Tag: Financial Conduct Authority

Crypto collapse: SEC brings regulatory clarity to Kraken and Celsius, stablecoins for the UK, crypto money laundering

  • By Amy Castor and David Gerard

Most of the deliberation time was spent saying “Wow, that was a lot of crime” “Just so much crime” “Maybe too much crime”

— Allistair Hutton

Regulatory clarity for Kraken

The crypto industry demands regulatory clarity! So the SEC keeps stating the regulations as clearly as it possibly can. Isn’t that nice of them? On November 20, the SEC sued the Kraken crypto exchange.

The causes of action are very similar to those against Coinbase and Bittrex. Kraken deals in crypto securities and acts as an exchange, a broker, a dealer, and a clearing agency, all in the same company and without the proper registrations for each. The particular crypto securities in this case are ADA, ALGO, ATOM, FIL, FLOW, ICP, MANA, MATIC, NEAR, OMG, and SOL.

The SEC also alleges Kraken commingled customer assets with its operating accounts. Kraken’s own auditors said this created “a significant risk of loss” to customers and led to “material errors to Kraken’s financial statements for 2020 and 2021.”

The message the SEC is sending in this series of cases is that it just isn’t going to put up with crypto exchanges doing all the securities jobs in one company anymore, and they need to stop. [SEC press release; complaint, PDF]

The Financial Stability Board, which monitors the global financial system, thinks what the SEC is doing is very good and cool. Its new report “The Financial Stability Implications of Multifunction Crypto-asset Intermediaries” sets out precisely how and why crypto exchanges combining all these functions (an exchange, a broker, a dealer, and a clearing agency) “can exacerbate structural vulnerabilities in those markets.” It uses precisely what happened in the crypto collapse as its example. Risk to the actual economy is limited, says the FSB — though the biggest issue is how the exchanges wrecked the few banks willing to talk to them. [Press release; cover sheet; report, PDF]

It’s not just the SEC cracking down on crypto. The US government is generally sick of crypto nonsense and looking to shut it down. This is what we’ve spent the past year and a half advocating for as loudly as we possibly could.

IOSCO, the International Organization of Securities Commissions, released its final policy recommendations to securities regulators on crypto. In short: regulate the heck out of this stuff for what it clearly is — and don’t accept handwaving about technology. IOSCO will release a second part on DeFi before the end of 2023. [Press release; recommendations, PDF]

SEC trashes Celsius bankruptcy plan 

Judge Martin Glenn approved the Celsius NewCo plan on November 9, giving creditors fresh hope that all the nonsense they’d been trudging through since July 2022, when Celsius initially filed for Chapter 11, was finally coming to an end. But it was not to be. 

The original plan was that NewCo would be managed by Fahrenheit LLC, which won the bidding for Celsius’ assets in May. This business would focus on bitcoin mining and ether staking. [Doc 3972, PDF] 

Creditors would get shares in NewCo, which would trade on NASDAQ. NewCo could issue shares without registration — under an exemption in the bankruptcy code that would allow it to do the initial issuance without filing an S-1 form with the SEC. Creditors would also get back $2 billion in crypto in January 2024. 

But within hours of the court approving the deal, it fell afoul of the SEC — who would not approve the staking and lending portion of the business. [CoinDesk]

The SEC also wanted more details on the company’s assets and accounts for the “predecessor entity,” i.e., Celsius Networks. Unfortunately, Celsius’ pre-bankruptcy accounts are comical trash, somewhat documented in QuickBooks and some Google spreadsheets. This wasn’t quite good enough. [Doc 4050, PDF]

Celsius is now pivoting to “MiningCo,” a mining-only company with US Bitcoin as the manager and a board of directors. Fahrenheit members will not be part of the new entity.

