Tag: FCA

Crypto collapse: Good night Silvergate Bank, unbanking crypto exchanges, Voyager sale to Binance proceeding

  • By Amy Castor and David Gerard

“And it seems to me, you lived your life like a candle in the wind. You’ve abruptly toppled over and you’re burning things. Now there’s one less fiat onramp, for those who’ve been orange pilled. And there is no liquidity, for all the crypto shills.”

— Rycochet on Silvergate Bank

Silvergate Bank: Time wounds all heels

Silvergate was the easiest crypto death pool call this week. The bank has announced it is voluntarily unwinding and liquidating, “in light of recent industry and regulatory developments” — its customers kept treating deposits as their own money or something, and regulators and legislators hated it a whole lot. All deposits will be returned in full. [Press release] 

“The Company is also considering how best to resolve claims and preserve the residual value of its assets, including its proprietary technology and tax assets.” We’re not sure which proprietary technology this means — Silvergate wrote off its investment in Diem, formerly Facebook’s Libra, in its preliminary Q4 2022 accounts, and it just shut down the Silvergate Exchange Network.

FDIC examiners went into Silvergate last week — as we predicted — and have been reviewing Silvergate’s books since. [Bloomberg]

The FDIC was discussing how to keep Silvergate alive — even suggesting a rescue by crypto-related investors. Yeah, right. We suspect they already asked every other bank in the US, none of whom would offer a dollar for this thing.

The big question is: what happens to the loans secured by bitcoins that Silvergate made to MicroStrategy and various bitcoin miners?

Silvergate’s total loan book, bitcoin and otherwise, was $1.4 billion as of September 30, 2022, including the infamous $205 million loan to MicroStrategy. The bitcoin loans are not “bad loans” — they’re not in default, as yet. But they were clearly stupid loans — some idiot thought that lending money to weird companies with insane business models, against an asset that was only up because of a bubble, was a good idea.

So, if Silvergate’s cut up for parts, who takes on these loans?

Loans collateralized with crypto will be a nuisance to transfer because you also need to transfer rights to the collateral (which is sitting in Coinbase Custody, the MSTR loan at least). The MSTR crypto was pledged rather than transferred — there’s a custody account for this specific deal — which is a bit less fiddly. And the bitcoin price is, of course, incredibly volatile, so the collateral itself is risky.

No sane bank is going to want to take on these loans at anywhere near face value. But we expect there will be some buyer who’s interested, at a suitable discount.

If no bank is willing to buy a loan from an insolvent bank, the FDIC tries to close the loan by negotiating with the borrower about possible early repayment. But we don’t expect these loans to end up in that position.

Silvergate Capital stock (NYSE:SI) is a dead cat bouncing between $3.00 and $3.50 today. It was $219 in November 2021. We hope the short sellers have managed to cash out. [Yahoo!]

Frances Coppola on Silvergate: “This is the story of a bank that put all its eggs into an emerging digital basket, believing that providing non-interest-bearing deposit and payment services to crypto exchanges and platforms would be a nice little earner, while completely failing to understand the extraordinary risks involved with such a venture.” [Coppola Comment; Coppola Comment]

Unbanking, on the blockchain

Marco Santori, chief legal officer at Kraken crypto exchange, tells The Block that Kraken is going to start its own crypto bank any day now. With “pens with the little ball chains.” [The Block]

Kraken got itself a Wyoming SPDI charter in 2020 — that’s the same charter as Caitlin Long’s Custodia Bank, which was recently refused an account at the Federal Reserve.

Kraken Bank originally told Decrypt it was aiming to launch in the first quarter of 2021. It’s currently “planning a phased launch” in, er, 2022, apparently. [Kraken, 2020; Decrypt, 2020; Kraken, 2023, archive]

Kraken recently lost US dollar access via Signature Bank for non-corporate customers. In the meantime, Kraken has various other dollar options. The dollar channel for ordinary schlubs is via SynapseFi, “The Launchpad for Financial Innovation” — a payment processor marketing itself hard to crypto companies, though stressing that it never touches crypto itself — or MVB Bank of West Virginia, which thinks there’s a market in “Web3.” [Kraken, archive; SynapseFi; MVB Bank]

UK payments processor BCB Group is angling to take over from Silvergate as the fiat rails to the crypto industry. BCB actually has an FCA license, so the FCA considered they could pass basic money laundering muster at least. BCB launched its BLINC network in 2020; BCB’s recent publicity push is marketing for that. [Coindesk; Coindesk, 2020]

Crypto.com has lost its onramps for actual money, except euros in the European Economic Area and a GBP onramp via BCB — but no US dollar access. [CoinDesk]

