The Breakdown - Are the WSJ Articles on Binance and Tether ‘Trial by Press’?

Starting point is 00:00:04 Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. The breakdown is produced and distributed by CoinDest. What's going on, guys? It is Monday, March 6th. And today, we are catching up on so much fud from the end of last week. One quick note before we dive in, there are two ways to listen to The Breakdown. You can hear us on the CoinDesk podcast network feed, which comes out every afternoon, and sits alongside other great coin desk shows,

Starting point is 00:00:37 or you can listen in the evening on the breakdown-only feed. Wherever you listen, if you were enjoying the breakdown, I would so appreciate it if you would take the time to leave a rating or review. All right, guys, it was a very busy Friday and weekend. A lot of fud, a little more clarity on some stories from last week. So let's dive in and let's kick off with some good old-fashioned tether fud. On Friday, the Wall Street Journal reported that Tether had used falsified documents and shell companies to obtain bank accounts,

Starting point is 00:01:03 citing emails leaked to the newspaper that discussed some of the tactics used by Tether and their intermediaries back in 2018. The article claimed that an email from Stephen Moore, one of the owners of Tether Holdings Limited, said that a major Chinese counterparty was trying to, quote, circumvent the banking system by providing fake sales invoices and contracts for each deposit and withdrawal. He wrote that it was too risky to continue with this method, considering his signature was on the fake invoices, and recommended that the counterparty abandoned its attempts to open the accounts, saying, I would not want to argue any of the above in a potential fraud-slash-money-londering case.

Starting point is 00:01:33 In March 17, according to the Wall Street Journal, Wells Fargo, stopped processing transaction from several Taiwanese accounts the Tether had been using, and in a lawsuit filed against the bank, Tether called the move, quote, an existential threat to their business, but withdrew the lawsuit shortly thereafter. A few weeks later, on a conference call with users, Phil Potter, Tether's then-chief strategy officer, attempted to calm concerns, saying, quote, we've had banking hiccups in the past, we've always been able to route around it or deal with it, open up new accounts or what have you. There's been lots of sort of cat-and-mouse tricks that everyone in the Bitcoin industry has to avail themselves of. The article also claims that another account opened up on behalf of Tether in Turkey

Starting point is 00:02:06 was later used to funnel money to a Hamas-linked terror organization. And on top of that, the article also chronicles an attempt to funnel money through Panama using a company called the Crypto Capital Corporation. The company allegedly used a series of shell companies to move around more than $1 billion. In October 2018, around $850 million was seized by authorities in the U.S. in Europe during an investigation into bank fraud and alleged money laundering. The seizure caused ripples through the crypto ecosystem, with Tether losing its peg and making a loan to Bitfinex, its sister exchange, to shore up Tether's balance sheet. Bifenex claims to this day that it was defrauded by Crypto Capital Corp and is still fighting the seizures. Also, according to the documents,

Starting point is 00:02:42 Tether and Bipfinex were able to open at least nine bank accounts using shell companies in Asia over nine days in October 2018, and argue that that month, Bipfinex announced to customers that it had a new, quote, distributed banking solution, but in communications with those customers warned them to keep the details of the banking arrangement to themselves, saying, quote, divulging this information could damage not just yourself and Bitfinex, but the entire digital token ecosystem. The article also claims that Tether and Bitfinex made repeated attempts to hold a bank account with Signature Bank in New York in 2018. Signature had already closed two accounts tied to the companies earlier that year and rejected another attempt during the fall.

Starting point is 00:03:16 An account was eventually opened up in the name of Christopher Harbourn for the stated purpose of trading on Cracken. Mr. Harbourn was a large backer of the UK's Conservative Party and owned AML Global. The application for the account did not state that Mr. Harbourn owned roughly 12% of Bitfinex and Tether under another name. The Salkincrete name had been earlier added to a list of names the bank felt were trying to evade anti-money laundering controls when the company's earlier accounts were closed, but Mr. Harbournes hadn't. Compliance executives eventually questioned why an account that stated it would be trading on Cracken was receiving massive inflows from what appeared to be Bitfinex. One signature executive wrote, quote, Bitfinex was not mentioned anywhere

Starting point is 00:03:51 on the paperwork that was provided. If they are buying and selling with Cracken, why is the money only coming in from Bitfinex? The account was provisionally open but closed soon afterwards when the bank realized the account was indeed connected to BitFinex. So a lot going on in here, a lot of allegations. Tether for their part just called it Fudd, releasing a blog post stating, quote, The Wall Street Journal's report about stale allegations from long ago is wholly inaccurate and misleading.