Celsius’ lawyers argue that the “toggle” to mining-only is just fine, and they had this in their back pocket the entire time. Judge Glenn is not convinced: “This is not the deal that creditors voted on,” he said in a November 30 hearing. Celsius may have to seek a new creditor vote to get approval on the revised plan, putting them right back in the mud again. [Reuters, archive]

Blockchain Recovery Consortium (BRIC), who had been selected as a backup bidder in May if the Fahrenheit plan fell through, argued that Celsius should have gone with its backup bid, rather than pushing forward with this stripped-down “MiningCo” plan. 

A hearing on this mess will take place on December 21.

If the MiningCo plan is not approved, Celsius may be forced to liquidate in Chapter 7.

If this new plan does go through, creditors should count the cash and liquid cryptos they get in the settlement as their actual return — and treat their MiningCo shares as lottery tickets.

My beautiful launderette

Spain has arrested Alejandro Cao de Benós, a long-time Western agent of North Korea and founder of the Korean Friendship Association, on behalf of the US, for working with Virgil Griffith. [Reuters] 

Cao de Benós was indicted in April 2022, along with Christopher Emms, a UK citizen, for signing up Griffith to travel to North Korea in April 2019 to give a talk on crypto at the Pyongyang Blockchain and Cryptocurrency Conference, which the pair organized. Emms, a crypto entrepreneur, is still at large. [DOJ; FBI; FBI] 

We’re guessing the US wants a long discussion with Cao de Benós concerning all of North Korea’s other money laundering as well.

The US is currently working to extradite Cao de Benós from Spain, a process that can take months.

In the US, FinCEN wants to declare crypto mixing to be primarily about money laundering, for no better reason than money laundering is precisely what crypto mixing is primarily about. [FinCEN; Federal Register]

Court to Coin Center over their spirited defense of Tornado Cash: LOL, go away. [Doc 74, PDF]

Following “requests from its wealthy customers,” Ferrari is looking to sell cars to sanctioned Russians (ahem) unspecified entities in a currency-substitute that they have to hand. [Reuters, archive]

Now that’s effective altruism

Sam Bankman-Fried is in a cell, where he belongs. [DOJ statement]

But there was much more to FTX than one crook — or five crooks if you count the guilty pleas of Sam’s former fellow executives. The use case for crypto is crime, and FTX was a money laundering machine. Jacob Silverman and Molly White discuss Sam’s many, many as-yet-unindicted co-conspirators. [The Nation; Molly White]

If you ever need a moment of cheer in your life, imagine how Alex Mashinsky, the criminally charged founder and former CEO of Celsius Network, feels seeing Sam be sent to jail in less than five hours. (The amount of time jurors deliberated.) Mashinsy’s trial is scheduled for September 2024.

Over in the FTX bankruptcy, John Jay Ray is suing the Bybit exchange to recover $953 million. Bybit had a private line into FTX and successfully withdrew $327 million in the run on the exchange just before FTX declared bankruptcy in November 2022. [Complaint, PDF]

Stablecoins for the UK

The more foolishly ambitious parts of the UK government are still talking up crypto. So the Financial Conduct Authority has a new discussion paper on fiat-backed stablecoins for “consumers who wish to pay for their everyday shopping with stablecoins” — a category that does not presently exist. [Discussion paper, PDF]

So far, the plan is to allow UK-issued asset-backed “regulated stablecoins” supervised by the FCA. Overseas-issued “approved stablecoins,” with a UK “payment arranger” taking local responsibility, will come later.

The FCA will be requiring consumer protections, consumer right of redemption, protections in case an issuer fails, coin value stability despite market conditions, and ways to “mitigate the risks and harms that we have observed in the market, and those that arise from existing business practices” — i.e., all the crime.

Anti-money-laundering requirements will apply only on redemption — not on every transaction.

This initiative is not about our friends at Tether or USDC — though the FCA uses them as cautionary tales, particularly with USDC breaking its peg when Silicon Valley Bank went down.

Instead, the FCA seems to be setting a path for non-banks to issue their own asset-backed pounds — a regulated form of wildcat banking, with crypto as the excuse to even contemplate doing this weird thing. Or a privatized CBDC, if you want to be generous. The listed examples don’t even really need a blockchain.

