Monopoly on Crypto
For some reason, this material was initially published in Russian. Since then KuCoin was ordered to pay $22 million fine and exited N.Y. market. Coinbase made a move that looked very opportunistic and pushed forward globally (archive), albeit they have been preparing for that for a pretty long time and made their intentions explicit after hostile actions of the U.S. government towards Silvergate and Signature banks.
Interestingly, unlike in 2017, the bankruptcy of Silvergate in the end of 2022 couldn’t do much harm to Coinbase. The U.S. regulators have always been late. “The Crypto Industry” benefitted from this for a while. However, now JP Morgan Chase likely wants to benefit from the regulations exclusively.
“The only true use case for it is criminals, drug traffickers, money laundering, tax avoidance,”
— said Dimon, while JP Morgan has been developing its blockchain platform, Onyx, for a couple of years.
The case of Changpeng Zhao has created somewhat of a furor despite the evidence of active investigation of the American branch of Binance.US and Zhao personally, whose correspondence in the messenger Signal turned out to be completely compromised. The confrontation between Sam Bankman-Fried and Zhao looked like a battle of market giants until it turned out that FTX was a complete sham. Zhao inadvertently played a crucial role in identifying the bankrupt exchange, as he had invested in FTX and had a stockpile of debt tokens. Sam relied on regulators, and Zhao relied on the market. In this contrast lies another essential fact: Zhao was prosecuted for derivatives trading violations, money laundering, and terrorist financing, not fraud and stealing from customers. It is likely he could face charges for trading in unregistered securities, but that is a civil proceeding, and the current charges are criminal.
In 2020, documents leaked to the press about the activities of JPMorgan, HSBC, Standard Chartered Bank, Deutsche Bank, and Bank of New York Mellon that continued to profit from powerful and dangerous players even after U.S. authorities fined them for failing to stem the flow of dirty money. Regulators suspected these banks of a range of financial crimes, including money laundering and potential terrorist financing totaling up to $2 trillion. Such stories are anecdotal among Bitcoiners. The largest exchange at the time of Zhao’s ouster, Binance, a private business, was operating much more efficiently and honoring its obligations to its customers in full compared to any of the banks listed above. The U.S. Department of Justice had no choice but to invoke the terrorist financing clause, even though the U.S. itself had paid $6 billion to Iran before the October Hamas attack. Let’s not forget that in April 2023 Binance challenged OFAC by openly returning to Russia and allowing Russian traders to facilitate exchanges, at least on its peer-to-peer platform.
Atlas leaks data
Zhao started building Binance five years later than Coinbase, and by 2022, the brand had become recognizable everywhere in the world, primarily in developing countries, just like Coca-Cola. Unfortunately, it quickly betrayed users’ interests for the sake of a deal with prosecutors. Patrick McKenzie recalls the stock exchange’s history, comparing Zhao to a supervillain from the Bond movies. An employee of Stripe, a fintech startup embedded in the fiat money system, he can’t imagine the head of a shadowy global corporation any other way.
“You are nowhere because you want to be everywhere.”
This is the exact formula of Binance’s operation. The exchange cannot be considered as genuinely rebellious as BTC-E or BITZLATO, openly flouting supranational organizations like FATF and the U.S. Bank Secrecy Act. Even little evidence about the possible collaboration of BTC-E and FSB (Russian security service) outweighs the simple fact that the two people who created BTC-E were nobody from nowhere and became rich in a few years. Americans like to say that Jessie or Brian played by rules, and it is hard to deny. They did that, though, in a country with abundant capital and the rule of law. To BTC-E founders, “not following rules” worked both ways — they could easily find themselves in the car’s trunk heading from Moscow’s city center to its gloomy peripheral districts.
Did Binance not follow the rules at all? It is strange to remember, but Bitcoiners disliked Binance for two major reasons: KYC and shitcoins. Zhao has been hiring ex-lawyers prosecutors and opening entities worldwide strictly for “following rules.” His case will be an important demonstration for anybody who decides to run a business in this field: it is not important how hard you try; the U.S. government will come after you.
McKenzie tells the story. When Zhao was in his twenties, he worked in Japan and New York, in contracting organizations at the Tokyo Stock Exchange, then at Bloomberg. Around 2013, he became interested in cryptocurrencies and joined several projects, including becoming CTO of OKCoin. In 2017, he did an ICO for Binance, which turned out to be a failure, as the project came into existence in June 2017, which counts for 3.5 years since the beginning of the year on planet Earth, by the standards of planet Crypto. But C.Z. claimed otherwise and succeeded.