Michel de Cryptadamus writes up crypto.com: “At the end of the day we will probably discover that the entire cryptocurrency industry is 5,000 shell companies run by 20 dudes in a foul smelling room in some non-extradition country.” [Cryptadamus]  

Outdoor miners

Crypto miners operating on public land haven’t been paying their taxes. Federal mineral lease operators have been using natural gas to power crypto mining without paying their gas royalties. The miners have been using mobile data centers in containers to evade oversight. [Office of Inspector General, PDF; Gizmodo]

Bitcoin miner Riot Platforms, née Riot Blockchain, has now filed its delayed 10-K for 2022 after the SEC told Riot to restate its accounts. There isn’t a lot that’s exciting here. The bitcoin mining business is knife-edge, bitcoin prices are down, and governments and the general public increasingly loathe bitcoin miners. Riot is branching out into selling its expertise in data center power distribution. Risks to Riot’s business include a pile of lawsuits against executives and directors concerning “allegedly false and misleading statements made in prior securities filings.” [SEC]

Voyager Digital

At the March 7 hearing in the bankruptcy of Voyager Digital, Judge Michael Wiles approved the purchase of Voyager assets by Binance US — assuming Binance US can pass various regulatory hurdles. (LOL.) [Doc 1159, PDF]

SEC staff think Binance US is likely an unregistered securities broker, but their objections weren’t specific enough to convince Judge Wiles to stop the sale. [WSJ]

In the hearing, Binance stressed that it really wants personal information, such as social security numbers, for all Voyager customers. Not just the ones moving to Binance US, but all of them: “Data is at the heart of the deal.” Judge Wiles was not impressed and said that SSNs from the Voyager customers who didn’t go to Binance would definitely not be a thing that Binance got. [Twitter]

More good news for bitcoin

The Financial Conduct Authority is hitting more UK crypto ATMs, this time in east London. No crypto ATM operator in the UK is registered with the FCA for anti-money laundering purposes, so all of them are illegal. [FCA]  

In India, the Financial Intelligence Unit of the Ministry of Finance is now requiring crypto-asset businesses to register with the FIU as reporting entities under AML laws. They also have to do basic know-your-customer — which they weren’t obliged to do before. Local crypto companies are actually positive about this move. [Gazette of India, PDF; CoinDesk]

In the US, the Public Company Accounting Oversight Board warns that crypto exchange “proof of reserves” statements are meaningless garbage. [PCAOB]

FTX in bankruptcy wants to redeem Alameda’s GBTC shares for the bitcoins backing them. Grayscale said no, so FTX is suing for redemption. Remember that Grayscale could now redeem GBTC any time they like — they just choose not to. [Press release]

Easy Money by Ben McKenzie and Jacob Silverman is available for preorder! The release date is July 27. [Amazon US; Amazon UK]

Image: With apologies to Alex Shaeffer.

Posted on by Amy Castor 0

Crypto collapse: Crypto.com’s shadow bank Transactive, US banks and crypto, Binance not so good with actual money

  • By Amy Castor and David Gerard

“funds are safe. we’ve done a risk assessment and found that 100% of hacks happen when someone has access to their coins, so we’re revoking that access to make them even safer”

— Boxturret

Transactive: Lithuania shuts down a money laundromat 

Crypto exchanges have trouble finding stable gateways for actual money. Proper banks won’t talk to them, so they turn to shadow banks, which cater to high-risk clients and use lots of tricks to skirt the traditional banking system.

Sometimes the exchanges just lose their gateway — and your money.

We wrote earlier about how Crypto.com customers’ euro deposits were seized by the Lithuanian government as part of an anti-money laundering enforcement action against the exchange’s payment provider, Transactive Systems UAB. Cryptadamus has a great post explaining what happened. [Substack]

If you had EUR on Crypto.com before this, it’s gone. The “EUR” you see in your account is unbacked. Work out what you can do to extract value from your outstanding balance, while Crypto.com gives you the runaround.

Transactive was also the payment channel for crypto lender Nexo, whose Bulgarian offices were recently raided by authorities. Transactive has an office in the UK as well — Transactive Systems Ltd. [Transactive]

After getting authorization from the UK Financial Conduct Authority and the Bank of Lithuania to act as an electronic money institution (EMI), Transactive grew astonishingly quickly in just five years — thanks to its clientele in crypto, gambling, and forex, and whoever else they were processing money for. [Bloomberg, archive]

Given Transactive’s sordid history, it’s amazing that the FCA authorized them at all.