There is nothing a regulated GBP stablecoin would do for ordinary UK consumers that they can’t already do with debit cards. But the FCA says that prospective issuers are already in the wings. Our psychic powers suggest these may be Conservative Party donors, given the present government’s recent track record of blatant kleptocracy.

CoinDesk spoke to Matthew Long, the FCA’s director of payments and digital assets, who confirmed that their intent is not to let rubbish through: “We’ve seen lots of things that we’re really concerned about and at the end of the day, the person this actually affects is the customer.” [CoinDesk]

Submit comments by January 22, 2024.

Bitfinex suffers hardly any data leakage to speak of

The Bitfinex crypto exchange apparently suffered a completely trivial wafer-thin leak of almost no customer information at all sometime in October. They announced this complete non-news at 21:30 UTC on Saturday November 4. [Bitfinex, archive]

How bad do you think Bitfinex’s customer data spill was? Clearly so very insignificant — a mere trifle! — that they couldn’t get away with just saying nothing at all to the very large and important customers with short tempers.

We’re sure it’s fine. “Bitfinex has a very close relationship with law enforcement,” and maybe it’ll get much closer.

More good news for bitcoin

CoinDesk has been sold in an all-cash deal to Bullish, the crypto exchange backed by Peter Thiel via Block.One — and not to the Vessenes consortium that was sniffing around the site in August. Terms were not disclosed. CoinDesk will operate as a totally independent entity, for sure! Bullish says it will inject lots of capital. [Press release; WSJ, archive]

Binance is finally killing its BUSD stablecoin as of December 15, 2023. The remaining BUSD balances will be converted to the totally trustworthy stablecoin FDUSD on December 31. You can redeem BUSD directly at Paxos up to February 2024 — if you can pass their anti-money laundering. [Binance, archive]

Binance had previously been trying to switch to Justin Sun’s TrueUSD. But TrueUSD was having problems in July 2023 — such as billions of pseudo-dollars being minted out of thin air. It turns out TrueUSD was hacked. The company waited a month to announce the hack, giving themselves plenty of time to furiously mint more TUSD tokens and send them to Huobi. [Twitter, archive; Twitter, archive; Protos]

Bankrupt crypto lender BlockFi is winding down at last. Payouts will be between 39.4% and 100%! … so, 39.4%. [Reuters, archive] 

Circle, the company behind the USDC stablecoin, reportedly wants to try going public again in 2024. Circle tried in 2021 to go public through a SPAC offering. But they failed to get SEC approval for the proposed merger with Concord Acquisition, and by early 2023 they had given up. [Bloomberg, archive; WSJ, paywalled]

OpenSea is laying off 50% of its staff, as all the air has been let out of the NFT balloon. When it laid off 20% of its employees last year, around 230 people remained. So now they’re down to about 100 employees. [Twitter, Nitter] 

The trial of crypto trader and alleged exploiter of Mango Markets Avi Eisenberg has been delayed until April 8, 2024. Eisenberg’s lawyers say they need additional time to prepare for the case. He is currently residing at MDC Brooklyn, also the temporary home of Sam Bankman-Fried. [CoinDesk]

Alex de Vries (Digiconomist) has a new report out on bitcoin’s water usage. Each transaction on the bitcoin blockchain uses 16,000 liters of water on average, about 6.2 million times more than a credit card swipe — and enough to fill a backyard swimming pool. [Cell]

We also suggested that someone should become the Digiconomist of AI power usage. It turns out that guy is Digiconomist! De Vries’ article “The growing energy footprint of artificial intelligence” was published in Joule in October. [Joule]

When you buy a nice house, make sure the previous owner wasn’t a crypto Ponzi scammer. Basketball player Shai Gilgeous-Alexander bought a house in Toronto previously owned by Aiden Pleterski, the guy who was kidnapped and tortured over three days by an extremely upset investor inquiring as to where his funds had gotten to. Further aggrieved investors are still showing up at the house — and so Gilgeous-Alexander wants to reverse the sale. [NYT, archive]

Image: Kraken founder Jesse Powell in a random tie he found out on a road somewhere.

