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State of Crypto: Binance Is Firmly in the Regulatory Crosshairs

World regulators have announced warnings around Binance, drawing attention to the exchange's operations and hinting at future actions.

CoinDesk Insights
Jul 13, 2021 at 1:30 p.m. UTC
Updated Sep 14, 2021 at 1:24 p.m. UTC

More than half a dozen national regulators have published warnings, announced investigations or otherwise cautioned investors about crypto exchange Binance and its different affiliates. Is this part of a coordinated global action – or just a coincidence?

You’re reading State of Crypto, a CoinDesk newsletter looking at the intersection of cryptocurrency and government. Click here to sign up for future editions.

Breaking Binance

The narrative

Several countries have announced investigations into or published warnings against Binance, currently the world’s largest crypto exchange by trading volume. It’s unclear if this is a coordinated effort by regulators or something closer to a domino effect. What we do know for sure is that Binance is under a powerful microscope – and I seriously doubt we’re done hearing about enforcement actions against the platform. 

Why it matters 

More than any other centralized cryptocurrency platform, what happens to Binance may signal how regulators will approach crypto, with enforcement actions against the exchange hinting at what other platforms should expect. 

It’s important to note here that any interpretations are likely to be specific to centralized exchanges and how they’re operating. The regulatory crackdown on Binance will almost certainly not apply to crypto trading or decentralized/peer-to-peer platforms.

Breaking it down

Over the last few weeks, regulators in a handful of different nations have announced that they are either investigating Binance or that Binance (or one of its legal entities) isn’t authorized to operate within its borders. Still more countries have warned users about the exchange. Several banks or payment processors, primarily in Europe and the U.K., have subsequently cut off the exchange, potentially stranding its customers.

In just the past few weeks:

  • The U.K.’s Financial Conduct Authority warned that Binance Markets Limited (an affiliate of Binance Global) is not authorized to operate within the country.
  • A number of British banks, including Barclays, Nationwide, Santander and Clear Junction, then pulled Binance’s access or announced reviews of their approach to crypto at large. Still, Binance said sterling withdrawals and debit/credit card purchases were enabled after briefly losing access to Faster Payments at the end of last month.
  • This morning, Faster Payments once again suspended the exchange.
  • The European Union’s Single Euro Payments Area appears to have (temporarily) cut off Binance.
  • Japan’s Financial Services Agency warned that Binance is not registered to do business within the country. This seems specific to the transfer and exchange services, and not the operation of the exchange’s technical platform (which appears to run on AWS servers in Japan).
  • The Cayman Islands announced that Binance Group and Binance Holdings Ltd. are not authorized to operate within the country.
  • Binance withdrew from the Canadian province of Ontario after the Ontario Securities Commission announced a handful of other exchanges had failed to comply with local regulations.
  • The Monetary Authority of Singapore said it’s watching Binance Holdings Ltd. and Binance Asia Services Pte. (another separate legal entity).
  • Thailand’s Securities and Exchange Commission announced it filed a criminal complaint against Binance for operating without a license within the country.
  • Banks in South Africa shut off credit card transactions for international crypto exchanges, including Binance (though this seems to be part of a broader crackdown).
  • WazirX, an Indian crypto exchange owned by Binance, was issued a show cause notice by India’s Enforcement Directorate on allegations that Chinese nationals laundered around $7.6 million through WazirX into Binance.
  • Silvergate Bank cut off withdrawals and deposits for Binance, but notably not Binance.US. 

That’s a lot of investigations! And it’s not even getting into the investigations that are ongoing, the largest of which may perhaps be through the U.S. Commodity Futures Trading Commission and Department of Justice. 

The best parallel to these agencies’ investigation of Binance is likely the ongoing legal action against Bitmex and founder Arthur Hayes. The feds went after Bitmex on allegations it offered derivatives trading to U.S. customers and did not conduct appropriate know-your-customer checks. Federal officials are also reportedly investigating Binance on similar charges, as well as money laundering and tax evasion concerns. 

Binance, however, is much, much bigger than Bitmex.

(It’s important to mention here that no wrongdoing has yet been alleged by U.S. officials, and we don’t even know whether they’ll bring an enforcement action.)