Transactive emerged from the rubble of PacNet Services, an international payments company that started in Vancouver. PacNet was forced to wind down after the US Treasury sanctioned it as a “transnational criminal organization” — specifically, being the middleman for mail-fraud scam artists. Several PacNet executives were charged with fraud and money laundering. [US Treasury, 2016; DOJ, 2019] 

A CNN investigative report from 2016 details how PacNet employees moved large piles of money around the world. PacNet set up bank accounts in the names of shell companies, they sent packages of cash labeled “legal documents,” they bribed Russian banking officials, and they even used a private plane to ferry cash to customers. [CNN, 2016]

So the money launderers left PacNet and moved over to a totally legitimate new business —Transactive, co-founded by convicted healthcare scammer Scott Roix.

In February 2022, the Bank of Lithuania fined Transactive 20,000 EUR for commingling customer and company funds. Transactive had also misreported its customer balances and its equity capital. [Lieutvos Bankas, in Lithuanian]

In January 2023, the Bank of Lithuania accused Transactive of massive money laundering and froze the company’s funds. It ordered Transactive to stop servicing clients in finance, forex, and crypto, pending a review. [Lietuvos Bankas, in Lithuanian]

Transactive notified clients about this trivial hiccup and said their funds were being “safeguarded” — a word meaning “you’ll never see your money again.” If an investigation discovers any of the money was dirty (if!), the government will seize the funds. [Reddit]

Crypto.com has told its euro-using customers that their SEPA (Single Euro Payments Area) transfers are being migrated to a new provider. Now the exchange has to find a new provider.

Here are Crypto.com customers screaming into the void to get their funds back. Crypto.com has yet to tell them what actually happened to their money. [Twitter, Twitter]

Unless Crypto.com had euros stored somewhere other than Transactive Systems UAB, they are likely insolvent in EUR and will have to start from scratch, paying withdrawals with new deposits until they can somehow fill the gap — or not.

US crypto banks are out of favor

In the US, Crypto.com still banks with Silvergate, which allows their institutional clients to transfer USD from their bank accounts to the exchange. This channel may have problems in the near future, due to Silvergate’s dealings with FTX.

The US Federal Reserve really, really hates banks touching crypto and is not putting up with it even a bit — especially after Silvergate needed a $4.3 billion bailout. The Fed issued a policy statement on January 27: [Federal Reserve; Federal Reserve, PDF]

“The statement makes clear that uninsured and insured banks supervised by the Board will be subject to the same limitations on activities, including novel banking activities, such as crypto-asset-related activities.

In particular, the preamble would provide that the Board would presumptively prohibit SMBs from holding most crypto-assets as principal, and also would provide that any SMB seeking to issue a dollar token would need to demonstrate, to the satisfaction of Federal Reserve supervisors, that the bank has controls in place to conduct the activity in a safe and sound manner, and to receive a Federal Reserve supervisory nonobjection before commencing such activity.”

That second paragraph directly addresses Silvergate’s plan to revive Diem (née Facebook’s Libra) and do their own private stablecoin for retail customers. Yeah, no. Silvergate says it’s written off its Diem investment after previous regulator refusals to let them print private money, but the Fed evidently thought it was still worth emphasizing their “no.”

The US Department of Justice is investigating Silvergate over its FTX and Alameda Research dealings. FTX customers were wiring money to Alameda and to Alameda’s dubious subsidiary North Dimension via the bank, thinking that money was going directly to FTX. The DOJ wants to know what Silvergate knew, and when they knew it. [Bloomberg]

Binance: increasingly freed from the chains of filthy fiat

In the UK, the Binance crypto exchange should have no access to pounds, ever. After the Financial Conduct Authority warned in March 2022 that “in the FCA’s view, Binance Markets is not capable of being effectively supervised,” UK banks cut off direct deposit to Binance immediately. [FCA, 2022]

But Binance knows you can’t keep a dedicated gambling addict down, so they keep trying to weasel their way back into the UK’s Faster Payments network, most recently through payments processor Paysafe. Sometimes this works. Binance recommends UK customers send money in and out via Visa — but even that’s being cut off by the banks. [Twitter; CoinDesk]

Cryptadamus traces Binance’s Visa connection — Binance owns crypto debit card issuer Swipe, which it bought in 2021! Swipe also issued a crypto debit card for FTX. [Twitter; Binance; FX Empire]

Australian users also report payment issues with Binance — even via Visa. [Twitter]

In the US, Binance users say they can’t withdraw funds in amounts of less than $100,000 from American banks. Binance says that’s fake news and everything is fine. Cryptadamus has been documenting the difference between Binance’s official statements and what customers report. [Reddit]

When Bitfinex was cut off from banking in 2017, users would buy bitcoins just to get their funds out of the exchange. This drove the price of bitcoin up and may have helped trigger the 2017 crypto bubble. So all of this is good news for bitcoin!