Posted on by Amy Castor 2

Crypto collapse: Venture capital goes home, Coinbase, Tether backing, FTX sues Hollywood VCs, 3AC on the beach

  • By Amy Castor and David Gerard

“My survey of three card monte tables suggests they’ve always got at least one patron but you won’t see anyone playing at the big casinos which just shows the system is rigged.”

— crossestman

Crypto’s not dead! Look, it’s still twitching

Crypto venture capital investments have gone full crypto collapse, from $21.6 billion in 2022 to just $0.5 billion so far in 2023. This Fortune article includes the funniest graph of the week: [Fortune, archive]

Investors are leaving the crypto sector without any plans to return. [Bloomberg] 

Crypto trading is at its lowest level since October 2020. The Block puts the volume for May 2023 at $424 billion. For comparison, May 2021 was $4.25 trillion and May 2022 was $1.4 trillion. [The Block]

Volume numbers are considerably less if you take into account that unregulated crypto exchanges are known for faking their volumes. Crypto trading is all but dead. We know this because exchanges run by normal finance guys don’t see any trading. [Bloomberg]

Traditional finance groups want to start their own crypto exchanges run in a non-clown-shoes manner. A nice ambition — but that was Gemini’s pitch and even they still had to resort to risky garbage. [FT] 

The Winklevoss twins marketed Gemini as an exchange that played by the rules — one that serious money people could trust. But after the failure of FTX and the Genesis bankruptcy — in which Gemini is the largest creditor — they lost that trust. Maybe they could pivot to AI? [Bloomberg] 

Crypto.com halted services for institutional traders in the US on June 21. The exchange cited “limited demand” as the reason. [news.bitcoin.com]

The rest of crypto is also desperate. Reddit founder Alexis Ohanian is still pushing play-to-earn games and touts Axie Infinity as a huge success. Gamers hate play-to-earn and think it’s vacuous horse hockey. [Twitter, archive]

Universe.xyz is the latest NFT market to shut down, taking all the images on the site with it. As more NFT markets shut down, your apes are in danger of going blank forever. [Twitter, archive]

TechMonitor asks: “Is crypto finally dead?” We should be so lucky. With quotes from David. [TechMonitor] 

Coinbase: We didn’t do it, nobody saw us, and it wasn’t even a thing

Coinbase has responded to the SEC’s complaint with 177 pages of chaff. [Doc 22, PDF]

Paragraph 2 makes the claim that in approving Coinbase’s original S-1, the SEC approved Coinbase’s business. Let’s quote again this line from the S-1, signed off by Brian Armstrong: [SEC]

Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

Coinbase argues that Congress is looking into cryptos, therefore existing laws don’t matter. Paul Grewal, Coinbase’s general counsel, has told Bloomberg how Coinbase’s big hope is that new laws will save their backsides. This is correct — Rep McHenry’s new crypto markets bill is indeed Coinbase’s only hope. [Bloomberg]

Coinbase claims that with this complaint, the SEC is working well outside its remit and that its ideas about whether crypto tokens are securities are entirely novel. Never mind the SEC’s repeated wins in court whenever a crypto issuer is dumb enough to take the matter that far. [Doc 23, PDF; CoinDesk]

Earlier, Coinbase filed a writ of mandamus demanding that the SEC consider its proposal for new crypto regulations. The SEC says it’ll have something to report within 120 days. Judge Cheryl Ann Krause expects a decision on Coinbase’s proposal from the regulator by October 11. [Doc 30, PDF; Doc 32, PDF]  

Tether: Yes! We have no Chinese commercial paper

CoinDesk finally got access to documents from the New York Attorney General related to Tether’s reserves from March 31, 2021. [CoinDesk; CoinDesk, PDF; CoinDesk, PDF; CoinDesk, PDF; CoinDesk, PDF; Bloomberg]  

The NYAG claimed that Tether had been lying about its reserves — which it had been. Tether and Bitfinex settled with New York for $18.5 million in February 2021.