Further, McKenzie cites evidence that the first market Binance was expelled from was Japan in 2018. This was well ahead of all other jurisdictions. In 2022, the exchange will go so far as to start cooperating with the authorities in Kazakhstan for the sake of implementing the digital tenge. In December 2023, Binance remains in Kazakhstan Central Bank’s whitepaper. However, the uncertainty in the exchange’s business operations remains even now. The most anecdotal case took place in Malta, as Binance allegedly had an office there since 2018, but in 2020, Malta pretended not to know anything about it. The author also notes the business model of U.S. regulators:
To make this palatable to the American public, those whistleblower rewards are not courtesy of the taxpayer; they’re courtesy of money seized from previous Bond villains. A portion of Binance’s settlement(s) will go to pay the whistleblowers at the next Bond villain. It’s a circle of life.
Four billion is a significant amount for U.S. prosecutors to start bribing any managers of any exchange anywhere in the world after 2023, and here we get to another part of Zhao’s deal — U.S. regulators’ access to Binance’s internal data, counting from February 2024 to three years ago.
Borderless Jurisdiction
As McKenzie puts it
Binance will suffer a wave of tag-along enforcement actions, in the U.S. and globally. Partly this will be for face saving; global peers of the U.S., which Binance has transacted billions of dollars in, will largely not want to signal “Oh we’re totes OK with money laundering for terrorists and child pornographers”, and so they’re going to essentially copy/paste the U.S. enforcement actions. They will then play pick-a-number with Binance’s new management team, who will immediately cave.
The earliest version of this is probably only weeks away, but Binance will deal with it for years.
The deal with prosecutors includes not only a fine and a waiver of further charges but also access to transaction history and constant external monitoring 24/7, 365 days a year.
Any Binance transaction can be retroactively verified. Binance’s chief compliance officer says users “have nothing to worry about unless they are part of a very small group of users who are using cryptocurrency for illegal purposes,” but the data could also enrich blockchain analytics systems and make everything completely transparent to tax agents and other criminals.
Wired quoted an unnamed prosecutor as he is not authorized to speak to the media about the case. He calls the degree of access to Binance’s records described in the agreement “kind of crazy” and still doesn’t believe Binance is complying with the terms of the agreement. “I don’t know what business would want to operate while allowing this amount of government oversight, especially one that has intentionally stayed out of the U.S. to avoid being under our noses,” they say. “The other option must have been really bad.”
The publication also recalls the case of the darkweb resource Welcome to Video, which contains child sexual abuse material. In 2017, one of the alleged abusers was identified and arrested after his email address was linked to an account on the cryptocurrency exchange BTC-e, which authorities had seized a few months earlier. To date, only the most prominent U.S. authorities’ databases include BTC-e, BITZLATO, smaller mixers and services, and now Binance.
The size of the fine will serve as an example for all other entrepreneurs who decide to create a global crypto exchange. It was chosen in proportion to the company’s revenue estimate, but Zhao also faces a prison sentence. In the case of Arthur Hayes, who got off with house arrest, the situation was milder. The U.S. authorities clearly make it clear to everyone else that they will not allow “the mixing of exchange warrants of Americans with persons from sanctioned countries.” It should be recalled that another global leader, Tether, recently revealed additional measures of cooperation with the U.S. authorities, which apparently included onboarding all 3-letter U.S. agencies into their platform.
On the Castle Island podcast, Nick Carter and Matt Walsh noted that Zhao “played without the rules.” These people take the extra-territoriality of U.S. enforcement actions for granted.
Road to monopoly
Let’s consider several events that took place before Coinbase announced its global expansion.
As of January 1, 2024 Unchained will stop offering Bitcoin secured loans to individuals. It was an excellent service that was rabidly popular. On the horizon of a few years, the service was under real stress due to LUNA-3AC-FTC collapses and rate hikes. It continued to operate nonetheless. Unchained will proceed to loan funds to businesses only. The announcement came unexpectedly, just after the Binance case.
At the same time the news about Zhao was released, the Bittrex exchange closed. The U.S. Securities and Exchange Commission (SEC) sued Kraken along with Coinbase. The SEC listed a number of cryptoassets that it believes are unregistered securities and that Kraken was directly involved in promoting to investors, according to the lawsuit (ADA, AXS, ALGO, ATOM, CHZ, COTI, DASH, FIL, FLOW, ICP, MANA, MATIC, NEAR, OMG, SAND, and SO). SEC suits are not dangerous; companies can pay the fines and move on.
