the US government told me last month.

But Binances’ growing list of compliance issues should be a wake-up call to what’s left of the crypto industry. Throughout its many controversies, the exchange has managed to grow to a size that dwarfs its competitors. In fact, data from CryptoCompare shows that the exchange now controls over 60% of the crypto spot market.

In other words, there is a risk of a key man at the top of the supposedly decentralized crypto industry, who is on a collision course with US regulators who just this year targeted a list of prominent crypto groups. .

The success of its biggest exchange is essential to keep the markets alive. The industry that preaches the decentralization bible is praying for the survival of its most centralizing force, Charley Cooper, former chief of staff of the Commodity Futures Trading Commission, told me.

What is your opinion of Binance and its position in the broader crypto market? As always, email me with your thoughts at [email protected].

Weekly Highlights:

Another former FTX executive relents: Nishad Singh, former technical director of the bankrupt exchange, pleaded guilty to six criminal charges in the United States. The SEC also stepped in after Singh, alleging that the former FTX high-flyer created the code that allowed FTX client funds to be diverted to sister trading firm Alameda Research.

Marathon Digital Holdings, a Nasdaq-listed crypto-mining group, filed a request to extend the deadline for its annual report after discovering certain accounting errors. In that filing with the SEC, the company said its financial reports for the year ending December 2021 should no longer be relied upon. Chris Brendler, senior research analyst at DA Davidson, said the SEC was less concerned about mining companies than it was about crypto exchanges and lenders, but the issue pointed to a broader problem with crypto regulation.

Cybersecurity firm SonicWall released its annual threat report this week, which reveals that cryptojacking attacks have increased by more than 40% in the past year. Unlike ransomware, cryptojacking, the practice of hijacking someone else’s computer to mine cryptocurrency, goes unnoticed, but that doesn’t mean it isn’t a cause of ‘worry. Make no mistake, cryptojacking is a high-stakes game with serious consequences, SonicWalls CEO Bob VanKirk told me.

Soundbite of the week: the BoE denounces crypto as a payment tool

The Bank of England’s focus on creating a digital ledger means it’s more Team Britcoin than Team Bitcoin. Still, the comments of Sir Jon Cunliffe, Deputy Governor for Financial Stability at the BoE, during a parliamentary hearing were particularly poignant:

No one would use [crypto tokens] like moneywell, some people would, but they are probably outside of criminal law as well as financial regulation.

Data Mining: Crypto Banking Crisis Bites Silvergate

Shares of crypto-focused Silvergate Bank took a hit this week.

Late Wednesday, the bank said it would not be able to file its annual report with the SEC as it assessed whether an ever-weaker capital position would affect its ability to survive. He had to sell assets to help pay off federal loans. Unsurprisingly, stocks lost almost 60% the next day on Wall Street.

Silvergates flirting with fate took a long time to come. The bank has bet big on providing services like payments to the crypto industry, so much so that it tapped Sam Bankman-Frieds’ former FTX empire as a client.

This week, crypto companies such as Coinbase and Galaxy Digital cut ties with Silvergate, which has a full suite of licenses from traditional financial regulators.

Like many other crypto (or crypto-exposed) companies, the financial health of banks has been correlated with that of the digital asset market. Since Bitcoin’s price peak in November 2021, Silvergates shares have fallen 97% from $219 to $5.

The bank posted a full-year loss of $949 million last year, in stark contrast to its $76 million profit in 2021. US banking authorities have repeatedly warned banks they oversee risks associated with exposure to crypto. Nothing sums this up better than Silvergate.

Cryptofinance is edited by Philip Stafford. Please send your thoughts and comments to [email protected].

Your comments are welcome.

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