The settlement required Tether to publish a breakdown of its reserves quarterly for two years. But what the public got to see in May 2021 were two skimpy pie charts, showing where Tether had parked its alleged $41 billion in backing reserves at the time. [Tether, archive]

CoinDesk then filed a Freedom of Information request for the fully detailed version of Tether’s report to the NYAG on its reserves.

Tether fought the release of the documents for two years. In February, they lost in court and decided not to go ahead with an appeal. So the NYAG sent Coindesk the documents on June 15. New York also sent the same documents to Bloomberg and Decrypt.

In June and July 2022, Tether vigorously denied that it held money in Chinese commercial paper — loans to Chinese companies which most money market funds avoid. It also said in September 2021 that it had no debt or securities linked to Evergrande, a cash-strapped Chinese real estate company. [Tether, 2022; Tether, 2022; CoinDesk, 2021]

Bloomberg called out Tether’s wider claims of no involvement in Chinese commercial paper as nonsense. [Bloomberg, 2021]

It turns out that Tether did hold Chinese commercial paper in 2021, and quite a lot of it. It held securities issued from banks around the world — but mainly China, including debt issued by the Industrial & Commercial Bank of China, China Construction Bank, and Agricultural Bank of China. ChainArgos took a close look at the funds and put together a spreadsheet. [Google Docs]

The Tether press releases on the FOIed docs are a hoot. Lots of table pounding. [Tether, archive; Tether, archive]

We give CoinDesk a bit of stick from time to time. But we also read the site every day and follow the livewire feed. They get all the credit for doggedly pursuing this one.

FTX versus the venture capitalists to the stars

John Jay Ray’s team at FTX seems to have found some more truly fascinating documents. FTX is suing venture capital firm K5 Global, its managers, Michael Kives and Bryan Baum, and various related entities to recover the $700 million that Sam Bankman-Fried put into the firm.

Kives worked at Creative Artists Agency from 2003 to 2018 as a Hollywood talent agent. He left in 2018 to found K5.

In February 2022, SBF attended a dinner party at Kives’ house, with A-list celebrities, billionaires, and politicians. He was deeply impressed with Kives’ “infinite connections” and even contemplated that Kives could work with FTX on “electoral politics.”

Less than three weeks later, SBF signed a “term sheet” agreeing to give Kives and Baum $125 million each personally and to invest billions of dollars into K5 over three years: 

The Term Sheet was little more than a cursory list of investment ideas, and repeatedly stated that the actual “mechanics” of these very substantial investments would be later worked out “in the long form documents.” 

SBF wired $300 million to K5 the next day. No due diligence was done on any of the deals — including $214.5 million for a 38% stake in MBK Capital LP Series T, whose gross asset value was just $2.94 million as of March 2022.

K5 were very close advisors. Kives and Baum joined FTX’s internal Slack chat. SBF reserved a room for them in his Bahamas luxury apartment. In May, Alameda transferred another $200 million to K5.

Sam didn’t worry too much about the fine details. In an August 2022 internal document, he wrote that “Bryan is ~100% aligned with FTX,” that “FTX is aligned with Bryan too,” and that “if there are significant artificial up-downs between FTX and K5 as entities, I’m happy to just true it up with cash estimates.”

SBF wrote that he was:

… aligned with Bryan and K5, and treats $1 to it as $1 to FTX even though we only own 33%, because whatever, we can always true up cash if needed, but also, who cares … There are logistical, PR, regulatory, etc reasons to not just merge K5 100% into FTX but I and Bryan will both act how we would if they were merged.

… Is Bryan an FTX employee, or a random 3rd party? The answer, really, is neither. The answer is that it’s sorta complicated and liminal and unclear. Bryan lives in the uncanny valley.

FTX and Alameda employees flagged K5’s “pretty bizarre” expenses at the time, such as “over $777k in design expenses” that had been billed to Alameda.

