Is Crypto.com Next On The US Stock Exchange Hit List?

Crypto.com may be the odds-on favorite as the next digital asset exchange to face the wrath of US authorities looking to rein in crypto excesses.

On March 28, Finance Forward reported that Germany’s Federal Financial Supervisory Authority (Bafin) was investigating Singapore-based Crypto.com for failing to keep its promise to secure a formal partnership with local brokerage CM-Equity.

Last summer, Finance Forward first reported that Crypto.com – which holds a Malta-issued electronic money institution (EMI) license issued to Foris DAX MT Limited – was promoting CM-Equity as its German partner (a requirement for marketing to German clients). Around one million Germans had downloaded the Crypto.com app at that time.

The Bafin-approved CM-Equity was supposed to handle Know Your Customer (KYC) requirements and other pesky regulatory obligations for Crypto.com, but CM-Equity reportedly never received any customer information from Crypto.com. This did not stop Crypto.com from listing CM-Equity as its partner and informing German digital currency exchange customers that for legal purposes they were considered customers of CM-Equity. The latter firm was reportedly unaware of this situation until Finance Forward contacted them.

Following last summer’s report, Crypto.com began advertising in Germany for a ‘Regulatory Compliance Manager’, whose responsibilities will include “obtaining the relevant licenses to conduct regulated business in Germany.”

Last week’s report claimed that the two parties had failed to move forward with their partnership, and Crypto.com had removed any mention of CM-Equity from its website. The Bafin registration of Foris DAX MT Limited expired in August last year. However, the now 1.3 million Germans who downloaded the Crypto.com app can still access exchange services and products, just not in German.

While Bafin responded to last summer’s report by saying it was “checking the facts” of the situation, the regulator now says it is “investigating”, a verbal exchange that Fast Forward considered significant.

Bank problems

Crypto.com’s European presence became more complicated in January after Lithuanian authorities ordered local payment processor Transactive Systems AB to end its relationship with customers involved in “virtual currencies”. The stop followed an inspection by the Bank of Lithuania which revealed “significant breaches and deficiencies” in anti-money laundering laws.

Bloomberg later reported that Transactive was launched with the help of senior executives at PacNet Services Ltd, a Vancouver-based processor that was cut off from the US financial system in 2016. The Treasury Department’s Office of Foreign Assets Control (OFAC) concluded that PacNet was facilitating money laundering money by operators of countless “bulk mail” scams that prey on American retirees.

In 2019, the US Department of Justice hit four of PacNet’s top executives with charges of fraud and money laundering. But when PacNet folded, Transactive was born, with former PacNet executives taking roles in Transactive’s compliance, marketing, technology and customer service departments.

In 2018, Scott Roix, a Florida resident who was one of Transactive’s early investors, pleaded guilty to felony conspiracy charges for his role in a $1 billion fraud scheme. Bloomberg reported that some of Transactive’s banking partners cut ties with the company after Roix’s conviction, but Transactive said it cut ties with Roix and denied that any of its seed funding came from Roix’s fraudulent activities.

In 2019, four more PacNet executives were charged with fraud and money laundering, including two who ended up working at Transactive. Both charges remain active, and while one executive (Renee Frappier) claimed to have left Transactive before being charged, the other (Miles Kelly) was until recently still in an anti-money laundering capacity (you can’t make this up) at Transactive .

Besides Crypto.com, Transactive’s other crypto clients included digital asset lending platform Nexo, whose offices were raided by Bulgarian authorities in January. The raids resulted in money laundering, tax evasion and fraud charges against four people suspected of being involved in the scheme since “early 2018”.

Another Transactive crypto client was Dominica-based lender Migom Bank, whose main investors included Mikhail Syroejine, a Russian national who pleaded guilty to US money laundering charges in 1996. Migom reportedly “severed” its Transactive ties last year and bought out “most of” ” Syroejine’s shares.

It is unclear whether Binance was a Transactive client, although it is reasonable. Wherever there is regulatory dodging, Binance is rarely far behind.

When it rains…

Lithuania’s actions against Transactive left Crypto.com temporarily unable to trade in euros, but the exchange’s UK users also reported problems moving pounds on/off the exchange. (Transactive is licensed by the UK’s Financial Conduct Authority, but Crypto.com uses BCB Payments for its UK banking.)

Crypto.com’s problems were likely exacerbated by Lithuania’s reported freeze of funds in Transactive’s crypto-related accounts, which resulted in Crypto.com customers asking for help in online forums. The exchange also began imposing stiff new fees on withdrawals, which, combined with another round of major layoffs, raised fears that all was not well with Crypto.com.

In February, the Bank of Lithuania announced that it was investigating UAB PayrNet, a subsidiary of banking platform Railsr, on suspicion of “grossly and systematically” violating money laundering laws. PayrNet was the issuer of Crypto.com’s Visa debit card until December last year, when the exchange announced it was switching providers to Malta-based Foris MT Limited.

