It is certainly heroic to fight the forces of nature, but success tends to be implausible. The forces of crypto regulation strongly oppose any innovative digital asset offering in the U.S. Since the Fed/FDIC/OCC statement on January 3, 2023, titled “Agencies issue joint statement on crypto-asset risks to banking organizations”, and the IMF statement on January 18, 2023, titled “Crypto Contagion Underscores Why Global Regulators Must Act Fast to Stem Risk”, regulators have dismantled crypto rails. First, the crypto on-off-ramp banking system was cut off (Silvergate Bank / Silicon Valley Bank / Signature Bank). The second step would be to force exchanges and crypto offerings out of the U.S. This has all been documented, and there are no surprises so far.
Bitcoin prices rallied after the SEC sued Coinbase last night because the market was already expecting this. After Kraken settled with the SEC on February 9, 2023, and discontinued their ‘unregistered’ crypto staking business in the U.S., Coinbase received a Wells notice on March 22, 2023 which signalled that it would also be sued by the SEC. SEC complaints against Kraken and Coinbase refer to ‘since 2019’ — when proof-of-stake (PoS) started. Despite Coinbase’s willingness to fight in court, using financial resources that Kraken does not have, Coinbase will likely a) eventually settle with the SEC and b) pay a hefty fine and agree to give up its U.S. staking business and focus on its overseas business.
On April 20, 2023, Coinbase obtained a license in Bermuda. In May 2023, we heard that Coinbase was expanding in Singapore and considering setting up its international hub in the United Arab Emirates (UAE). Like Binance, Coinbase has already taken steps to diversify its business away from the U.S. But the Coinbase complaint is very different from the Binance one. The SEC isn’t attacking its founder, and it doesn’t seem that Dept. of Justice (DoJ) implications would result in personal liabilities, as in the case of Binance. The SEC will bar Binance and some of its executives from operating entirely in the U.S., and while Binance has voiced their willingness to pay a huge fine, the SEC (and likely DoJ) will go after them. Freezing Binance.US assets is equivalent to seizing its business. As we saw a decade ago when the U.S. Financial Crimes Enforcement Regulation took place, crypto will be scaled in Asia, with the Middle East also now a viable option.
There are 420 million crypto owners worldwide, with the majority being based in Asia (260 million), and if there is ‘one’ conclusion from my book ‘Crypto Titans’, crypto is ‘not’ going away. There is too much demand for this ‘product’. Since the Binance / SEC suit announcement, users have withdrawn $1.4 billion $in the last 24 hours (compared to $2 billion in withdrawals during the December 2023 Binance FUD). Users have also withdrawn $1.3 billion from Coinbase and Coinbase custody. The top three wallets moving funds out of Coinbase are all ‘elite’ traders like Cumberland and BH Digital.
The SEC has filed 13 charges against Binance and its founder Changpeng Zhao (CZ), despite Binance’s efforts to settle any wrongdoing. The result will likely be billions of dollars in fines and Binance no longer serving U.S. customers. This would be an unfortunate but expected development. However, the crypto industry will be fundamentally different as Binance has already taken various steps to prepare for such an event. Remember when Binance moved $1 billion of BNB tokens into BTC and ETH a few months ago? Remember when Binance stopped zero-fee trading for BTC crosses and volumes started to dry up — leading to Jane Street and Jump Crypto stepping back from market-making activities?
The SEC lawsuit is ‘big’ and claims that Binance has illegally earned at least $11.6 billion in revenue. The statement reads that CZ, as ‘a control person,’ is liable. This could lead to Department of Justice (DoJ) implications for the firm’s founder. Like FTX and Sam Bankman-Fried, the SEC also alleges that Binance and CZ commingled customer funds and sent them to CZ’s trading entity, Merit Peak Limited. That entity was also used for other actions in combination with the Key Vision entity in Seychelles. BAM trading later morphed into Binance.US, lost several CEOs in short order. The entity’s first CEO Coley already hired a former CFTC enforcement director who is now a partner at the law firm Sullivan & Cromwell, and her attorney since April 2021. It appears that she has testified and fully cooperated with the SEC. While this lawsuit is unfortunate, nobody should be surprised, and the outcome appears quite apparent.
Everybody must now watch the value of BNB tokens, assets on the Binance exchange and the perp discount for BNB tokens. The industry will be very different in a year. Trading volumes will likely drop further and pressure market makers’ revenue projections. Crypto in the U.S. will continue to go through a nuclear winter.
Markus Thielen, author of ‘Crypto Titans: How trillions were made and billions lost in the cryptocurrency markets’. (Available on Amazon: https://amzn.to/3qkleym)