FTX wants the $700 million back as having been avoidable transfers. It may want even more money, as Ray’s team suspects that more interesting details will come out in discovery. FTX also wants K5’s claims in the bankruptcy disallowed until this matter is resolved. [Adversary Case, PDF]

More news from Chapter 11

Cameron Winklevoss tweeted yet another open letter to Barry Silbert of Digital Currency Group on July 4, demanding back Gemini Earn customers’ money. Winklevoss accuses DCG of “fraudulent behavior” and wants them to do the “right thing” and hand over $1.465 billion of dollars, bitcoin, and ether. If Silbert doesn’t pay up, Winklevoss threatens to sue on Friday, July 7. CoinDesk, which is owned by DCG, couldn’t get a comment from their own proprietor on the story. [Twitter, archive; CoinDesk]

After the deal for Binance.US to buy Voyager Digital fell through, Voyager gave up trying to sell itself and is liquidating. Here’s the liquidation notice. [Doc 1459, PDF]  

Celsius is finally converting its altcoins to BTC and ETH as it pursues its plan to relaunch with the auction-winning consortium Fahrenheit. [CoinDesk]  

If you have vastly too much time on your hands, here’s the full Celsius Network auction transcript — all 256 pages of it. [Doc 2748, PDF]

Customers of the bankrupt US branch of the Bittrex crypto exchange — which is being sued by the SEC — can withdraw those holdings that are clearly theirs … whatever that means. [CoinDesk]  

Three Arrows Capital: What Su and Kyle did next

Crypto was taken out in 2022 by a one-two punch of Terra-Luna collapsing in May and then crypto hedge fund Three Arrows Capital collapsing in June.

Other crypto firms had invested in Terra-Luna and 3AC because they paid the highest interest rates! Now, you might think that investment firms would know that high interest means high risk.

3AC’s two founders, Su Zhu and Kyle Davies, just shut their office door in Singapore in late May 2022 and skipped the country, leaving their staff to tell investors the bad news.

What did Zhu and Davies do next? They spent the summer traveling around Asia, went surfing, and played video games. Davies is currently in Dubai and Zhu is back living in Singapore. [NYT]

Zhu and Davies insist they must have done nothing wrong because no government has filed charges yet. Uh huh.

3AC’s creditors think Zhu and Davies have done one or two things wrong. Teneo, the liquidator trying to clean up the 3AC mess, wants the pair fined $10,000 a day for contempt, saying that Davies has failed to respond to a subpoena. [CoinDesk]

The pair are suing Mike Dudas, the original founder of crypto media outlet The Block, for defamation. In the US, LOL. They allege Dudas said nasty things about their new crypto venture OPNX, though the suit doesn’t say what allegedly defamatory claims Dudas made. We expect the 3AC boys to have some trouble demonstrating they have a reputation to malign. Stephen Palley is representing Dudas. [CoinDesk]

Regulatory clarity

In the UK, the Financial Services and Markets Bill has passed. One part of this gives the Treasury greater powers to regulate crypto, likely via the Financial Conduct Authority. We should expect more detailed regulations within a year. [CoinDesk]

This comes not before time. UK losses to crypto fraud increased more than 40% to surpass £300 million (USD$373 million), according to Action Fraud, the national reporting center for fraud and cybercrime. [FT] 

Europe’s MiCA is now law from the end of June 2023. It goes into application in one year for stablecoins and in 18 months for general crypto assets and virtual asset service providers. [EUR-Lex]  

The European Central Bank keeps talking about doing a CBDC. This is good news for crypto! Or maybe it isn’t: [ECB]

Policymakers should be wary of supporting an industry that has so far produced no societal benefits and is increasingly trying to integrate into the traditional financial system, both to acquire legitimacy as part of that system and to piggyback on it.