The violation of the Bank Secrecy Act (which Zhao is also accused of) is much more severe, and individuals are liable for violations. The pioneer here was BitMEX, which the U.S. Department of Justice sued on October 1, 2020. At that time, charges were brought against three individuals. This eventually led to guilty pleas from those individuals and civil penalties against the trading platform itself on CFTC and FinCEN charges. BitMEX eventually lost its credibility in derivatives trading as competition, regulatory scrutiny, and the Black Thursday events of March 2020 caused reputational damage.
Coincenter has looked at Bank Secrecy Act (BSA) issues from different angles: in a 2019 report, “Electronic Money, Decentralized Exchanges, and the Constitution,” they argued that any application of the BSA’s surveillance obligations to software developers would violate Americans’ First and Fourth Amendment rights. The new report examined the BSA from a different constitutional perspective: the Supreme Court’s current approach to overbroad laws and delegations of broad powers to administrative agencies.
In Coincenter’s view, the Bank Secrecy Act is either (A) so broad as to criminalize everyday life, (B) so ambiguous as to make its application to millions of Americans uncertain, or © spared such breadth or ambiguity through the use of legislative authority delegated by Congress to the Treasury Department. Each alternative interpretation of the Bank Secrecy Act raises substantial constitutional doubts for Coincenter.
Beyond these doubts is the purely numerical part: when it was enacted, there was a $10,000 limit on “suspicious” transactions. That $10,000 in 1971 is equivalent to $75,968.15 now. Yet, a vast number of suspicious activity reports are generated each year and largely ignored, which is what allows banks to launder money and fund terrorism effectively. However, regulation is not without consequences for smaller banks, which are forced to shut down their operations and this has led to a highly concentrated banking industry in the U.S. compared to 1971, with the 2008 crisis leading to a dramatic consolidation of the sector as not everyone can get freshly printed dollars.
Now exchanges are closing in the U.S.; no new marketplaces have opened there in several years — they are popping up in Latin America, Asia, or even Europe, although leaders like Deribit are also fleeing the Old World. All the large and relatively reliable exchanges have draconian KYC rules, severely limiting their ability to compete. Eventually, Americans could buy only ETH-backed ETF products by BlackRock because, hopefully, either individuals or institutes will withdraw bitcoins from American soil.
The American reaction to Zhao’s trial is revealing. Castle Island, for example, also gloated over the case of Cristiano Ronaldo, who was sued for promoting Binance. The initiators of the class action lawsuit claim to have suffered damages from the promotion, but it looks like a case of abuse of the courts, like getting burned by a hot coffee at McDonald’s. The lawsuit notes that users who came to Binance after Ronaldo’s ads were more likely to use the exchange for other purposes, such as investing in unregistered securities, including BNB, Incrypted reported.
Kraken co-founder Jesse Powell sees the Binance case as a positive development that will benefit the industry. And only Arthur Hayes expressed a more or less solidarity.
CZ and all of us are sinners in the eyes of Lord Satoshi because we profit off of centralization.
Hayes realizes that the regulator wants common people to go to the bank only and use imposed services there, almost as in the case of Ronaldo, but “legally” in every sense.
Andrei Zakharov’s book about BTC-E describes a success story of very ordinary people from a hopeless province. Zhao built a unique business, although Binance was impossible to recommend at all times precisely because of the strange aura of a shadow exchange with a predilection for blocking funds. It always gave the impression of an organization close to bankruptcy; any delays in withdrawals were viewed with sensitivity, but it turned out not to be that way at all. Apparently, Zhao, unlike Bankman-Fried, didn’t steal anyone’s funds but merely allowed anyone to trade on its platform in defiance of the U.S. While this seems like a comeback to U.S. regulators, as the Treasury has just been relieved of the critical business of selling bonds to service a foreign debt that is growing exponentially, they are being followed by a trail of harassment of crypto projects of all stripes. Surprisingly, this almost never affects U.S. companies; even Uniswap could defend itself in a proper U.S. court, but the Russian developers of Tornado.cash don’t have that privilege.
Currently, the U.S. government demonstrates its power via the “Bank Secrecy Act for All” approach. But it has its limits. Because they went as far as turning Tether from a private entity to a DOJ department, it will hurt the competitiveness of the major stablecoin. Now, it is almost like the worst version of neobank. In the SatsBridge project, we believe in the mission of building non-custodial services. Some may be decentralized, too. In a considerably narrowing market, the most decentralized protocol wins. In the previous bull market, people didn’t need HodlHodl, Bisq, or Robosats because they could buy anything with their fiat debit card. The next bull market situation will be closer to 2017, and a major onramp for crypto will happen via Bitcoin again.