FTX in bankruptcy

At the next FTX bankruptcy hearing on February 6, Judge John Dorsey will hear arguments for and against appointing an examiner. FTX and the Unsecured Creditors’ Committee are against hiring an examiner, but the US Trustee and various state regulators want one. John Reed Stark thinks it’s absolutely necessary. [Agenda, PDF; LinkedIn]

Brian Glueckstein of Sullivan & Cromwell for FTX filed a declaration in support of FTX’s objection to an examiner. It’s 3,855 pages of mainly exhibits. But the US Trustee wants it stricken from the record because the deadline to file was January 25, and Glueckstein filed on February 3, one business day before the hearing. Oops. [Declaration, PDF; Doc 617, PDF]

FTX is suing Voyager for repayment of $446 million of loans. After Voyager filed for bankruptcy in July, it demanded repayment of all outstanding loans to FTX and Alameda. FTX paid the money back for Alameda — but because they paid it back so close to FTX’s bankruptcy filing, FTX wants to claw it back again. [Complaint, PDF; Reuters]

In the legal case against Sam Bankman-Fried, Judge Lewis Kaplan has barred Sam from using Signal or Slack and from contacting any former FTX employees without lawyers present until February 9, when he’ll hear arguments. He wasn’t impressed when Sam reached out to a key witness, who we assume is FTX US counsel Ryne Miller, to “vet” things on the phone. [Order, PDF]

SBF’s bail conditions required two more sureties. These are now in, with their names redacted: $200,000 and $500,000. Judge Kaplan has agreed to unseal the names, but they’ll remain redacted pending possible appeals. [Bond, PDF; Bond; PDF, Memorandum Opinion, PDF]

Digital Currency Group

The second day hearing in the Genesis bankruptcy is February 22. No agenda yet. We wonder if anyone will attempt to go after Genesis’ owners, DCG. [Notice, PDF]

The Gemini crypto exchange implied to its Gemini Earn customers in 2022 that their deposits were protected by FDIC insurance, and customers took Gemini’s statements to mean they were protected by the FDIC from Genesis failing. But Gemini didn’t technically say that! So it must be fine, right? [Axios]

DCG’s crypto news site CoinDesk claimed to have prospective buyers approaching them unsolicited and offering hundreds of millions of dollars for the site. The new rumor is that the prospective buyers are looking at buying only parts of the site — the conference business or the media outlet — and certainly not at paying hundreds of millions of dollars. [Twitter]

Other good news for bitcoin

Coinbase was fined 3.3 million EUR (USD$3.6 million) by De Nederlandsche Bank for not registering as a money transmitter in the Netherlands. [Reuters] 

Coinbase bragged about having proper registration in September 2022. But the violation occurred in the years prior when they weren’t properly registered. [Coinbase, 2022]

MicroStrategy posts another loss. This is its eighth straight quarterly loss in a row. Before former CEO Michael Saylor started to amass bitcoin in 2020, the company had $531 million in cash. Now it’s down to $43.8 million in cash. [Bloomberg] 

MicroStrategy is one of the loans that Silvergate is particularly worried about. In March 2022, MicroStrategy borrowed $205 million in a three-year loan from Silvergate. The loan was collateralized with bitcoin — and Silvergate will need to worry about that too. 

Image: PacNet’s part owner Don Davis (on the left) posted on LinkedIn. Airplanes are great for moving piles of cash.

Posted on by Amy Castor 0

The SEC busts Kim Kardashian over EthereumMax, pour encourager les autres

  • By Amy Castor and David Gerard, for their sins
  • Our work is funded by our Patreons — here’s Amy’s, and here’s David’s. Your monthly contributions help us greatly in steeling ourselves to dive into this jaw dropping foolishness!

Reality show queen Kim Kardashian is not stupid. She’s a billionaire businesswoman. She clearly has basic competence.

Kardashian is even studying law. She passed the first-year “baby bar” exam in December 2021, on her fourth attempt. (This isn’t unusual — the pass rate is around 21%.) [The Guardian; Elle]

But that doesn’t mean she understands securities laws — or that putting “#ad” on the end of an Instagram post promoting a security does not, in fact, leave you in the clear.

Section 17(b) of the Securities Act specifically states that you need to spell out how much you’re being compensated for a promotion — and Kardashian neglected that bit when she posted about EthereumMax (EMAX) to her 225 million Instagram followers on June 16, 2021.

How could Kardashian have known EthereumMax was a security? Paragraphs 6 to 9 of the SEC order against her detail how blatant EMAX was. Kardashian’s post even promoted a token burn that was supposedly “giving back” to the “community” — implying financial benefit. [SEC press release; Order, PDF]

The SEC came down hard on Kardashian. She has agreed to a $1 million fine, and disgorgement of the $250,000 she was paid plus $10,415.35 in prejudgment interest. Kardashian must not promote a “crypto asset security” in the next three years. She will also “continue to cooperate with the Commission’s investigation in this matter.”

