Takes stock of the US crypto crash

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

One consequence of the collapse in the crypto markets last year is that the survivors have become larger and more central.

With great scale comes great scrutiny, as Binance is finding out. So let’s take stock of the year so far for the headquarterless exchange.

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

Subsequently, financial crime agency Fincen singled out Binance as a counterparty to Bitzlato, an obscure crypto exchange allegedly linked to illegal crypto funds and the darknet. The order was the first of its kind under a powerful new section of the law put in place to combat Russian money laundering. Binance said it was happy to support law enforcement in the investigation. A spokesperson added that it has a “team of over 750 in global compliance roles, as well as a team of former federal law enforcement officers working around the clock to support litigation against organizations like Bitzlato.”

At the end of the month, I revealed that Binance was using the same Washington lobbyists as its US affiliate. Coupled with the fact that CEO Changpeng Zhao is the ultimate beneficial owner behind Binance US, this undermines the offshore group’s claim that the two trading platforms operate separately.

“The government sees the same beneficial owner of both companies and sees them as one entity,” said a Washington lobbyist who was once approached by Binance for a job.

So it was January. Moving on to February: Binance temporarily halted wire transfers in US dollars, giving no reason for the suspension.

In the middle of the month, New York’s financial regulators shut down the issuance of BUSD, a Binance-branded stablecoin that just a couple of months ago accounted for 40 percent of trading volume on the exchange.

Zhao said BUSD was “never big business” for the exchange, but the data is not on his side.

Binance believes the void left by the token, whose market value has fallen, will be replaced by other stablecoins. But analysts told me earlier this week that the stock market will not necessarily escape unscathed.

The exchange has gone to great lengths to clean up its image, and over time has made major hires, including Tigran Gambaryan and Greg Monahan, former heavyweights in the IRS and US Treasury respectively.

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

But Binance’s growing list of compliance hiccups should be a warning to the rest of the crypto industry. Through its many controversies, the stock exchange has successfully ballooned to a size that dwarfs its competitors. In fact, CryptoCompare data shows that the exchange now controls more than 60 percent of the crypto spot market.

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

“The success of the largest exchange is critical to keeping the markets alive. The industry that preaches the bible of decentralization is asking for the survival of its most centralizing force,” Charley Cooper, former chief of staff at the Commodity Futures Trading Commission, told me.

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

Weekly Highlights:

• Another former FTX executive gives in: Nishad Singh, former chief engineer at the bankrupt exchange, pleaded guilty to six criminal charges in the United States. The SEC also came after Singh, alleging that the former FTX high-flyer created the code that allowed FTX client funds to be diverted to sister trading firm Alameda Research.

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

• Cybersecurity company SonicWall published its annual threat report this week, which revealed that cryptojacking attacks have increased by more than 40 percent last year. Unlike ransomware, cryptojacking — the practice of hijacking someone’s computer to mine cryptocurrencies — flies under the radar, but that doesn’t mean it isn’t a cause for alarm. “Make no mistake, cryptojacking is a high-stakes game with serious consequences,” SonicWall CEO Bob VanKirk told me.

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

The Bank of England’s focus on creating a digital pound means it’s more Team Britcoin than Team Bitcoin. Yet the comments made by Sir Jon Cunliffe, deputy governor for financial stability at the BoE, at a parliamentary hearing were particularly poignant:

“No one would use [crypto tokens] like money—well, some people would, but they’re probably outside the criminal code as well as financial regulation.”

Data mining: Crypto’s banking crisis bites Silvergate

Shares in crypto-focused bank Silvergate have taken an absolute hit this week.

Late on Wednesday, the bank said it would not be able to file its annual report with the SEC as it evaluated whether a steadily weakening capital position would hurt its ability to survive. It has been necessary to sell assets to help repay federal loans. Unsurprisingly, shares lost nearly 60 percent the next day on Wall Street.

Silvergate’s flirtation with destiny has been long overdue. The bank invested heavily in providing services such as payments to the crypto industry, so much so that it brought in Sam Bankman-Fried’s former FTX empire as a client.

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

Like many other crypto (or crypto-exposed) companies, the bank’s financial health has been correlated to the digital asset market. Since the peak of bitcoin’s price in November 2021, Silvergate’s shares have fallen an eye-popping 97 percent from $219 to $5.

Last year, the bank reported a full-year loss of $949 million, in stark contrast to its $76 million profit in 2021. US banking regulators have repeatedly warned the banks they oversee about the risks associated with exposure to crypto. Nothing encapsulates this better than Silvergate.

Cryptofinance is edited by Philip Stafford. Send any thoughts and feedback to [email protected].

Your comments are welcome.