Regulators put more pressure on Binance, the crypto giant

by · March 6, 2023

When FTX fell in November, top rival Binance became the undisputed giant of the crypto world. It was so strong that it offered to bail out other companies, including collapsed broker Voyager Digital, and scolded Sam Bankman-Fried, FTX’s founder, for bad business practices that shook investor confidence in the sector and depressed asset prices.

But Binance has come under increasing scrutiny from US regulators. And now, according to a new report, they may seek to examine new evidence that the exchange’s US and global arms were more interconnected than previously described. With negative headlines piling up, Binance Coin, the exchange’s digital token, has fallen nearly 7 percent in the past week.

Binance’s two divisions were supposed to be independent of each other, so that the firm – which claims to have no actual headquarters – can shield its vast overseas operations from US oversight. But that may not have been the case, according to The Wall Street Journal:

Binance and Binance.US, have been much more intertwined than the companies have disclosed, mixing employees and finances and sharing an affiliated entity that bought and sold cryptocurrencies, according to the interviews and messages and documents reviewed by The Journal. Binance developers in China maintained the software code that supports Binance.US users’ digital wallets, potentially giving Binance access to US customer data.

A spokeswoman for Binance acknowledged to The Journal that the company “did not have adequate compliance and controls in place during the early years” and operated differently now.

Binance considered several ways to minimize exposure to US oversight, beyond creating the Binance.US entity only for US customers. An internal presentation suggested that Binance is rolling out “big PR efforts” to show its willingness to cooperate with US regulators.

And in 2019, executives asked Gary Gensler — then a former CFTC chair turned MIT professor who taught a class on crypto — to advise the company, according to The Journal. (Binance executives believed that if a Democrat won the White House in 2020, Gensler would again be a regulator.) Gensler declined—and has since led the SEC

This agency is now one of several US authorities closely investigating Binance. In addition to a year-long investigation into the relationship between Binance and Binance.US, the SEC is also trying to stop Binance from buying Voyager Digital. (Changpeng Zhao, Binance’s founder, briefly hinted on Friday that the company was thinking about going away from the appointment, before quickly confirms his commitment.)

Meanwhile, a bipartisan group of US lawmakers last week demanded more information from Binance, citing potential evidence “that the exchange is a hotbed of illicit financial activity that has facilitated over $10 billion in payments to criminals and sanctions evaders.”

A spokesperson for Binance told DealBook that the company was “confident in the strength” of its internal compliance practices and that it remains committed to dialogue with regulators and lawmakers.

Binance officials had worried that such scrutiny was a risk hanging over the firm: An executive told colleagues in a 2019 memo that a lawsuit by a US regulator would lead to “nuclear fallout.”

Tesla cuts prices in the US again. The electric vehicle maker announced a 4 percent discount for its Model S and a 9 percent cut for its more expensive Model X. The move, apparently driven by flagging demand, follows price cuts announced in January that appeared to revive sales.

Credit Suisse is losing a long-time supporter. Shares in the Swiss bank fell on Monday after investment firm Harris Associates sold its remaining stake, ending a decade-long investment in the beleaguered lender. “It’s a question of the future of the franchise,” David Herro, Harris’ chief investment officer, told The Financial Times.

Altria is officially ending its partnership with Juul. The Marlboro maker traded its stake in the disposable vaping giant for the rights to the company’s global IP. The move ends a disastrous bet by Altria, which bought a third of Juul in 2018 for $12.8 billion; it now values ​​that holding at just $250 million.

A bipartisan push to ban TikTok is set to gain momentum. Senators Mark Warner, Democrat of Virginia, and John Thune, Republican of South Dakota, plan to introduce new legislation this week that would give President Biden the power to ban foreign technologies like TikTok. It will escalate efforts to block the video app over fears it puts users’ data in the hands of the Chinese government.

China unveiled a modest growth target of 5 percent on Sunday at the annual meeting of the country’s legislature, the National People’s Congress. The overwhelming target – and the decision not to initiate any economic stimulus measures – sent markets in two directions: Stocks rose (following Friday’s Wall Street rally), but commodities fell (due to China’s importance as a major commodity buyer).

