Welcome to The Node. This is Daniel Kuhn and Prachi Vashisht, here to take you through the latest in crypto news and why it matters. In today’s newsletter:
In a blog post Monday, Binance CEO Changpeng Zhao called the lawsuit filed by the Commodity and Futures Trade Commission (CFTC) against him and his firm “an incomplete recitation of facts.” Binance is alleged to have skirted know-your-customer rules, commodity laws and shielding itself against oversight by spinning up multiple subsidiaries and shifting its headquarters. Zhao said the lawsuit was “unexpected and disappointing” while disagreeing with the “characterization of many of the issues alleged in the complaint.” Following the lawsuit, stablecoin Binance USD (BUSD) had over $500 million in outflows within 24 hours. Market observers believe the CFTC-Binance lawsuit could worsen crypto market liquidity, pulling bitcoin down to $25,000. A Bernstein research report stated the lawsuit can require Binance to cease operations in the U.S. as part of a potential settlement.
Metaverse Unplugged
Media conglomerate Disney is laying off 7,000 employees, including its metaverse team, as an attempt to control costs and “streamline” the business, people familiar with the matter told the Wall Street Journal. The firm announced its metaverse strategy in mid-2022, picking Polygon as its blockchain of choice. In September, Disney appeared to ramp up its resource deployment by posting jobs for a specialized in-house counsel for non-fungible tokens (NFT) and decentralized finance (DeFi).
‘Verified’ Users
On Tuesday, European lawmakers on two key committees in the parliament voted in favor of imposing a cap of $1,000 euros on payments made by unverified crypto users, strengthening money laundering laws in the trading bloc. The plans were approved by the parliament’s Economics and Civil Liberties committees on Tuesday, with six abstentions. Damien Carême, the French lawmaker who leads the parliament’s negotiations on the overhaul, said the plans wouldn’t prevent crypto payments as the cap won’t apply if a regulated wallet provider is involved. Experts estimate the final text of the bill may take months. Elsewhere, a federal judge has paused Voyager Digital’s efforts to sell its assets to Binance.US in response to the U.S. government’s filing for an emergency stay.
Sound Bites
“If you read the complaint, there is so much detail to it, it suggests that [regulators] did have some information from people inside [Binance]. It’s really quite striking.”
– Former CFTC Chair Timothy Massad, discussing the CFTC’s compliant against Binance, on CoinDesk TV’s “First Mover”
The Takeaway: Bad for Binance?
Binance, the largest global crypto exchange by trading volume, and Chief Executive Changpeng Zhao, aka CZ, were reportedly taken off guard by the U.S. Commodities and Futures Trading Commission’s (CFTC) decision to file a civil lawsuit against the company on Monday. The firm, which has for years avoided establishing a permanent headquarters, had been in dialogue with U.S. and other regulators about operating compliantly in the hundred-plus jurisdictions it services.
Just last month, Binance Chief Strategy Officer Patrick Hillman told the Wall Street Journal that the exchange had closed “gaps” that formed in its compliance strategy as a result of the exchange’s rapid expansion. At the time, Hillman more or less suggested Binance was prepared to eat flour for its previous crimes, committed unwillingly, but was also having substantive conversations with regulators that would allow it to continue existing.
The CFTC’s filing was a surprise, to an extent. There have been rumors the U.S. Department of Justice, Securities and Exchange Commission and even the Internal Revenue Service were preparing lawsuits for a range of corporate failings. When U.S. officials sanctioned Russian crypto exchange Bitzlato, they noted Binance was a large counterparty for darknet marketplaces. That the CFTC dropped the first shoe is surprising – if only because it fuels confusion over whether ether (ETH) and other cryptocurrencies are commodities or securities.
In its 74-page complaint, the CFTC, accused Binance of not only servicing U.S. customers without filing for the appropriate licenses but actively helping customers skirt know-your-customer and other compliance rules. Binance’s executives were allegedly aware its geofencing tools were inadequate, and even had a semi-formalized (though confidential) procedure for getting “whales” around it and shielding their U.S. IP addresses.
The case is obviously bad for Binance, and comes during an uncertain time for crypto. Experts say this could be a fatal blow to the exchange (worst case), or disrupt a significant part of its revenues (Bloomberg’s Matt Levine, for instance, essentially said the case is not centered on consumer safety, but designed to prevent Binance from profiting from U.S. hedge funds). CEO Zhao could be barred from running the firm he founded in 2017, and from trading crypto period.
If Zhao, who is thought to be one of the wealthiest people in the world, starts selling off assets, that could have a negative impact on crypto prices. And cutting Binance out of derivatives markets could have deleterious effects on bitcoin’s liquidity and price. If the BitMEX case filed by the CFTC in 2018 provides any insight into how things will play out, the toppling of the largest derivatives exchange may be worse than it sounds.
Instead, this is likely just another significant blow to crypto’s reputation. Evidence suggests there is at least one informant at Binance, who passed private communications and self-destructing Signal messages to the commodities watchdog. Those messages paint a portrait of Binance – with Zhao at the helm – as a business that would sacrifice rules for the sake of growth. Large traders were privileged with faster settlement connections and lower fees – putting them above retail investors. And, if the CFTC is to be believed, Binance traded against its customers, which seems to be a trend at crypto exchanges.
However, it’s important to note the claims made are just allegations. Too often (in and out of crypto) are the police taken at their word. U.S. regulators are likely not filing a lawsuit based on false evidence, but it is information with a slant. In the Bitzlato suit, U.S. regulators assumed the exchange’s lifetime transaction volumes were all from illicit sources. In the BitMEX suit, regulators suggested but did not prove the exchange facilitated transfers for terrorists.
Binance, as Hillman said, has made serious mistakes and has operated under a suspicious corporate and regulatory veil. But the worst accusations have not yet been proven, and may have explanations. The U.S. government has taken a hard line against crypto – seemingly coordinating efforts to cut crypto off from the wider economy through banking restrictions and punitive lawsuits – and so it should not be a surprise they would target an exchange that has seemed to weather and grow during the bear market.
Make no mistake, Binance’s apparent conflicts of interests and willingness to flaunt regulations is abhorrent. Zhao and other Binance executives’ internal communications regarding fraud and illicit activity on the exchange, disclosed in the court documents, are laughably inept. But the lawsuit, as bad as it is for Binance, won’t kill Blorkchains.
Kraken founder promoted Custodia’s doomed bank and stablecoin (Protos)
Black, Hispanic investors struggle with faith in crypto (AP)
Circle Stablecoin USDC To Launch On Cosmos (Blockworks)
London loses ground to Paris in battle for crypto conference crown (The Block)
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Taking Over?
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