Starting point is 00:04:15 Bitfinex and Tether have world-class compliance programs and adhere to applicable anti-money laundering, know your customer and counterterrorist financing legal requirements. Paulo Arduino of Tether also said the same thing. He said, I'm at the Plan B anniversary in Lugana. So much energy and people excited to talk about Bitcoin. While I was on stage, I heard some clown honks, pretty sure it was the Wall Street Journal. As always, tons of misinformation and inaccuracies. Poor guys must be difficult to be them, but we need better media.

Starting point is 00:04:40 Samson Mao, the former chief strategy officer at Blockstream, wrote, Operation Choke Point can't reach Tether, so it's back to the tried and tested strategy of Fudd. Wall Street Journal needs to do better. Rehashed old info mixed with misinformation and new facts, they admit they can't confirm. Now that Tether is the only stable coin left standing, the attacks will only intensify. I obviously have no idea what the truth of what Tether got itself into or how they were using these bank accounts. But I do think that the right reference point is to this discussion of Operation Chokepoint 2.0. James Murphy at Meta Lawman writes,

Starting point is 00:05:10 If this report is factually accurate, the Tether Stablecoin is in a lot of trouble. Whatever variety of Maxi you may be, the government's coordinated effort to choke off all access to the bank, banking system will affect you. And I think this is the salient point here. The great irony of all of this is that if companies like Tether were able to actually get banking access more easily, and the crypto industry wasn't systemically discriminated against, there'd be a lot less chance for bad behavior, whether it's from Tether or others. Something Something Sunlight is the best disinfectant, right? Anyways, that wasn't the only time the Wall Street Journal figured into the Fudd conversations this weekend. Saturday, reporting from the WSJ cited private chats obtained between Binance

Starting point is 00:05:48 executives, which suggested that they were concerned about the quote-unquote nuclear fallout of U.S. crackdown against offshore exchanges. The messages from 2019 allegedly showed that executives at the exchange had turned their minds to the threat of U.S. regulatory enforcement and were working on plans to neutralize that threat. Finance was headquartered in China when it was founded in 2017 before shifting to Japan and then later entered a regulatory gray area with no readily identifiable headquarters. According to this piece, early on in its existence around one-fifth of their customers were U.S.-based. In September 2019, Binance launched its American spin-off Binance U.S.

Starting point is 00:06:22 The California-based exchange was a partnership with BAMT trading services, which already held money services registration with FinCEN. The WS.J reporting claims that this U.S.-based entity was designed to appear wholly independent of Binance.com, which would bar U.S. customers, thus shielding the offshore exchange from U.S. regulatory scrutiny. According to interviews with former staff members and leaked private messages, the links between the two supposedly independent exchanges were much deeper than they were claimed to be. A key claim from the piece is that Binance developers based in China maintain the software code

Starting point is 00:06:49 operating Binance U.S. customer wallets, potentially giving Binance International access to U.S. customer data. Of course, the links between Binance.com and BinanceUS are key to any forthcoming regulatory enforcement efforts. Without proving that there was effective control over the U.S. entity, the SEC and DOJ will have difficulty proving they have jurisdiction to really go after Binance.com. Now, to the extent anything makes this new Wall Street Journal reporting interesting, it's the extent of the source materials making it to publication.

Starting point is 00:07:16 The paper claims to have seen a presentation, for example, outlining a proposal to use a U.S. entity to attract the attention of regulators. That proposal supposedly included sections titled Insulate Binance from U.S. enforcement, which explained that the U.S. would need entirely separate management and operations. Regulator engagement plans, which recommended that Binance launch, quote, a major PR effort, demonstrating U.S. operations willingness to exceed SEC expectations and serve as an industry resource for the SEC. Join CoinDesk's Consensus 20203, the most important conversation in crypto and Web3,

Starting point is 00:07:50 happening April 26th through 28th in Austin, Texas. Consensus is the industry's only event bringing together all sides of crypto, Web3, and the Metaverse. Immerse yourself in all that blockchain technology has to offer creators, builders, founders, founders, entrepreneurs, and more. Use code Breakdown to get 15% off your paths. Visit Consensus.com. coin desk.com or check the link in the show notes. In another private chat cited by the WSJ, after a Binance employee noted in 2019 that

Starting point is 00:08:27 more than 18% of Binance.com's page views originated from the U.S., the company's then compliance chief suggested that the exchange could retain U.S. customers with some plausible deniability, quote, have them be creative and VPN. Some of the private chats also involve former CEO, Catherine Coley. She was the first CEO of Binance U.S. and had claimed publicly the party line of being a separate entity. Yet the WSJ claims, she had also asked staff at Binance US to prepare weekly progress reports for the CEO and CFO of Binance.com. And then, of course, there's the pieces of the article that got lots and lots of attention. That was the part where in 2018 and 2019,