The CFTC Division of Clearing and Risk sent out a staff advisory to registered derivatives clearing organizations on May 30, reminding them of the risks associated with expanding the scope of their activities. It specifically addressed crypto. [CFTC]

When the CFTC points out that market shenanigans are illegal in crypto just like they are in regular commodities, keep in mind that Avi Eisenberg is finally going to trial for allegedly committing those precise market shenanigans in DeFi. These are real go-to-jail crimes. [Bloomberg; Schedule, PDF; Case docket]  

The Thailand SEC has banned crypto lending that pays returns to investors. It now also requires crypto trading firms to post the following warning: “Cryptocurrencies are high risk. Please study and understand the risks of cryptocurrencies thoroughly. because you may lose the entire amount invested.” [SEC Thailand, in Thai]

New York has settled with CoinEx after suing them in February for failing to register as a securities exchange. The company has to stop operating in the US — not just New York — return $1.1 million to investors, and pay $600,000 in penalties. [NYAG; Stipulation and consent, PDF]

The ETF trick will surely work this time

Guys, guys, the Blackrock and Fidelity bitcoin ETFs will change everything! They’re going to get surveillance of trading and market data from somewhere! This will surely answer all of the SEC’s previous objections to bitcoin ETFs! The market will be delighted!

… oh. The SEC has found these applications inadequate. [WSJ]  

Blackrock and Fidelity are going to try again with Coinbase as the exchange supplying market surveillance. [CoinDesk]  

But the trouble with monitoring at Coinbase is that Coinbase isn’t where the market is — the bitcoin market is at Binance. That’s where price discovery happens.

We expect these ETF applications to go no further than all the previous bitcoin ETF applications.

The good news for bitcoin continues its monotonous patter

Binance senior staff have been jumping ship. General counsel Han Ng, chief strategy officer Patrick Hillmann, and SVP for compliance Steven Christie all resigned this week. They specifically left over CZ’s response to the ongoing Department of Justice investigation. [Fortune]

Binance.US’s market share has dropped to 1%, down from a record 27% in April. Is Binance giving up on its US exchange? The market share nose-dived after the SEC sued Binance in June. [WSJ]  

Fortune favors the internal trading desk: Crypto.com has been caught trading directly against its own customers. Dirty Bubble spotted the job ads for a proprietary trading desk at the firm in November 2022, of course. [FT, archive; Twitter, archive]  

Russia is giving up on the idea of a unified state-run crypto exchange. Instead, it’s focusing on regulation for multiple exchanges. Russia is continuing to promote crypto as a way to evade sanctions for making international payments. When you’ve devastated your economy by embarking upon a very stupid war, that’s … a strategy? [Izvestia, Russian]

In crypto collapse news from the distant past, something’s happened in Quadriga! The government of British Columbia is seeking forfeiture of $600,000 in cash, gold bars, and Rolex watches that QuadrigaCX cofounder Michael Patryn has in a safe deposit box. The RCMP alleges the items are the proceeds of unlawful activity. [Vancouver Sun]

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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Binance: A crypto exchange running out of places to hide

Binance, the world’s largest dark crypto slush fund, is struggling to find corners of the world that will tolerate its lax anti-money laundering policies and flagrant disregard for securities laws. 

On Thursday, the Cayman Islands Monetary Authority issued a statement that Binance, the Binance Group and Binance Holdings Limited are not registered, licensed, regulated, or otherwise authorized to operate a crypto exchange in the Cayman Islands.

“Following recent press reports that have referred to Binance, the Binance Group and Binance Holdings Limited as being a crypto-currency company operating an exchange based in the Cayman Islands, the Authority reiterates that Binance, the Binance Group or Binance Holdings Limited are not subject to any regulatory oversight by the Authority,” the statement said.

This is clearly CIMA reacting to everyone else blaming Binance on the Caymans, where it’s been incorporated since 2018. 

On Friday, Thailand’s Security and Exchange Commission filed a criminal complaint against the crypto exchange for operating a digital asset business without a license within its borders. 

Last week, Binance opted to close up shop In Ontario rather than meet the fate of other cryptocurrency exchanges that have had actions filed against them for allegedly failing to comply with Ontario securities laws.

