Taking stock of the US crypto crackdown

Welcome to the latest edition of this week’s Cryptofinance newsletter, where we’re taking stock of Binance’s rocky start to 2023.

One consequence of the collapse in crypto markets last year is that the survivors have become bigger and more central.

With great scale comes great scrutiny, as Binance is finding out. So let’s do a rundown of the year so far for the headquarter-less exchange.

In the first week of 2023, the Securities and Exchange Commission intervened on a bid by the exchange’s US affiliate to buy the assets belonging to bankrupt crypto lender Voyager.

Then, financial crime agency Fincen named Binance as a counterparty to Bitzlato, an obscure crypto exchange allegedly linked to illicit crypto funds and the darknet. The order was the first of its kind under a powerful new section of legislation put in place to combat Russian money laundering. Binance said it was pleased to support law enforcement in its investigation. A spokesperson added it has a “team of over 750 in global compliance roles as well as a team of former federal law enforcement officers who work around the clock to support casework against organizations like Bitzlato.”

By the end of the month, I revealed that Binance tapped up the same Washington lobbyists as its US affiliate. Together with the fact that chief executive Changpeng Zhao is the ultimate beneficial owner behind Binance US, this undermines the offshore group’s claim that the two trading platforms operate separately.

“The government looks at the same beneficial owner of both companies and sees them as one entity,” said one Washington lobbyist who was once approached by Binance for a job.

So that was January. On to February: Binance temporarily halted bank transfers in US dollars, giving no reason for the suspension.

Mid way through the month, New York’s financial regulators shut down issuance of BUSD, a Binance-branded stablecoin that just a couple of months ago accounted for 40 per cent of trading volume on the exchange.

Zhao said BUSD was “never big business” for the exchange, but the data isn’t on his side.

Binance believes the void left by the token, whose market cap has plummeted, will be replaced by other stablecoins. But analysts told me earlier this week that the exchange won’t necessarily get off unscathed.

The exchange has gone to lengths to clean up its image, over time making big-name compliance hires including Tigran Gambaryan and Greg Monahan, previous heavyweights at the IRS and US Treasury respectively.

“They have literally hired a dream team of illicit-finance investigators,” one person familiar with the inner workings of the US government told me last month.

But Binance’s growing list of compliance hiccups should be a warning for what remains of the crypto industry. Throughout its many controversies, the exchange has successfully ballooned to a size dwarfing its competitors. In fact, CryptoCompare data shows the exchange now controls more than 60 per cent of the crypto spot market.

In other words, there is a key man risk right at the top of the allegedly decentralised crypto industry, which is on a collision course with American regulators who have just this year targeted a who’s who list of prominent crypto groups.

“The success of its biggest exchange is essential to keeping the markets alive. The industry that preaches the bible of decentralization is praying for the survival of its most centralizing force,” Charley Cooper, former chief of staff at the Commodity Futures Trading Commission, told me.

What’s your take on Binance and its position in the wider crypto market? As always, email me with your thoughts at scott.chipolina@ft.com.

Weekly highlights:

• Another former FTX executive gives in: Nishad Singh, previously engineering head at the bankrupt exchange, pleaded guilty to six criminal charges in the US. The SEC also came after Singh, alleging the former FTX high-flyer created the code enabling FTX customer funds to be diverted to sister trading firm Alameda Research.

• Marathon Digital Holdings, a Nasdaq-listed crypto mining group, filed to extend the deadline on its annual report after discovering “certain accounting errors”. In this SEC filing, the company said its financial reports for the year ending December 2021 “should no longer be relied upon”. Chris Brendler, senior research analyst at DA Davidson, said the SEC was less concerned about mining companies than with crypto exchanges and lenders, but the problem pointed to a “larger issue” of regulating crypto.

• Cyber security company SonicWall published its annual threat report this week, which revealed cryptojacking attacks have risen by more than 40 per cent last year. Unlike ransomware, cryptojacking — the practice of hijacking someone else’s computer to mine cryptocurrencies — flies under the radar, but that doesn’t mean it isn’t a cause for alarm. “Make no mistake, cryptojacking is a high-stakes game with serious consequences,” SonicWall’s chief executive Bob VanKirk told me.

Soundbite of the week: BoE slams crypto as payment tool

The Bank of England’s focus on creating a digital pound means it’s more Team Britcoin than Team Bitcoin. Even so, the comments from Sir Jon Cunliffe, deputy governor for financial stability at the BoE, at a parliamentary hearing were particularly punchy:

“Nobody would use [crypto tokens] as money—well, some people would, but they are probably outside criminal law as well as financial regulation.”

Data mining: Crypto’s banking crisis bites Silvergate

Shares of crypto-focused bank Silvergate have taken an absolute pummeling this week.

Late on Wednesday the bank said it wouldn’t be able to file its annual report with the SEC as it was evaluating whether an ever-weakening capital position would hit its ability to survive. It has needed to sell assets to help pay back Federal loans. Unsurprisingly shares lost nearly 60 per cent the following day on Wall Street.

Silvergate’s flirting with fate has been a long time coming. The bank bet big on supplying services such as payments to the crypto industry, so much so that it brought in Sam Bankman-Fried’s former FTX empire as a client.

This week crypto companies such as Coinbase and Galaxy Digital have severed ties with Silvergate, which has a full suite of licences from traditional financial regulators.

Like many other crypto (or crypto-exposed) companies, the bank’s financial health has been correlated to that of the digital asset market. Since the peak of bitcoin’s price in November 2021, Silvergate’s shares have fallen an eye-popping 97 per cent from $219 to $5.

Last year, the bank reported a full-year loss of $949mn, in stark contrast to its $76mn profit in 2021. US banking authorities have repeatedly warned the banks they supervise about the risks associated with exposure to crypto. Nothing encapsulates this better than Silvergate.

Cryptofinance is edited by Philip Stafford. Please send any thoughts and feedback to cryptofinance@ft.com.

Your comments are welcome.