Crypto.com’s “Midnight Blue” Visa debit card comes courtesy of Metropolitan Commercial Bank (MCB), although MCB announced in January that it would be “exiting the crypto-active related vertical” before the end of the year. MCB clarified that this pivot would not affect “MCB’s service to clients who do not have crypto-asset related activity as a main business.”

MCB included Crypto.com in its list of “paying clients” when the bank released its Q322 investor presentation, but Crypto.com was no longer there when MCB’s Q422 presentation was released. Crypto.com’s ‘How to Deposit USD via ACH Direct Deposit’ page still cites MCB as handling these transactions, but how much longer is anyone’s guess. And with most traditional banks now dropping crypto clients like yesterday’s skinny jeans, where Crypto.com will find new USD payment skins is an even more difficult question.

Fat fingers, thin reserves

Bank connections aside, Crypto.com’s internal operations have often sparked controversy. In May 2021, the exchange accidentally sent $7.2 million worth of tokens to a customer who had requested a withdrawal of around $68. That nonsense was somehow not discovered until December 2021, and the company has yet to recover all of the mistaken funds.

Last October, questions rose after 320,000 ETH tokens were mistakenly sent from Crypto.com to the Gate.io exchange. While the tokens were returned to Crypto.com the following week, Crypto.com CEO Kris Marszalek was delayed. public admission that this transfer was a fat-fingered booboo didn’t exactly inspire confidence, especially coming on the heels of the bankruptcy filing of rival exchange FTX.

FTX’s collapse prompted many exchanges to produce reflective “proof of reserves” reports that didn’t always provide much in the way of reassurance. In Crypto.com’s case, the revelation that nearly 20% of its roughly $3 billion in wallet reserves in mid-November was in the Shiba Inu meme coin raised eyebrows, but the company wrote it off as reflecting customer interest.

Not all customers proved willing to dismiss their concerns, leading to mass hammering of “withdrawal” buttons. Some observers claim that Crypto.com appeared to have been backstopped by rival exchange Binancewhose founder Changpeng ‘CZ’ Zhao at the time was keen to take on the mantle of crypto savior recently released by FTX’s Sam Bankman-Fried.

Numerous online scouts claim to have uncovered other connections linking Crypto.com to Binance, both in terms of their executives and even some digital wallets which was opened by Binance but now used by Crypto.com.

However, according to Crypto.com extracted hundreds of millions of dollars worth of digital assets from Binance ahead of the proof of reserves, CZ declared (in a since-deleted tweet): “If an exchange has [sic] moving large amounts of crypto before or after they demonstrate their wallet addresses is a clear sign of trouble. Stay away.” So if there was a CZ-Marszalek bromance, it didn’t last.

Given Binance’s mounting legal troubles, even the perception of ties to CZ could prove dangerous. But for an exchange seemingly teetering on the brink like Crypto.com — and Marszalek has his own history of bad business practices — this kind of connection could prove fatal.

Fortune favors the solvent

Not too long ago, Crypto.com spent huge amounts of money promoting its services, including $100 million on its high-profile “Fortune favors the brave” Super Bowl commercial with Matt Damon. Damon recently told The Associated Press that his motivation for doing the spot was because his non-profit Water.org was having “a down year.” Damon says he “gave my entire salary to charity,” while Crypto.com “gave $1 million to Water.org … just on my own.”

Crypto.com also inked a $700 million naming rights deal for the Staples Center in Los Angeles, home of the NBA’s Lakers. Last November, in the wake of FTX’s collapse, Marszalek defended the deal, saying the annual payment on the 20-year deal “made up about 10% of our revenue.”

But with Crypto.com increasingly unable to secure an influx of new money – due to reduced retail interest in digital assets and the difficulty of getting fiat on the exchange – 10% of annual revenue may soon prove to be a deal breaker.

Last August, Crypto.com backed out of a $495 million deal to sponsor the UEFA Champions League, a decision reportedly based not only on the suddenly prohibitive cost, but also on a more restrictive European regulatory environment.

Things are also getting tough in the state. This year alone, US authorities have targeted exchanges such as Binance, Coinbase (NASDAQ: COIN ), Kraken and Nexo. Bittrex, which was fined $29.3 million last year for lax anti-money laundering practices, announced last week that it will close its American operations this month due to the “current US regulatory and economic environment” that makes the market no longer “economically viable.”

Crypto.com’s sensational campaigns, its ties to sketchy payment processors, a history of promoting high returns on the kind of staking products that got Kraken into so much trouble and – as the German situation shows – a willingness to treat compliance as optional… It can all prove to be catnip for US authorities, who don’t seem to need much encouragement to press charges these days. If you have a dead pool for crypto exchanges going on, you can make it worse.

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