We’re pretty sure Kardashian knows what a security is now.

Kardashian is currently launching a private equity firm, SKYY Partners. So she’d better be on top of this stuff. [Fortune]

What’s EthereumMax?

EthereumMax is an ERC-20 token on the Ethereum blockchain. The promotion for EMAX promised all sorts of amazing visionary aspirations — but it’s just another worthless altcoin that doesn’t do anything. [CoinDesk; EthereumMax white paper, archive, PDF] 

EMAX was launched in May 2021, only a month before the June 2021 celebrity push. Kardashian, boxer Floyd Mayweather, and former NBA player Paul Pierce hawked EMAX to their massive social media followings — though this didn’t halt the token’s ongoing price collapse. 

Paid to pump

In September 2021, a few months after Kardashian’s EMAX post, Charles Randall, the head of the UK’s Financial Conduct Authority, gave a speech that called on online platforms to crack down on financial scams. He specifically noted Kardashian’s post: [FCA speech]

“Which brings me on to Kim Kardashian. When she was recently paid to ask her 250 million Instagram followers to speculate on crypto tokens by ’joining the Ethereum Max Community,’ it may have been the financial promotion with the single biggest audience reach in history.

The problem is much wider than Kardashian. Celebrity endorsements for financial toxic waste are an ongoing problem. Actor Ben McKenzie speaks up about it from time to time — including on the case of Kardashian — and suggests celebs stick to promoting non-trash: [Slate]

“To criticize celebrities shilling crypto isn’t to impugn them as people or to say that I’m above accepting an easy payday. (Call my agent, legit companies with not-scammy products!)”

Citing quotes from a “crypto marketing agency” executive, the Financial Times wrote this on celeb crypto promotions: [FT, archive]

“It’s considered easy money,” said an executive at a crypto marketing agency, who asked not to be named, adding that the endorsements are often pushed by talent agents who will offer deals that include posts by several of their high-profile clients, with price tags ranging from tens of thousands to millions of dollars. “You ain’t seen nothing yet.”

Fundamentally, Kardashian’s people failed to realize that the EthereumMax sponsorship would blow up on her. We expect a deeply displeased Kardashian sent more than a few heated texts to her minions along the lines of “what on earth?” — or however you phrase that in Kardashian.

We don’t know of any evidence that Kardashian cared about EthereumMax or knew anything about crypto in general. The only past involvement she had with crypto is that she apparently used some chips with bitcoin logos on them in a charity poker game in 2018. We doubt she cared about crypto then either. [Cointelegraph]  

How about those NFT shills?

Celebrities have been hawking NFTs at top volume for the past year — such as Jimmy Fallon and Paris Hilton pumping bored apes on late-night television, and Madonna tweeting that she finally got her “very own ape” in March. (Madonna’s talent manager Guy Oseary represents Yuga Labs, the company behind the BAYC project. He is also an investor though his fund Sound Ventures.) [Mashable; Twitter]

Almost no celebs would understand the many NFT deals we saw them taking through 2021. Likely, their people would have just told them: “It’s a sponsorship for internet art, free money!” and they’d go “Sounds good, tell me when you need me to nod and smile.”

So far, NFTs are not securities. Mostly. Probably. But they’re still stupid investments best left entirely to the crypto speculators.

Celebrity NFT promotion would be under Federal Trade Commission rules — where disclosing that your promotion is an “#ad” is probably sufficient. Though almost no celebrity Bored Apes promoters did so, for instance.

Some of this stuff flies a bit close to the sun. When celebrities go on TV promoting Bored Apes NFTs, they’re not just promoting Bored Apes, but the entire ecosystem that Yuga Labs has created — including Apecoin, which is an obvious and blatant security offering. 

It’s so unfair!

The SEC moved quicker on Kardashian than on many previous crypto-related violations. It only took a little over a year to charge Kardashian. The SEC hasn’t charged EthereumMax directly for not registering its offering. 

