The Breakdown - Is CZ a Flight Risk? DOJ Says He Is

Episode Date: November 27, 2023

The crypto industry is getting used to the post-CZ, post-Binance settlement world. Is CZ a flight risk? Is this all just good for crypto? Might it even be good for Binance? Today's Sponsor: Kraken Kraken: See what crypto can be - https://kraken.com/TheBreakdown Enjoying this content? SUBSCRIBE to the Podcast: https://pod.link/1438693620 Watch on YouTube: https://www.youtube.com/nathanielwhittemorecrypto Subscribe to the newsletter: https://breakdown.beehiiv.com/ Join the discussion: https://discord.gg/VrKRrfKCz8 Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW

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. What's been on, guys? It is Monday, November 27th, and today we are settling into the new post-finance settlement world. Before we get into that, however, if you are enjoying the breakdown, please go subscribe to it, give it a rating, give it a review, or if you want to dive deeper into the conversation, come join us on the Breakers Discord. You can find a link in the show notes or go to bit. L.Y slash breakdown pod. Hello friends, welcome back to the world after what was hopefully a lovely Thanksgiving slash long weekend slash regular weekend for those of you who are not here in America are celebrating Thanksgiving. As I mentioned right at the top, we are settling into this new post-CZ

settlement, finance settlement world. And so today a lot of our conversation is just catching up on all of the fallout from that, how people are feeling about it, what they think, and where the narrative is settling. So, after pleading guilty to one charge of violating the Bank Secrecy Act on Tuesday, Binance CEO, CZ, was released on bond and cleared to return home to the UAE to await sentencing by a magistrate judge. The Justice Department is pushing back on that ruling, arguing that CZ has, quote, minimal ties to the U.S. and may not return. Sentencing is currently scheduled for February 23rd, with CZ expected to face up to 18 months in prison and a fine of $50 million. The DOJ is not requesting that CZ be jailed ahead of the sentence, just that he be prohibited from

leaving the U.S. CZ remained in the U.S. over the weekend pending appeal of his bail conditions. Now, under the current terms, he would be required to return to the U.S. two weeks ahead of sentencing. During the Tuesday hearing, Cizzi said that being forced to remain in the U.S. would represent a hardship for himself and his family. He said that his wife and children could not relocate to the U.S. for the next few months. The magistrate presiding over the plea hearing asked prosecutors whether CZ voluntarily coming to the U.S. to surrender on charges meant that there was no serious flight risk. Prosecutor said there was a material difference between voluntarily presenting to be charged and returning to face potential prison time. Lawyers representing CZ responded in a Thursday

filing reinforcing that he was not a flight risk. The partially redacted document said that, quote, based on all the relevant facts, including Mr. Zhao's voluntary self-surrender, his intent to resolve this case, and the sizable bail package he proposed, Judge Tuchita found that Mr. Zhao represents no risk of flight, even when residing in the UAE. CZ has posted $15 million in a trust account and agreed to a $175 million bond backed by multiple guarantors. Now, the DOJ has argued that CZ could afford to lose this money due to his immense wealth, but CZ's lawyers had their argument ignored the significant financial commitments already

made by himself and finance in settlement of the case. They wrote, against the weight of all disinformation and the court's consideration of it, the government provides no meritorious or additional basis to insist that Mr. Zhao remain in the United States away from his family for months between his plea and sentencing. In a Saturday night response filing, the DOJ suggested they could argue for a much tougher sentence. They wrote, The defense claims that Mr. Zhao faces merely a brief sentence and has no incentive to flee. The reality is that the top end of the guidelines range may be as high as 18 months,

and the United States is free to argue for any sentence up to the statutory maximum of 10 years. As the defense will certainly emphasize its sentencing, Mr. Zhao has a family and has never spent a day in custody. The penalties he faces at sentencing will no doubt seem significant. into him, and that weighs in favor of the responsible restrictions the United States proposes. So, the matter is expected to be returned to court imminently. There are a few different ways to get a read on this. One thing that's clear is that the DOJ is definitely making an overt threat that they could

