Crypto power struggle enters new stage with Binance settlement

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Almost the only topic that techies can talk about this week is the extraordinary drama at OpenAI. But a little further north, in a federal court in Seattle, another startling tale has unfolded, which has implications for another set of recently hot innovations.

On Tuesday, the Department of Justice unveiled sweeping money laundering and fraud charges against Binance, the world’s biggest crypto-trading platform, prompting its leader, Changpeng Zhao (“CZ”), to resign and pay a $50mn fine. Binance also made a $4.3bn settlement, marking “one of the largest corporate penalties in US history”, as Merrick Garland, attorney-general, triumphantly declared.

Some observers might think — or indeed hope — that this marks the demise of crypto. A year ago CZ presented himself as the clean saviour of the industry, after his ally-turned-bitter-rival Sam Bankman-Fried (“SBF”), co-founder of the FTX platform, was charged with fraud. Now, the men who were both heads of the world’s two biggest crypto exchanges are deemed criminals. This is like the moment in a spaghetti Western movie when the sheriff rides in after rival gangs have a shootout.

But here is a curious thing: on Wednesday, Binance’s BNB token rallied modestly to sit 60 per cent below its 2021 peak — but 10 per cent up from last month. Meanwhile, bitcoin’s price has doubled this year, leaving the overall crypto sector valued at about half its level two years ago — but 50 per cent bigger than late 2022. Crypto may have shrunk but it is not dead.

What explains this resilience? One explanation might be that those people who use crypto to conduct shady deals (and there are plenty of them) think they can continue, even with DoJ oversight.

However, another is that some big investors view this not as the beginning of the end, but the end of the beginning — and they expect a better sequel. “Binance settling with the US regulators would be super bullish!!” Mike Novogratz, a hedge fund luminary, said on X, before Tuesday’s deal, hailing a chance “for the industry to move forward”.

That might seem ridiculous, particularly since Novogratz lost eye-popping sums when the crypto tokens — Luna and Terra — imploded last year. But not entirely. For a third way to frame these dramas is that a power struggle has been raging between the “tower” and “square” — ie the central authorities and networked crowds, to borrow a metaphor used by historian Niall Ferguson.

Crypto was initially from the “square” — infused with libertarian, anti-establishment ideals. These later became perverted, since — ironically — platforms such as FTX and Binance created concentrations of power even more extreme than those at mainstream companies. That is because they blended the roles of brokers, exchanges and custodians (and, at FTX, proprietary trader).

And while crypto is widely viewed as anonymous or, more accurately, pseudonymous, consultants such as Chainalysis are now so deft at digital detective work that regulators tell me it is often easier to track crypto criminal transfers than those using bundles of cash.

This week’s court documents illustrate that: they describe transactions with Iran, for example, with a level of detail that would be unimaginable if the payments had occurred via hawala channels (the time-honoured person-to-person, network system widespread in the Islamic world).

But the key point is this: most crypto enthusiasts hitherto either wanted to topple the “tower” — or hedge against its collapse. Crowd power was the ideal. But now the tower is fighting back. Since Congress has (shamefully) failed to pass effective laws for the sector, the DoJ and Securities and Exchange Commission are in effect creating policy via legal sanctions. And while Binance remains alive, its new leader is Richard Teng, a former civil servant turned crypto executive, who is apparently ready to accept intrusive oversight.

Separately, central banks are seeking to displace crypto with their own digital currencies. Meanwhile, BlackRock and Grayscale have lodged requests to launch bitcoin ETFs, and JPMorgan suspects mass approval looms. Indeed, one (plausible) reason for crypto resilience this week is that traders think the settlement will give regulators more freedom to approve these products, after a quasi clean up.

This will make libertarians squeal. And traditionalists might (quite reasonably) ask why mainstream finance even wants to dance with digital assets, given that the tech is still too clunky to make rapid payments at scale — and prices too volatile to be a good store of value.

But the answer is that at the core of the crypto dream there is still an interesting idea about using tokenisation and digital ledgers to transfer value. And it need not be libertarian at all; the Chinese state, after all, is creating its own digital currency in a deeply authoritarian way.

So I predict a future where crypto ideas are slowly absorbed into the financial establishment, while a smallish rump of products, such as bitcoin, remain partly in the square and mostly used by investors as a hedging tool, akin to digital gold. If so, it will be a striking demonstration of how power tends to swing between the “tower” and the “square” in history. Silicon Valley bros should take note.

gillian.tett@ft.com