Anyone who calls this “regulation by enforcement” is a clown. This is just enforcement. There’s absolutely no reasonable question of the facts or laws here. The SEC has been warning about this nonsense since 2017. [SEC, 2017] 

Floyd Mayweather in particular already settled with the SEC in November 2018 for failing to disclose payment for promoting ICO tokens. That settlement barred Mayweather from accepting payment for promoting securities — and his EthereumMax promotion in June 2021 would have been within that period. We wonder if there’s an order coming his way too. [SEC press release, 2018; order, PDF, 2018] 

Action against unregistered securities isn’t restricted to the SEC — private citizens can bring actions against unregistered offerings, and against their promoters. In January, a class action was brought against EthereumMax founders Steve Gentile, Giovanni Perone, and Justin French, and promoters Kardashian, Mayweather and Pierce, claiming investor losses on this alleged unregistered security. [Complaint, PDF; The Block]

Kardashian didn’t just fly too high — she set a course directly for the sun, and she got burnt. EMAX was blatantly an offering of securities, the SEC had given clear warning over the previous several years, and there are clear laws governing disclosures when you promote a security. 

Why did she so blatantly just not follow the law? Because she was likely ill-advised, and crypto seemed like easy money.

But it is incredibly irresponsible — and that’s why it’s so reprehensible. You’re encouraging people to engage in risky investments, where they invariably lose money. 

Kardashian is a billionaire — $1.26 million is a trivial fine for her. But this is excellent enforcement by the SEC, pour encourager les autres.

SEC chair Gary Gensler even made a nice video about celebrity endorsements! Securities TikTok awaits. [YouTube]

Posted on by Amy Castor 4

Binance: Italy, Lithuania, Hong Kong, all issue warnings; Brazil director quits

Ever since Germany’s BaFin and the UK’s FCA issued warnings against Binance, the dominoes have continued to topple. Global regulators are fed up with the world’s biggest crypto exchange.

This last week, three more jurisdictions issued warnings about Binance’s tokenized stocks, joining several others in voicing their concerns about the exchange.

In a press release on Thursday, Italy’s market watchdog Consob warned investors that Binance and its subsidiaries “are not authorized to provide investment services and activities in Italy.” The notice specifically points to Binance’s “stock token.” 

Lithuania’s central bank issued a warning on Friday about Binance UAB, a Binance affiliate, providing “unlicensed investment services.”

“Companies that are registered in Lithuania as virtual currency exchange operators are not supervised as financial service providers. They also have no right to provide any financial services, including investment services,” the Bank of Lithuania said.

Also on Friday, Hong Kong’s Securities and Futures Commission announced that Binance is not licensed to trade stock tokens in the territory. 

In a statement, Thomas Atkinson, the SFC’s executive director of enforcement, had stern words for the exchange: “The SFC does not tolerate any violations of the securities laws and will not hesitate to take enforcement action against unlicensed platform operators where appropriate.”

Binance responded to the mounting pressure by announcing on its website that it would cease offering stock tokens. Effective immediately, you can no longer buy stock tokens on Binance, and the exchange will stop supporting them on October 14.

As for the unlucky ones who are still holding Binance stock tokens, you apparently have 90 days to try and offload them onto someone else.

The exchange also deleted mentions of stock tokens on its website. If you click on a link to “Introduction to Stock Tokens” on the site, you get a “404 error.” You can still visit the page here, however.

A short-lived bad idea

Binance introduced its tokenized stocks idea on April 12, starting with Tesla, followed by Coinbase, and later MicroStrategy, Microsoft and Apple. (Links are to archives on Wayback machine.)

“Unlike traditional stocks, users can purchase fractional shares of the listed companies with stock tokens. For instance, for a Tesla share that trades at over $700 per share, stock tokens enable investors to buy a piece of the underlying share (e.g., 0.01) instead of the entire unit,” Binance explained on its website.

Prices were settled in BUSD — a stablecoin Binance created in partnership with Paxos, a NY-based company. Binance claims its stock tokens are fully backed by shares held by CM-Equity AG, a regulated asset management firm in Germany.

The exchange also said Friday that users in the EEA and Switzerland will be able to transition their stock token balances to CM-Equity AG once the brokerage creates a special portal for that purpose, sometime in September or early October. However, the transition will require additional KYC.

Binance, whose modus operandi has always been to ignore the laws and do whatever, launched its stock token service two days before US crypto exchange Coinbase went public on the Nasdaq and bitcoin reached an all-time high of nearly $65,000. The price of bitcoin is now less than half of that.

In April, Germany’s financial regulator BaFin warned that Binance risked being fined for offering its securities-tracking tokens without publishing an investor prospectus. Binance went back and forth with BaFin on the issue, trying to persuade them to take the notice down, according to the FT, but to no avail. The warning stayed up.

In June, the UK followed with its own consumer warning, and then one by one, a host of other global regulators issued their own cautions about Binance, and banks began cutting off services to the exchange — essentially a form of slow strangulation.  

Binance clearly wasn’t thinking when it introduced those stock tokens. The move appears to have been driven by the hubris of its CEO CZ, who is now realizing that actions have repercussions. Or maybe not, since his recent tweets and a blog post celebrating Binance’s fourth birthday seem to reflect an ongoing detachment from reality.

