The 5 Crypto Stories You Need to Know This Week (#147 - 12 June 2023)

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1. SEC Files 13 Charges Against Binance and its CEO

Last week, the SEC accused Binance of a suite of regulatory breaches.?

Binance is the world’s largest centralized exchange by a considerable margin, so this development carries many implications.?

If you don’t have time to read the SEC’s 130+ page filing against Binance, here are some key highlights of the allegations:?

• The SEC alleges that Binance did not conduct any KYC for any withdrawal of up to 2 BTC a day until Aug 2021.?
• Binance and its advisors allegedly devised the Tai Chi plan to delay any U.S. regulatory action and insulate their international business. This included the set-up of a Binance entity in the US and ensuring that key Binance staff does not operate from the US.
• Whilst Binance banned US customers, the SEC alleges that its CEO and others actively encouraged using VPNs or offshore entities to bypass the ban.
• The SEC alleges that Binance did not require all clients to submit KYC information until Aug 2021. Whilst Binance had 62m customers, it only had KYC information on 25m of them. The SEC alleges that a large number of clients had not completed the KYC process until mid-2022.
• Binance and its CEO CZ allegedly overrode efforts from senior management to try to comply with specific US regulations, including offering BNB to US clients.
• An independent auditor found serious gaps in the internal controls of Binance US in May 2020. It only implemented a formal policy for custody and operations in May 2023. By then, it had over $1.7b of customer assets.
• Binance entities were allegedly conducting wash trading on Binance US. This was allegedly up to 50% of the volume of the platform. They also allegedly had no tools to prevent manipulative trading on the platform and had not implemented trade surveillance controls.
• Binance allegedly used these inflated numbers to raise external capital and thus misled investors.
• The SEC also accuses Binance and CZ for touting the investment potential of BNB, which would tilt it towards being a security.

• The SEC also alleges that the following assets Binance offers are securities: BNB, BUSD, Solana, Cardano, Polygon, Filecoin, Cosmos, Sandbox, Decentraland, Algorand, and Axie Infinity.

The full list of charges is available to read here .?

So, what should the crypto ecosystem expect moving forward?

This serious action against Binance should keep lawyers busy for some time.

Whilst it’s unclear at this stage if Binance will ever be able to operate in the US again or serve US clients, it remains to be seen if it will impact its global business.

The allegations that many crypto assets are securities will be actively debated. However, this is another example of the regulation-by-enforcement approach and the need for more clarity that the crypto ecosystem has been complaining about.

Definitely a development to follow.?

2. SEC Sues Coinbase for Operating Unregistered Securities Exchange

The next day,? it was Coinbase’s turn.?

The SEC charged Coinbase with operating an unregistered national securities exchange/broker/clearing agency and failing to register its staking-as-a-service program.

The SEC alleges that, despite setting up the Crypto Rating Council, Coinbase still made available assets with a high “risk“ score to “boost its own trading profits.”

The SEC also alleges that the following crypto assets are securities: Solana, Cardano, Polygon, Filecoin, Sandbox, Axie, Chiliz, Flow, ICP/Dfinity, Near, Voyager, Dash, and Nexo.

This means that 14 of the 50 most valuable crypto assets by market cap have been labeled a security by the SEC.

The SEC also alleges that Coinbase’s staking as a service constitutes a security.

If you don’t have time to read the 100+ page SEC filing against the company, here are the key takeaways you need to know.?

• First, the SEC allegations against Coinbase are pretty simple compared to those against Binance. The only allegations are that Coinbase did not register the exchange or the staking service. However, registering is de facto impossible, as the company’s CEO Brian Armstrong reminded us.??

• Second, the new list of crypto assets now deemed a security is another example of the regulation-by-enforcement approach that the crypto community has been complaining about. Interestingly, there is no explicit mention of Ether (ETH) being a security in these charges.
• Third, unlike Binance, there is a lot of public support for Coinbase, as the exchange has repeatedly tried to get clarity and has led by example in being best-in-class. Coinbase also immediately launched a very smart PR campaign showing their repeated efforts.

• And finally, based on the allegations in this case, the SEC could easily launch similar actions against most other large crypto exchanges in the United States. After all, most big crypto exchanges list all or some of the tokens that the SEC alleges are securities in this action.

The full charges are available to read here .?

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3. U.K. Regulator Classifies Crypto as High Risk

The UK’s Financial Conduct Authority (FCA) announced stringent new requirements for crypto advertising in the country.?

The FCA wants to? impose a 24-hour cooling-off period requirement and ban “refer a friend” or “new joiner bonus” programs.?

This is not a surprise considering all the negative noise around crypto globally at present and that crypto adoption is high in the UK, with a recent FCA survey showing that around 10% of respondents hold crypto assets.

We need to wait and see to really determine the imapct these rules could have on the crypto ecosystem in the UK.

4. Hong Kong Prepares for Retail CBDC

The Hong Kong Monetary Authority (HKMA) released a report announcing plans to begin laying the groundwork for a retail CBDC.?

The retail CBDC version of the Hong Kong dollar - termed the "e-HKD" - has been under consideration since 2017. The decision to accelerate retail CBDC plans is reportedly driven by results from a recent study and input from two rounds of market consultation.

Whilst e-HKD may have a limited role in the current retail payments environment, the HKMA believes that the rapidly evolving digital economy could quickly generate potential use cases for the digital currency.?

Of course, the exact shape of the e-HKD is not clear at this stage. For example, earlier this year, it was reported that the HKMA might lean towards developing e-HKD on a permissioned blockchain. And in their recent report, HKMA clarified that whilst blockchain solutions are under consideration for e-HKD, the authority will examine various factors, from policy objectives to strategies adopted by other jurisdictions, to explore the path forward further.

5. VC Capital for Crypto Firms Plunges

Crypto VC capital raising fell over 90% in H1 2023.?

According to a recent report, only $US500 million has been raised in 2023 so far, representing 2.3% of the amount raised in 2022.?

This is not surprising as investors paused many of their crypto investments post-FTX and raising capital for a crypto VC fund became very difficult.?

However, there is still a lot of dry powder that was raised in 2021 and 2022 that is looking for quality crypto companies, thus why we are still seeing crypto companies close fundraising rounds in recent weeks and months.

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*Please note that this newsletter reflects Henri’s personal views and not those of any organisation he is involved with. This newsletter is for educational purposes only and none of its content should be construed as investment or financial advice of any kind.?

Who is Henri?

Henri Arslanian is the co-founder and managing partner of Nine Blocks Capital Management, an institutional-grade hedge fund focused exclusively on digital assets, with a market-neutral crypto fund focused on generating alpha from inefficiencies in crypto markets using relative value, arbitrage, and quantitative strategies.?

Henri was previously a partner and global crypto leader at PwC. In that role, he advised many of the world’s leading crypto exchanges, investors, financial institutions, and tech firms on their crypto initiatives and numerous governments, regulators, and central banks on crypto regulatory and policy matters.

With over 500,000 LinkedIn followers, Henri is a TEDx and global keynote speaker, a best-selling published author, and is regularly featured in global media, including Bloomberg, CNBC, CNN, BBC, The Wall Street Journal, The Economist, and the Financial Times.?

Henri was named by LinkedIn as one of the 2022 global Top Voices in Finance and is the host of the CryptoCapsules? social media video series as well as The Future of Money podcast and newsletter.