push for 10 years. Does that mean that they are unhappy with CZ returning to UAE? Maybe it wasn't part of the deal? Does it represent them feeling like they need to apply some pressure now to get an additional cooperation? Or is it simply them being pissed off about CZ saying that the platform is fine and that after that, are safe. Basically, there could be something that was different between the negotiations and the public statements, or it could be the DOJ having second thoughts about the deal that they cut, or it could just be a show of strength for media purposes. Basically, the thing to watch out for is whether this is all just bluster or whether something has gone wrong behind closed doors,

and the resolution ends up being less smooth than it seemed like it would be at the end of last week. Now, holding aside that specific speculation, the world is certainly adjusting their outlooks based on the changes wrought by the settlement in this case. For example, a JPMorgan research report said that the Binance settlement is positive for the crypto industry as well as for the exchange. The report, released on Thursday, said that the settlement deal, quote, would see significant reduction of a potential systemic risk emanating from a hypothetical Binance collapse. They added that it reinforces a, quote, ongoing shift towards regulated crypto entities, and instruments which have been the objective of U.S. authorities post-FTX's collapse.

Basically, the general idea is that the uncertainty around the resolution of Binance's legal issues has been weighing on crypto markets, giving institutional firms and investors a reason to stay away. With the collapse of Binance now seemingly off the table, JPMorgan analysts believe that one of the last major risks has been removed. Notably, this is exactly what myself and many others said, as the news was breaking about CZ and Binance's settlement. Now, JPM also notes that Binance will likely benefit from this risk being taken off the table. They note that both the trading division and the B&B smart chain business could stabilize following the settlement. The report noted that Binance has been bleeding market share throughout the year on the back of legal uncertainty. Analysts wrote,

Its market share loss should be contained going forward and perhaps partly reverse once the implications from this settlement on Binance's operations and business model become more clear. Now again, what's notable about this is not particularly the novelty of the analysis as it reflects much of what the industry thought, but it's noteworthy because of who's saying it and to whom. This is J.P. Morgan, not us on the breakdown podcast, and they're talking not to you awesome people, but to their investing clients. Now, relatedly, investment management firm Bernstein have said that Binance will likely continue to dominate the international crypto industry following their settlement. In a report released on Wednesday, the firm noted that there was no rush for the exits with

net outflows contained below $1 billion on Tuesday. Since then, outflows have slowed to a trickle with less than $75 million in net outflows over the past day. Bernstein analysts wrote that, quote, reputation with retail non-U.S. customers has remained strong throughout the crisis. End quote. Bernstein suggested that Binance would remain an insignificant entity in U.S. markets and would face new competition from Coinbase's offshore derivatives exchange and newly regulated exchanges based in Hong Kong and Singapore. The report argued that Binance's complete exit from the U.S. would mean continued dominance of onshore and incumbent exchanges in the U.S. It noted that U.S. asset managers are moving forward with ETF applications that would

bolster the importance of Coinbase, which is acting as a custodian and surveillance partner for many of the products. Analysts wrote, in our view, this is the final straw before the establishment feels comfortable to approve a regulated Bitcoin ETF. Lastly, they noted that they believe that Binance has adequate funds to settle the $4.3 billion fine without impacting operations. Now, one more report on this ETF idea, Matrixport echoed the sentiment around it being now inevitable. They wrote, with this plea deal, the expectations for a spot Bitcoin ETF might have increase to 100% as the industry will be forced to follow the rules that Tradfye firms must follow. Matrixport also argues that Binance will likely remain a top three exchange in the near term.