“Together, we can increase the freedom of money for people around the world, in safe and compliant ways,” he wrote. By freedom, I assume he means, freedom to operate outside the law, or freedom to freeze withdrawals on his exchanges — a frequent user complaint, according to Gizmodo.

FTX and Bittrex

Binance isn’t the only crypto exchange to offer stock tokens. Sam Bankman-Fried’s FTX exchange also offers tokenized stocks (archive) — a service that it added in June. I suspect that a lot of Binance’s business will flow over to FTX, and we’ll soon see similar regulatory crackdowns on FTX. 

Like Binance, FTX has a US version of its exchange and a main site.

FTX is registered in Antigua and Barbuda with headquarters in Hong Kong. It offers stock tokens for Tesla, GameStock, Beyond Meat, PayPal, Twitter, Google, Amazon, and a host of others. 

Bittrex Global — another exchange that has a regulated US-based arm — also offers an impressive array of stock tokens. The Liechtenstein-based firm added the service in December 2020, according to a press release at the time, noting that “these tokenized stocks are available even in countries where accessing US stocks through traditional financial instruments is not possible.” 

FTX and Bittrex also claim their stock tokens are backed by actual stocks held by CM-Equity AG.

Binance Brazil director resigns

Banks are not the only ones distancing themselves from Binance these days.

Amidst the recent drama, Ricardo Da Ros, Binance’s director of Brazil announced his departure on LinkedIn. He had only been with the company for six months.  

“There was a misalignment of expectations about my role and I made the decision according to my personal values,” he said.

Other employees have also exited stage left in recent months. Wei Zhou, the chief finance officer at Binance, quit abruptly in June, and Catherine Coley, the CEO of Binance.US stepped down in May — though nobody has heard from her since.

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Posted on by Amy Castor 0

Binance: Fiat off-ramps keep closing, reports of frozen funds, what happened to Catherine Coley?

Last thing I remember,
I was running for the door.
I had to find the passage back
To the place I was before.
Relax,” said the night man.
“We are programmed to receive.
You can check out any time you like,
But you can never leave.”

~ Eagles

Binance customers are becoming trapped inside of Binance — or at least their funds are — as the fiat exits to the world’s largest crypto exchange close around them. You can almost hear the echoes of doors slamming, one by one, down a long empty corridor leading to nowhere. 

In the latest bit of unfolding drama, Binance told its customers today that it had disabled withdrawals in British Pounds after its key payment partner, Clear Junction, ended its business relationship with the exchange.

Clear Junction provides access to Faster Payments through a UK lender called Clear Bank. Faster Payments is a major UK payments network that offers near real-time transfers between the country’s banks — the thing the US Federal Reserve hopes to get with FedNow.

In a statement on its website on Monday, Clear Junction said:

“Clear Junction can confirm that it will no longer be facilitating payments related to Binance. The decision has been made following the Financial Conduct Authority’s recent announcement that Binance is not permitted to undertake any regulated activity in the UK. 

We have decided to suspend both GBP and EUR payments and will no longer be facilitating deposits or withdrawals in favor of or on behalf of the crypto trading platform. Clear Junction acts in full compliance with FCA regulations and guidance in regards to handling payments of Binance.” 

The Financial Conduct Authority, or FCA, ruled on June 26 that Binance cannot conduct any “regulated activity” in the UK. Binance downplayed the ruling at the time, telling everyone the FCA notice related to Binance Markets Ltd and had “no direct impact on the services provided on Binance.com.”

Binance waited a day after learning it was cut off by Clear Junction before emailing its customers and telling them that the suspension of payments was temporary. 

“We are working to resume this service as soon as we can,” Binance said. It reassured customers they can still buy crypto with British Pounds via credit and debit cards on the platform.   

This is the second time in recent weeks that Binance customers have been frozen out of Faster Payments. They were also frozen out at the end of June. A few days later, the service was restored — presumably when Binance started putting payments through Clear Junction.

I am guessing that Clear Bank’s banking partners warned them that Binance was too risky and that if they wanted to maintain their banking relationships, they’d better drop them as a customer asap, so they did. 

Binance talks like all of these issues are temporary snafus that it’s going to fix in due time. In fact, the exchange’s struggle to secure banking in many parts of the world is likely to intensify. 

Despite numerous claims in the past about taking its legal obligations seriously, Binance has been loosey-goosey with its anti-money laundering and know-your-customer rules, opening up loopholes for dirty money to flow through the exchange. Now that the word is out, no bank is going to want to touch them. 

