The Breakdown - The USA’s Crypto Loss is Hong Kong and China’s Crypto Gain

Episode Date: April 1, 2023

It’s no secret that the US is pushing banks away from crypto companies. What’s surprising is that Chinese state owned banks are apparently actively recruiting crypto customers in Hong Kong – seemingly in response to growing US anti-crypto attitudes.    Enjoying this content?   SUBSCRIBE to the Podcast Apple:  https://podcasts.apple.com/podcast/id1438693620?at=1000lSDb Spotify: https://open.spotify.com/show/538vuul1PuorUDwgkC8JWF?si=ddSvD-HST2e_E7wgxcjtfQ Google: https://podcasts.google.com/feed/aHR0cHM6Ly9ubHdjcnlwdG8ubGlic3luLmNvbS9yc3M=   Join the discussion: https://discord.gg/VrKRrfKCz8   Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW “The Breakdown” is written, produced and narrated by Nathaniel Whittemore aka NLW, with editing by Michele Musso and research by Scott Hill. Jared Schwartz is our executive producer and our theme music is “Countdown” by Neon Beach. Music behind our sponsor today is “Foothill Blvd” by Sam Barsh. Image credit: by CoinDesk.  Join the discussion at discord.gg/VrKRrfKCz8.  

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Register now at Consensus.coindex.com and join CoinDesk at Consensus 2023. 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 Saturday, April 1st, and today we are not joking around. we are talking about why the U.S.'s crypto loss is Hong Kong's gain. 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.ly slash breakdown pod. All right, friends, what's going on? Welcome to April. This is the weekly recap. And so given that, I wanted to hone in on something that's been a real theme for the week, which is China, red fear, and the implications for the crypto industry. A couple of places that this has come up in the previous few days. One is certainly around the Restrict Act, which we talked about here on Thursday. That's the act which would nominally allow the U.S. to ban TikTok, but seems like a much bigger assault and expansion of executive power.

But then another is the discussion surrounding Binance. At the beginning of the week, we got the CFTC lawsuit against Binance, but then in the next couple of days, there was more fud as well in the form of a Financial Times piece, revealing, question mark, that Binance had closer ties to China than it tried to show. So, the main thrust of the story is that Binance continued to have significant operations in mainland China, long after it claimed to have left in 2017. The article cites internal documents, which imply that Binance continue to have operations in China well into 2019. It suggests that Binance were still hiring staff to work in China, and that wages were paid via a bank in Shanghai.

In a group chat viewed by the Financial Times, CZ told the company in November 2017 that, quote, we no longer publish our office addresses. People in China can directly say that our office is not in China. Internal documents dating from 2019 surrounding a recruiting team in Shanghai, reportedly told staff, quote, please do not wear any apparel or accessories with Binance logos at or around our office locations.

It is strictly prohibited. Binance told the Financial Times in response to the story, quote, it is unfortunate that anonymous sources are citing ancient history in crypto terms and dramatically mischaracterizing events. This is not an accurate picture of Binance's operations. Now, this reporting is largely focused on Binance operations prior to 2020 and contains very little in the way of firm facts leaning heavily on anonymous sources. What's more, it has an interesting presumption that underlies it. The framing of the article suggests that

Binance is trying to hide its closer ties to China from the U.S. or from people who don't really like China. However, if this were all true, wouldn't it also be as plausible that they were trying to hide their continued operations from the Chinese government itself, which banned exchanges in 2017? I think either of these would be plausible explanations, and it says a lot about Western media right now that the framing assumes that if there are these connections, it's because Binance is closer to China than we thought. Now still, all speculation aside, the ramifications of a continued link to China could be pretty significant for Binance. For example, Binance U.S. is currently attempting to purchase the assets out of the Voyager bankruptcy, but has been stymied

by government objections, which in part question links between the offshore firm and its U.S. counterpart. The Committee on Foreign Investment in the United States has been scrutinizing the deal and one former official laid out the stakes for the Financial Times. The United States, they said, is in one of the most consequential geopolitical contests in history. To the extent the government seeks to influence this new means of finance, CFIUS will have concerns over any deal that traces back to China. End quote. Beyond that, data security for Chinese firms has also been a hot-button issue in Washington. Again, going back to the Restrict Act, but Binan spoke to this issue as well, stating that, quote, to be clear, the Chinese government, like any other government, has no access

to finance data except when we are responding to lawful and legitimate law enforcement requests. Still, the question that many are asking is why are we reading this now? Investor Adam Cochran writes, if you think press articles like this are just well-timed, they aren't. This is absolutely a friendly tip-off from agencies as they tighten the screws by painting a narrative on Binance with more action in the pipeline. They are going full tilt here. No one in the industry was under the impression that Binance didn't have strong Chinese ties. But that news at this moment is helpful as anti-CC sentiment is high and Congress pushes the restrict act against TikTok.