It’s possible that the regulatory backlash to Binance also reflects founder Changpeng "CZ" Zhao’s stated goal of creating a decentralized business with no headquarters. 

The exchange is reacting to this by hiring a number of former regulators to its compliance and executive teams. 

Binance.US has brought on former Acting Comptroller of the Currency Brian Brooks and former California Department of Financial Protection and Innovation Commissioner Manuel Alvarez

The global version of the exchange is now looking to hire an equivalent policymaker in the U.K., after bringing on former Financial Action Task Force officials Rick McDonell and Josée Nadeau, as well as former U.S. Senator Max Baucus.

CZ called more regulations “a positive sign” in an open letter last week which said the exchange is “committed to being compliant … wherever we operate.” 

Circle is going public

Circle Internet Financial announced it was going public through a special purpose acquisition corporation (SPAC) transaction last week, to be completed later this year. In addition to being the latest high-profile crypto company to go public, Circle is the other half of the Centre Consortium that is ostensibly in charge of the USDC stablecoin (alongside Coinbase, which went public earlier this year). 

In an investor presentation, Circle estimated that USDC in circulation could more than double from about $26 billion as of Monday to over $80 billion by next year, and jump to a staggering $194 billion by the end of 2023. 

Of course, Circle’s announcement has renewed scrutiny around just what is backing the USDC stablecoin, and how secure these reserves are. 

Jeremy Allaire, the exchange’s CEO, promised that Circle will provide more detail after the company completes its transaction to go public. 

“They deserve a greater degree of transparency,” Allaire told CoinDesk TV last week. “Our intention is to include greater reserves transparency there.”

These are similar questions to those that critics ask about the reserves backing Tether’s USDT

Stablecoins more broadly have been increasingly scrutinized by global financial regulators over the past few years, but conversation around fiat-pegged cryptocurrencies seems to have shifted from focusing on global stablecoins (i.e., the former vision for libra) to centrally issued ones (i.e., USDC, USDT). 

I’m curious to see whether this results in firmer action or regulations, particularly as stablecoins take on a more important role within the crypto world.

Biden’s rule

Changing of the guard

Key: (nom.) = nominee, (rum.) = rumored, (act.) = acting, (inc.) = incumbent (no replacement anticipated)

This isn’t in the list above but the U.S. Senate confirmed Jen Easterly to run the Cybersecurity and Infrastructure Security Agency (CISA), a Department of Homeland Security entity focused on, uh, cybersecurity. I strongly suspect Easterly’s initial work will focus heavily on ransomware – both mitigating such attacks and finding ways to investigate them. The Biden Administration has already mentioned crypto analysis a few times in statements about ransomware. Deputy National Security Advisor for Cyber and Emerging Technology Anne Neuberger was the latest official to reiterate this position in a statement last week.

Elsewhere: 

  • Why China’s Ban on Crypto Mining Is More Serious Than Before: China’s most recent mining ban may be driven as much by the nation’s energy policies as its crypto policies, my colleague David Pan reports. China's environmental policy mandates that it cut back on coal power, meaning energy-intensive operations (such as crypto mining). This suggests this crackdown may last longer than the last one.
  • Can Taiwan Become Asia’s Crypto Haven? Not Yet: China’s crackdown on crypto could have led to a boost in Taiwan’s crypto economy, but it hasn’t, according to my colleague Sandali Handagama. This is partly due to strict anti-money laundering requirements and partly due to some vague regulations in other areas. 

Outside CoinDesk:

  • (The Wall Street Journal) Investors in South Africa are looking for Ameer and Raees Cajee, the founders of Africrypt, a crypto investment firm. The Cajees have apparently disappeared after claiming that the platform was hacked. 

If you’ve got thoughts or questions on what I should discuss next week or any other feedback you’d like to share, feel free to email me at nik@coindesk.com or find me on Twitter @nikhileshde

You can also join the group conversation on Telegram

See ya’ll next week!

Correction (July 13, 2021, 23:30 UTC): Clarifies that South African banks only cut off credit card transactions for crypto exchanges; corrects that the Ontario Securities Commission didn't publish a warning against Binance.

DISCLOSURE

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