Other developments

I wrote about Binance’s global pariah status earlier this month. Since I published that story, UK high-street banks have moved to ban Binance, all following the FCA ban.

On July 5, Barclays said it is blocking its customers from using their debit and credit cards to make payments to Binance “to help keep your money safe.” Barclays customers can still withdraw funds from the exchange, however. (Since Clear Junction cut Binance off, credit cards remain the only means for UK customers to get fiat off the exchange at this point.)

Two days later, Binance told its users that it will temporarily disable deposits via Single Euro Payments Area (SEPA) bank transfers — the most used wire method in the EU. Binance blamed the move on “events beyond our control” and indicated users could still make withdrawals via SEPA.

On July 8, Santander, another high-street bank, told its customers it was also stopping payments to Binance.

“In recent months we have seen a large increase in UK customers becoming the victims of cryptocurrency fraud. Keeping our customers safe is a top priority, so we have decided to prevent payments to Binance following the FCA’s warning to consumers,” Santander UK’s support page tweeted.

As I detailed in my earlier story, regulators around the world have been putting out warnings about Binance. Poland doesn’t regulate crypto markets, but the Polish Financial Supervisory Authority also issued a caution about the exchange. Its notice included links to all the other regulatory responses.

Amidst the firestorm, Binance has been whistling Dixie. On July 6, the exchange sent a letter to its customers, saying “compliance is a journey” and drawing odd parallels between developments in crypto and the introduction of the automobile. 

“When the car was first invented, there weren’t any traffic laws, traffic lights or even safety belts,” said Binance. “Laws and guidelines were developed along the way as the cars were running on the road.” 

Frozen funds, lawsuits, and other red flags

There’s a lot of unhappy people on r/BinanceUS right now complaining their withdrawals are frozen or suspended — and they can’t seem to get a response from customer support either.

Binance.US is a subsidiary of Binance Holdings Ltd. Unlike its parent company, Binance.US, does not allow highly leveraged crypto-derivatives trading, which is regulated in the US.

A quick look at the subreddit’s weekly support thread reveals even more troubling posts about lost access to funds. 

This mirrors Gizmodo’s recent findings. The media outlet submitted a Freedom of Information Act request with the Federal Trade Commission asking for any customer issues filed with the FTC about Binance. The agency located 760 complaints filed since June of 2020 — presumably mainly from Binance.US customers.  

In an article titled “32 Angry Complaints to the FTC About Binance,” Gizmodo uncovered some startling patterns. “The first, and arguably most alarming pattern, appears to be people who put large amounts of money into Binance but say they can’t get their money out.”

Also, Binance is known for having “maintenance issues” during periods of heavy market volatility. As a result, margin traders, unable to exit their positions, are left to watch in horror while the exchange seizes their margin collateral and liquidates their holdings.  

Hundreds of traders around the world are now working with a lawyer in France to recoup their losses. In a recent front-page piece, the Wall Street Journal said it suspected that the collective complaints may be the reason why Binance has received continuous warnings from many countries.

If you still have funds on Binance, I would urge you to get them off the exchange now — while you still can. When hoards of people start complaining about lost and frozen funds, it’s usually a sign of liquidity problems.  

We saw a similar pattern leading up to February 2014 when Tokyo Bitcoin exchange Mt Gox bit the dust. And also just before Canadian crypto exchange QuadrigaCX went belly up in early 2019. In both instances, users of those defunct exchanges are still waiting to recoup a portion of their lost funds. Bankruptcy cases take a long, long time, and you are lucky to get back pennies on the dollar. 

Finally, where is Catherine Coley?

In another bizarre development, folks on Twitter are wondering what happened to Catherine Coley, the previous CEO of Binance.US. She stepped down in May when Brian Brooks, the former Acting Comptroller of the Currency, took over. Nobody has heard from her since. Where did she disappear off to?  

Coley’s last tweet was on April 19. And both her LinkedIn Profile and Twitter account indicate she is still the CEO of Binance.US. 

She hasn’t been in any interviews or podcasts. She doesn’t respond to DMs, and there are no reports of anyone being able to contact her. 

A Forbes article from last year says that Binance.US may have been set up as a smokescreen — the “Tai Chi entity” — to divert US regulators from looking too closely at Binance, the parent company. 

Binance.US maintains that it is a separate entity. However, Forbes 40 under 40 reported that Coley was “chosen” by CZ, the CEO of Binance, which suggests that Binance is more involved with Binance.US than it claims. 

Has CZ told her to stop talking? What does she know? Catherine, if you are reading this, send us a message!

(Updated July 13 to clarify that Barclays still allows customers to withdraw funds via credit card and to note that Binance.US is the Tai Chi entity.)

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Posted on by Amy Castor 1