end quote. Indeed, this has led some to speculate about whether the Restrict Act has targets other than just TikTok, and whether companies like Binance are in the sight lines. Regardless, the narrative is certainly shifting against them right now. Research firm Bernstein has said that the CFTC could force Binance to cease U.S. operations as part of a lawsuit settlement. Their report, which came out on Tuesday, just a day after the regulator had sued the largest crypto exchange in the world, said that it expects Binance to abandon the U.S. market. It said that given crypto is a global business, Binance will likely seek to, quote, safeguard its dominant international business, which is

its cash cow, and where it has worked on licenses in Europe, Africa, and Australia. The report noted that Binance U.S. makes up only 5% of the exchanges global operations and said that the latest enforcement action was not, quote, material to overall crypto markets, anticipating that the news would not catalyze a large sell-off. Bernstein said that the regulatory narrative has pivoted away from the U.S., instead focusing on their loosening of regulations in Hong Kong, and the expectation of strong inflows from the island city as well as from mainland China. And this is a theme we'll now explore.

Now, for Binance's part, in addition to his normal tweets of four, which is a reference to CZ's four resolutions for 2023, the fourth one being ignore fud, fake news, attacks, etc. CZ also tweeted an article from Bloomberg about Chinese banks court in crypto in Hong Kong, adding the quote, when one door closes, other ones open. So to understand the shift going on here, we need to go back a little. bit. China's relationship with crypto has always been pretty iffy. In 2017, the country banned

exchanges, a move that again nominally forced finance out. For the next several years, China bans crypto was a recurring fud meme in crypto circles. In 2021, however, the meme got a little bit more real, as China made its most aggressive moves yet to push the industry away. This came first in the form of a ban on Bitcoin mining in May 2021, after which the U.S. and Kazakhstan would go on to be the biggest recipients of the shifting hash power, and a few months later, China made trade. of any type of crypto at all illegal, with severe punishments for crypto companies to keep any staff in mainland China. Now, of course, these moves corresponded with the continued push by the CCP and the People's Bank of China to launch a digital yuan. These efforts had started years earlier,

but in the wake of Facebook's 2019 announcement of Libra, they were pushed into overdrive. In 2020, the Chinese government cracked down aggressively on traditional mobile money services, which they saw as threatening their control over the financial system. Notably, and financial, the Jack Ma company had its IPO pulled at the 11th hour and was ultimately forced to restructure to comply with Chinese banking laws. Jack Ma has kept an extremely low profile ever since then. And after those mobile money services were solved in 2021, it seemed it was crypto's turn. Now, in this dark period for Chinese crypto, Hong Kong remained somewhat more open, but not all that much. In fact, in the fall of 2022, it was looking like new registration rules in Hong Kong

would keep with the mainland anti-crypto ethos. Earlier this year, however, the proposed guidelines were published, and to many people's surprise, were much more open than just about everyone had guessed would be the case. In mid-February, Hong Kong securities regulator proposed new rules for registration of crypto exchanges, including things like ring fencing customer deposits, certain controls over key security, and requirements that at maxed 2% of customer funds would be stored in hot wallets. And hold aside the details for a second. The main point was that they were letting crypto companies register. Take that in contrast, for example, to the U.S., where our securities regulator makes video saying,

come in and register. But then when exchanges do, the SEC says, actually you don't qualify and sues them. The biggest surprise for many was that the Hong Kong Securities and Futures Commission had reversed its perspective from the year before and seemed to be prepared to allow retail customers to trade crypto as well. Their logic? From the Wall Street Journal, quote, If retail customers weren't allowed to trade on licensed platforms, they could just trade on overseas exchanges, which could put them at more risk, a spokesperson at the SFC. said. Now, around the same time as we were getting this new insight on the Hong Kong registration regime, Bloomberg also published a piece called Hong Kong's Crypto Hub Ambitions when quiet backing from Beijing.

From the piece, quote, Representatives from China's liaison office and other officials have been frequent guests at the city's crypto gatherings over the past months. Swapping business cards and we chat details said people familiar with the matter who asked not to be named discussing private information. The encounters have been friendly with officials checking in on developments, asking for reports, and in some cases making follow-up calls. The low-key support shows that officials are keen on using the LazyFaire City as a testing ground for digital assets, as they keep a tight rain on any such activity on the mainland. Now, this basically had the whole crypto industry wondering if this really was a sea change and if this attitude shift would persist.