Now, as far as their operations go, Binance appears to be sticking to their core business without missing a beat. Since the Tuesday announcement, multiple new meme coins have been listed with options to trade derivatives using high leverage. Newly appointed CEO Richard Tang attended the Abu Dhabi Grand Prix on the weekend to unveil a fan design-sponsored helmet worn by Pierre Gassley. sentiment for Binance's future outside of the U.S. appears generally positive. Danny Chong, the co-founder of Defi Protocol, Trancheless said, In terms of dominance, we could see Binance maintain or even strengthen its market position. The resolution of these legal issues should reinstall confidence in the exchange, and funds

that were previously pulled for safety measures may flow back. Arthur Chiang, CEO of Defiance Capital, was pessimistic but expressed a fairly limited downside, stating, I think their market share will gradually decline from here, but will still be in the top three exchanges for their foreseeable future. I do think new management teams means the focus is less on product innovation and will be more on compliance and institutionalization of the company. So expect less vibrancy. Crack and co-founder Jesse Powell also had really interesting thoughts, saying that the finance settlement had leveled the playing field in the U.S., and that, quote, the game feels a bit

more fair. He continued, the last 12 months have answered two nagging questions from shareholders. One, how are they going so fast? Two, how are they getting away with it? Trust me, any day now, dot, dot, dot, dot, is only believable for so many years. It's hard to keep faith while your market share dwindles, and the only enforcement that's happening is against the good guys. Fortunately, we have very long-term-oriented shareholders who understand that this holy mission is a marathon, and that we must lead by example. Unfortunately, many of our

like-minded, responsible peers perished while waiting for justice to arrive. For them, there is no solace. New threats to the industry's reputation continue to emerge. Each dodgy operation represents an opportunity for governments to scapego crypto and tighten the noose. We clearly cannot count on timely protection. We have to self-police. One of the things that I am most interested to see is whether some new exchange, be it a centralized exchange or a decentralized exchange, emerges to fill in some product gap that we don't even know we're missing right now. Every previous bull run has been to some extent characterized by a new exchange emerging. In fact, not just bull runs, but bear markets as well. This time, obviously,

we have the opposite, with bear markets being characterized and bookended by exchanges shutting down. A huge question coming off of FTX and Binance in the year between them is whether we'll proceed with better actors or whether someone new who's ready to play fast and loose again comes up to intervene. Today's episode is brought to you by Cracken. For far too long, the whole financial system has been standing still, too slow, only on for certain hours, overly designed for some types of people, but not for others. Crypto, at its best, represents progress.

It asks the question, what if? It invites people in instead of leaving them out. It's on 24-7, 365, and moves at the speed of real life. Not everyone believes it. We've got our fair share of detractors, but that's the way it always is when you're building something new. Cracken is a crypto company that has been through the highs and lows of the industry, facing forwards towards progress throughout. And now they're inviting us to see what crypto can be. Learn more at crackin.com slash the breakdown. Not investment advice. Crypto-trading involves risk of loss. Cryptocurrency services are provided to U.S. and U.S. territory customers by Payward Ventures Inc. PVI, PVI, DBA, Krakken.

Now, a couple more stories on similar themes to close out the day. Tether and Bitfinex have agreed to drop their opposition to a New York Freedom of Information Law request. The request was brought by a group of journalists, including Bloomberg, Zeke Fox. The author of number goes up. The firm said that the move was part of their, quote, unwavering commitment to transparency and the belief that we have nothing to hide. However, they said that transparency does not mean a wholesale release of all of our documents. Indeed, a blog post from Tether expressed concerns about prior reporting in major financial publications. They specifically highlighted reporting from Fox, which they said, quote, sometimes extended beyond the boundaries of professional journalism. Fox's book had

been particularly critical of Tether's use in criminal activities, including so-called pig-butchering scams. Since publication, Tether has frozen over $225 million linked to these scams in collaboration with the DOJ. Tether said that they were, quote, open to constructive engagement with journalists and regulatory authorities who adhere to ethical reporting standards and respect data privacy boundaries. They urged journalists to engage in, quote, responsible document review and handling before any public disclosure. Now, Tether lost a string of appeals against the FOIL request from Coinbase leading to the disclosure of documents in June. The documents were related to the New York Attorney General's lawsuit in 2019, which questioned Tethers' reserves.