A post-Covid boost could be a blip. At 5 percent, The target is China’s lowest in decades and reflects the serious challenges facing the economy despite a recent pick-up in consumer spending and factory activity after Beijing ended its tough zero-Covid policy. But all the good news may be short-lived if structural challenges are not addressed, economists say. These include a debt-ridden real estate sector (a long-standing engine of growth), a tech sector meltdown that has put a chill on investment, and the impact of punishing Western sanctions on sensitive industries, such as chip manufacturing.

Xi Jinping, China’s leader, is expected to cement his authority at the NPC, the most watched in years, with the appointment of loyalists to bolster his policies. “If the economy and radical reforms were really the focus, we would know and hear a lot more about them,” George Magnus, an economist at Oxford University’s China Center, told DealBook. “And the fanfare for change would be higher. Instead, the economy plays second fiddle to control, and the primacy of the party over state institutions.”

Here’s what else happened:

  • China to increase military spending by 7.2 percent, fastest pace in four years, amid rising tensions with US

  • The authorities want to double down on self-reliance, and unveil a “whole nation strategy” to produce more technology at home. China also wants to increase grain production and produce more food domestically to reduce dependence on foreign supplies.

Arm, the British chip designer that SoftBank bought for $32 billion in 2016, is taking further steps to return to the public markets. And the impending IPO will carry heavy expectations about what it will bring for the majority owner – and perhaps for IPOs more generally.

Arm is reportedly aiming to raise around $8 billion in its offering, at a potential value of over $50 billion, according to Reuters. The company has also appointed Goldman Sachs, JPMorgan Chase and Mizuho as lead underwriters. (Banks have eagerly courted Arm, setting up valuations for the business ranging from $30 billion to $70 billion.)

Hopes for a blockbuster Arm debut come from many quarters. SoftBank is aiming for a stunning IPO as the Japanese technology investor suffers paper losses across its vast investment portfolio. (So ​​important is Arm to SoftBank’s fortunes that Masa Son, the Japanese company’s outspoken founder, stepped back from most day-to-day management duties to focus on that business.)

The public markets also hope Arm succeeds. IPO activity in the US has been almost frozen since the markets began to falter last year. Arm’s debut, which is widely expected to arrive later this year, could help end those hibernations.

According to Moody’s Analytics, closing the gender pay gap would boost the global economy by 7 percent, or $7 trillion. At the rate employers are moving, it will take 132 years to achieve equal pay.

Jobs, inflation and earnings – here’s what to watch this week.

Tomorrow: Jay Powell will deliver the Fed’s monetary policy report to the Senate, the first of two days of testimony on Capitol Hill. Expect questions about the state of the economy and interest rates.

Wednesday: It’s International Women’s Day. On the earnings calendar: Adidas.

Thursday: The White House is expected to release a budget proposal for fiscal year 2024. China is set to release inflation data. Oracle reports financial results for the third quarter.

Friday: It’s work day. Economists polled by Bloomberg on average predicted an additional 215,000 jobs were created last month; another data point to look at is wage growth, an inflation indicator. Apple holds its annual meeting: Usually a straightforward affair, this one will include shareholder votes on executive pay and labor policies. Bank of Japan ends its rate-setting meeting; it is expected to leave the principal rate untouched.

Offer

  • Thomas Lee, the private equity pioneer who died last month, apparently of a self-inflicted gunshot wound, had struggled in recent years to match his earlier deal-making successes. (WSJ)

  • GAM, the troubled Swiss asset management firm, is reportedly racing to sell itself in the next two months. (FT)

  • Stable Diffusion, a London-based rival to OpenAI, is reportedly seeking to raise new capital at a valuation of around $4 billion. (Bloomberg)

  • A bidding war has broken out over Telecom Italia’s landline network, with contenders including KKR valuing the network at about $19 billion. (Reuters)

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