Anecdotal reports seem to confirm a new openness. For example, on March 28, Christopher Perkins from Coin Fund wrote, just had a nice chat with a friend in Hong Kong. They said the crypto community springing back to life with energy and excitement. Then just this week, we got another round of news that suggested that Chinese banks were seeing opportunity in the banking turmoil in the U.S. and the potential of a concerted effort to pressure U.S. banks out of the crypto business. On March 27th, the Singapore outlet, The Straits Times, wrote a piece called Chinese Banks Court Cryptoferms in Hong Kong after mainland ban. The lead of the piece reads,

Crypto firms rushing into Hong Kong after the city opens its doors to the battered sector, are finding a surprising source of potential support. China's state-owned banks. The piece from the Straits Times suggests that Chinese banks have been reaching out to crypto companies about banking services, and this includes the Bank of Communications, the Bank of China, and others. According to the paper, the pitches have even included reps going to crypto companies' offices in Hong Kong to try to sell their services. The piece explicitly makes the connection, by the way, between the U.S. anti-crypto moves and the increased interest from Chinese banks. The same day that piece came out,

Bloomberg reported that Hong Kong regulators are actually facilitating a meeting between crypto firms and banks. The roundtable is happening on April 28th, the Hong Kong Monetary Authority, and is being held in conjunction with the securities regulator as well. Again, in that piece, the connection and the contrast to the U.S. mood right now is notable. Bloomberg writes, a recent collapse in a string of U.S. crypto-friendly banks has added difficulties in finding banking for some firms. Even so, one recent bright spot has been a growing interest among Chinese state-owned lenders in the sector, which has come as a surprise to the industry since China has banned most crypto-related activities. That same Bernstein report we mentioned before suggested that this was a fork in the road moment and that we could see significant

crypto energy shifting to the east. So watching all of this, crypto Twitter is calling out what's happening in pretty precise terms. Ryan Sean Adams from bankless writes, the quote-unquote freest country in the world is choking off crypto while Hong Kong is opening the floodgates. Straight embarrassing for the U.S. Is America just going to finance its future with debt? Or are we actually going to build something again because the builders are leaving. Sasha Hatter writes, Hong Kong has received over 80 expressions of interest from crypto companies agreeing to headquarter there if strong banking is available. Operation choke point equals Operation Brain Drain. Coinbase, meanwhile, put this in terms that politicians can understand, i.e. lost jobs.

On March 29th, they tweeted, 1 million tech jobs are at risk of going overseas. As the U.S. goes down a path of regulatory uncertainty, the EU-UK-U-A-E, Hong Kong, Singapore, Australia, and Japan are all creating environments for crypto to flourish so that they can capitalize on the next wave of innovation. And by the way, this seems to be more than lip service. According to Bloomberg, Coinbase are looking into options to establish a trading platform overseas and had already been in discussions with institutional clients. The exchange is in the middle of an international expansion, but a move to route trades through a venue outside the U.S. would be a dramatic departure from their history of being a decidedly American firm.

During last month's earning call, Chief Operations Officer Emily Choi said that, quote, international expansion is going to continue to be a very core part of how we operate. She noted that the firm was, quote, encouraged by regulatory developments in Europe and the UK. And by the way, these guys aren't the only ones thinking in similar ways. According to reporting from the information, Crypto Exchange Gemini are also looking into launching an international derivatives exchange. The platform would offer perpetual futures, which are not currently allowed to be offered to retail traders in the U.S. and some other Western countries.

According to people familiar with the matter, Gemini has been reaching out to trading firms to serve as market makers for the overseas operation. Now, one last little final nugget of intrigue as we think about the U.S. losing its place in the crypto industry is that it appears that the SEC's Gary Gensler isn't just content to keep his anti-crypto action to the U.S., but is actually trying to export chokepoint elsewhere as well. Fox Business Journalist Eleanor Territ says,

Industry sources abroad tell me that Gary Gensler and Coe have been lobbying their UK and Canadian counterparts to pinch the crypto industry in the same way as the U.S. The FCA, which regulates financial services firms and markets in the UK, is preparing an announcement about tightening restrictions in the coming weeks, while Canada has already announced sweeping crackdowns against the industry. Now, in response, many pointed out that the UK banking sector has not been particularly friendly to crypto already. And in fact, the FCA has been pretty hostile as well. It's really only the prime minister when he was the chancellor of the exchequer, who seemed to

be interested in getting crypto into the UK. Of course, now that Rishi does have power, many have speculated that maybe the UK's tune would change. This sets up a pretty interesting battle between different parts of that government. Ultimately, it is a rough time right now. There is no denying it, but it is fascinating to see how geopolitics are feeding into the changes going on in the crypto industry, and we are also feeding into them. Lots to consider in this crazy world, and I appreciate you hanging out and thinking through it with me. Hope you guys are having a great weekend, and until tomorrow, be safe and take care of each other. Peace.