The stories coming from those foil documents were a little out of date by the time they were released and confirmed that Tether held substantial amounts of commercial paper as part of their reserves, but they really didn't contain any massive revelations. Now, also last Tuesday, Tether disclosed some additional details on their collaboration with U.S. law enforcement. In a blog post discussing recent cooperation with the DOJ, Tether noted that they have, quote, recently onboarded the United States Secret Service into its platform, and will be working with the Federal Bureau of Investigation to do the same. The move was said to be an extension of a current initiative to provide support to victims of crimes under investigation by the DOJ.

former CTO and new CEO, Paolo Adrino said, Tether remains steadfast in its commitment to supporting law enforcement efforts and aiding victims in their recovery. We condemn the misuse of USDT or any cryptocurrency for illicit purposes and are fully committed to collaborating with global law enforcement agencies. They said that their collaboration with the DOJ stands as a, quote, tangible testament to the enduring relationship between the cryptocurrency industry and law enforcement agencies. Now, why is Tether related to Binance? Well, because frankly, what we are doing right now, the process that we are in the midst of, is a not. knocking down of all of the big risks that overhang the industry. After FtX, the biggest that everyone

was focused on was GBT slash DCG and of course, Binance. Now, DCG and GBTC still aren't fully resolved, but obviously Grayscale has had some success in the courts, and Binance appears to be a lot better resolved than a lot of people thought. Naturally, that means eyes go to the big 800-pound gorilla in the room tether, which, depending on your point of view, is the biggest disaster waiting to happen at all, or the most inappropriately maligned of all crypto assets. In either case, at least for now, it seems like there is active cooperation between them and U.S. authorities, so who knows? Now, wrapping up on some of the cleanup from the last set of bad actors, a court in Montenegro has approved Doquan's extradition after he finishes serving his prison term.

The disgraced Terraform Labs founder was sentenced to four months in prison on document forgery charges. The court found that extradition requests from both the U.S. and South Korea were valid. The Montenegrin justice minister will ultimately decide where to send Kwan. He is set to face criminal charges related to the collapse of Luna ecosystem in each jurisdiction, along with civil regulatory lawsuits. Now, updates from Montenegro have been patchy and lacking details, so we don't have a clear understanding of when Kwan's prison term will be complete. He was sentenced in June, but has fought an appeal since then, and presumably his four months will be up soon, and it now appears that the extradition process is moving along. Meanwhile, Sam Bangman-Fried's latest request to be

released from jail has fallen on deaf ears, with the court of appeals denying his application on Tuesday. Sam will now remain in jail pending his sentencing hearing on March 28th. The clerk of court wrote, we have reviewed the additional arguments and find them unpersuasive. The court noted that Sam had attempted to tamper with two witnesses ahead of his trial and ruled, quote, the record shows that the district court thoroughly considered all of the relevant factors, including his course of conduct over time that had required the district court to repeatedly tighten the conditions of release. Meanwhile, the Wall Street Journal has provided some new reporting on how SBF is spending his time behind bars at the Brooklyn Metropolitan Detention Center. According to the WSJ, Sam is sharing a unit with a former

Honduran president and a recently convicted senior police officer from Mexico. He has also apparently discovered that federal prisons no longer use cigarettes as unofficial currency among inmates following smoking bans. Instead, inmates apparently use pouches of preserved fish, purchased from the commissary to trade with one another. The journal reports that Sam traded a few pouches of smoked mackerel, known colloquially as max to pay for his pretrial haircut. He has also reportedly been befriending guards by giving them tips on crypto markets. Sam's spokesperson Mark Botnick said, Sam's doing the best he can under the circumstances. Prison consultant Bill Barone said, when he is sentenced, his life will get better. He'll be out of the facility with the most

violent people. Barone is a lawyer who spent some time at the Brooklyn MDC while fighting fraud charges. He said that he paid four Max for his own prison haircut while he was locked up. Barone added that SBF would likely be allowed to bring his mackerel pouches with him when he is relocated to a federal prison. Max currently cost $1.30, up 30% since 2020. Barone noted, the Mac currency system is far more stable than crypto. Anyways, friends, that is going to do it for today's breakdown. Until next time, be safe and take care of each other. Peace.