Starting point is 00:09:03 Binance staff approached Gary Gensler, who at the time was the former CFTC chair and tried to recruit him. Now, a person close to Gensler told the WSJ that he had been approached by multiple firms, including Binance, to take on an advisory role during his time. teaching at MIT. That anonymous source said that Gensler had met with Binance's founder in Tokyo during March 2019. However, in one of these chats, it sounded like Gensler had politely declined to become an advisor. Now, to be absolutely clear as we wrap up this section, the entirety of these allegations are according to the Wall Street Journal, which is claiming to have viewed all these private communications. We have no real way to examine the accuracy of that reporting. It's notable

Starting point is 00:09:40 mostly in the sense that it's claiming much more extensive sourcing than in a previous reporting we've been seeing on Binance's corporate operations. And to many in the crypto industry, the timing doesn't seem coincidental. Quite relatedly, we've got more details on the SEC's argument for why Binance US shouldn't be allowed to acquire Voyager assets, something that if you'll remember last week, a U.S. judge said that they were quote unquote shocked by. We were actually, in fact, on day three of witness testimony centered around the SEC's claims that Voyager can't complete its deal with Binance US without violating securities laws, particularly in relation to sales of Voyager's native token, VGX.

Starting point is 00:10:16 Thursday's opening session featured the judge airing his displeasure with SEC attorneys, stating that the SEC had offered little in the way of specifics about their objection, and it offered no case law or analysis to support their claim that VGX was an unregistered security. In fact, the SEC appeared to be unwilling to even firmly argue that VGX is a security only going so far as to saying that it could be. The SEC senior trial attorney representing the agency said during Friday session that, quote,

Starting point is 00:10:40 the staff believes, based solely on the facts and circumstances currently known to the staff, that the offering and sale of VGX tokens has the attributes of a securities transaction. The staff also believes that Binance U.S. is operating an unregistered securities exchange in the United States. That line was, of course, what got all of the narrative juice. The lawyer also noted that the SEC staff's views don't necessarily reflect the views of the five commissioners at the agency and declined to comment on whether there were any enforcement actions to come based on this belief. Also, during that Friday, hearing the council for the SEC requested a private meeting with the judge, claiming that there were, quote, statutory limitations on our ability to share non-public information.

Starting point is 00:11:16 After a brief private discussion between the judge and counsel for the SEC, Voyager and Binance, the judge returned to court and urged the SEC to make their comments public. Quote, this is a public court process. I believe that everyone has a right to hear anything that clarifies the foundation for the SEC's stance. As the SEC took no official stance in open court, the judge claimed he did not have any clarification even after counsel for the SEC made it clear that the staff think that Binance is operating an unregistered securities exchange. A Binance spokesperson again denied the allegations, saying, it's regrettable that an SEC staff member would make allegations that Binance U.S.

Starting point is 00:11:48 and platforms like ours are operating an unregistered exchange without specifying the assets listed on our exchange the SEC considers to be securities. So what are the takeaways from all of this? Well, one of the popular sentiments on Twitter is that these things actually suggest not power on the part of regulators and enforcement officials, but some amount of powerlessness. that basically, rather than bringing actions against someone like a Binance, they're doing a bit of trial by press. I don't necessarily think that this is a misinterpretation. Remember, there had been reporting about a month ago that inside the DOJ,

Starting point is 00:12:20 there was some fairly serious disagreement about whether they actually had enough to pursue legal action against Binance. The sort of leaks in the Wall Street Journal might reflect that. Now, when it comes to the SEC, it's clear that they are pushing to see how much they can get away with without explaining themselves along their view that basically everything in the world is a security. I continue to feel as I did last week that the best thing for the industry is that it gets confronted in front of judges like this, and hopefully becomes forced to proactively make their case about their assertions. We have some more happening this week on that front with the Grayscale trial, so hopefully this won't be the last time this week I get to talk to you about the SEC getting called out.

Starting point is 00:12:55 But for now, that's where things stand. It's going to be an interesting one, where you're going to have more Silvergate, drama, or potentially resolution in one-way-shaped or form or another. The latest around Sam Bankman-Fried is that he might be downgraded to a flip phone, and who knows what other new craziness will happen this week to rip our attention over towards it when it does. I appreciate you listening, as always, and until tomorrow, be safe and take care of each other. Peace.

The Breakdown - Are the WSJ Articles on Binance and Tether ‘Trial by Press’?

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