Singapore’s central bank, the Monetary Authority of Singapore, said Thursday that it would look into Binance Asia Services Pte., the local unit of Binance Holdings, Bloomberg reported. 

The Binance subsidiary applied for a license to operate in Singapore. While it awaits a review of its license application, Binance Asia Services has a grace period that allows it to continue to operate in the city-state. 

“We are aware of the actions taken by other regulatory authorities against Binance and will follow up as appropriate,” the MAS said in a statement.

On June 26, the UK’s Financial Conduct Authority issued a consumer warning that Binance’s UK entity, Binance Markets Limited, was prohibited from doing business in the country. 

“Due to the imposition of requirements by the FCA, Binance Markets Limited is not currently permitted to undertake any regulated activities without the prior written consent of the FCA,” the regulator said.

It continued: “No other entity in the Binance Group holds any form of UK authorisation, registration or licence to conduct regulated activity in the UK.” 

Following the UK’s financial watchdog crackdown, Binance customers were temporarily frozen out of Faster Payments, a major UK interbank payments platform. Withdrawals were reinstated a few days later.

Only a few days before, Japan’s Financial Services Agency issued a warning that Binance was operating in the country without a license. (As I explain below, this is the second time the FSA has issued such a warning.)

Last summer, Malaysia’s Securities Commission also added Binance to its list of unauthorised entities, indicating Binance was operating without a license in the Malaysian market.

A history of bouncing around

Binance offers a wide range of services, from crypto spot and derivatives trading to tokenized versions of corporate stocks. It also runs a major crypto exchange and has its own cryptocurrency, Binance Coin (BNB), currently the fifth largest crypto by market cap, according to Coinmarketcap. 

The company was founded in Hong Kong in the summer of 2017 by Changpeng Zhao, more commonly known as “CZ.” 

China banned bitcoin exchanges a few months later, and ever since, Binance has been bouncing about in search of a more tolerant jurisdiction to host its offices and servers.  

Its first stop after Hong Kong was Japan, but Japan was quick to put up the “You’re not welcome here” sign. The country’s Financial Services Agency sent Binance its first warning in March 2018. 

“The exchange has irked the FSA by failing to verify the identification of Japanese investors at the time accounts are opened. The Japanese officials suspect Binance does not have effective measures to prevent money laundering; the exchange handles a number of virtual currencies that are traded anonymously,” Nikkei wrote. 

Binance responded by moving its corporate registration to the Cayman Islands and opening a branch office in Malta, the FT reported in March 2018.

In February 2020, however, Maltese authorities announced Binance was not licensed to do business in the island country. 

“Following a report in a section of the media referring to Binance as a ‘Malta-based cryptocurrency’ company, the Malta Financial Services Authority (MFSA) reiterates that Binance is not authorised by the MFSA to operate in the crypto currency sphere and is therefore not subject to regulatory oversight by the MFSA.”

The ‘decentralized’ excuse

CZ lives in Singapore but has continually refused to say where his company is headquartered, insisting over and over again that Binance is decentralized. This is absolute nonsense, of course. The company is run by real people and its software runs on real servers. The problem is, CZ, whose net worth Forbes estimated to be $2 billion in 2018, doesn’t want to abide by real laws. 

As a result, his company faces a slew of other problems. 

Binance is currently under investigation by the US Department of Justice and the Internal Revenue Service, Bloomberg reported in May. It’s also being probed by the Commodity Futures Trading Commission over whether it allowed US residents to place wagers on the exchange, according to another Bloomberg report. 

Also in May, Germany’s financial regulator BaFin warned that Binance risked being fined for offering its securities-tracking tokens without publishing an investor prospectus. Binance offers “stock tokens” representing MicroStrategy, Microsoft, Apple, Tesla, and Coinbase Global.  

Binance has for five years done whatever it pleases, all the while using the excuse of “decentralization” to ignore laws and regulations. Regulators are finally putting their collective foot down. Enough is enough.

Image: Changpeng Zhao, YouTube

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