Saturday Hark Back - 1 Apr 2023

Capturing the themes of the week when there’s time to digest them.

Is this the beginning of the end for Binance as both the US and China take aim?

This week brought a further wave of attacks on the crypto industry and in particular Binance. First, the CFTC issued civil charges against the company and its high-profile owner, Changpeng Zhao. The accusations include regulation arbitrage, operating a derivatives exchange illegally and the “wilful evasion” of federal law.

The case centres around the question of access to the exchange by US users. The claim is that around 20/30% of Binance’s users (up to 3m users), are in fact based in the US and as such Binance should have registered with the CFTC or the SEC prior to soliciting this cross-section of their user base. Indeed the case looks damning even to a Luddite like me. It is fairly apparent, even from the naked eye, that volumes tend to pick up in the European afternoon session, as the US starts to ramp up. In addition, a Chicago based high frequency trading shop, Radix, has broken cover and admitted that it was onboarded by Binance.

To add to the woes of CZ, China has waded in. They are not best pleased by the alleged “coaching” by Binance employees enabling Chinese users the ability to circumvent the KYC verification process hence avoiding the attention of the authorities. Remember crypto exchanges have been banned in China for over 5 years now. All allegations have been strongly refuted by Binance but the charge sheet is starting to stack up. 

Staying on the China theme. SBF, remember him, had additional charges filed against him this week. The most eye-catching of which was a $40m alleged bribe to one or more Chinese government officials to try to unfreeze some of Alameda’s Hong Kong based accounts. The bribe related to $1bn worth of the company’s trading funds which had been frozen back in late 2021. Mysteriously these funds were unfrozen shortly after the payment of the “alleged bribe”. 

Anyway back to CZ and Binance. The timing of the charges coincided closely with the discontinuation of Binance’s zero-fee BTC trading policy (BTC/TUSD is the only zero-fee pair remaining on the exchange) which had dated back to the middle of last year. The change in policy has seen volumes drop quite considerably on the exchange so the timing by the CFTC seems less than a coincidence or am I giving the CFTC too much credit?

The charges levelled against Binance, thus far, remain civil but given how they read it would not be surprising for the stakes to rise and they become criminal. More worryingly for CZ is the fact that the CFTC charges have once again put the spotlight on the accusations that the company, and indeed himself, were allegedly on the other side of customer “crypto bets” which has of course been denied firmly by CZ. 

The CFTC allegations saw $2bn of assets leave the exchange but well over $60bn still remains. The bigger question is not whether the exchange will survive, which seems likely, but whether the exchange is a viable option for the wholesale institutional market in the longer term? That remains a serious doubt but with its current market dominance, there is little alternative for the institutions. CFTC wise it would seem a heavy fine, closure of some of the Binance entities and a “don’t do it again” warning seems the most likely outcome unless, of course, the charges turn into criminal ones. Could we see SBF and CZ reunited once again but this time in the same state penitentiary?

Despite last year’s troubles for the industry with the demise of FTX and the Terra/Luna crash and now a quarter that has seen the collapse of Silvergate and Signature Banks, and with it the closure of the on/off ramps for crypto, on top of theses storm clouds gathering around Binance; Bitcoin has risen over 70% in the quarter. It’s best quarter in two years. Whether that is in the main down to a perception/hope that the Fed will flush the market with liquidity or the banking sector is under strain and hence money needs to go to a “safer” place or that Bitcoin has found its natural bottom; its nevertheless an impressive performance from Bitcoin given the underlying structural issues we speak about above.

However, with FTX gone and Binance under scrutiny, it would seem that the gap in the market both for the retail and in particular the institutional space is wide open. The CME was quick to trumpet an all-time high for its options volumes and open interest for the quarter. Open interest, as the name suggests the total number of outstanding contracts in the market, hit $1.3bn whilst volumes almost doubled from the previous month to a record $1.1bn. However, as we know the CME product is not perfect for true Bitcoin exposure given the fact that the contracts are USD based rather than Bitcoin underlying and the 24/7 nature of crypto is not reflected in the CME’s opening hours leading to gap risk.

Once again regulation and a properly regulated digital asset exchange, which can also solve the privacy issues surrounding the use of the blockchain coupled with the ability to self-custody whilst interacting with the exchange, can’t come quick enough for the institutions.

Unchained - Is this the beginning of the end for Binance?

Coinstack - CFTC vs Binance

CZ’s response to the CFTC charges

 

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