The Breakdown - Why the DOJ, IRS Investigation Into Binance Could Be Good for Bitcoin

Episode Date: May 15, 2021

Today on the Brief: More chaos from Elon Musk Hedge funds moving into DeFi? Tether reserve attestations Our main discussion looks at recent revelations of investigations by the Department of Justice and the Internal Revenue Service around Binance. NLW breaks down: What we know about who is involved Why the sound bite seems worse than the real story Why each possible outcome leads the Bitcoin industry to a better place -- Earn up to 12% APY on Bitcoin, Ethereum, USD, EUR, GBP, Stablecoins & more. Get started at nexo.io -- 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=   Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW   The Breakdown is produced and distributed by CoinDesk.com

Now, there is, of course, a third possibility that actually they find no wrongdoing, that there becomes a better relationship between regulators and the world's biggest exchange, that other exchanges get better clarity on expectations for stopping U.S. customers from using them. This would significantly increase trust in the system. It would undermine the just-for-criminal's foot even further, and it would eliminate regulators targeting a big exchange from the concern list. 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 sponsored by nexus.io and BitStamp and produced and distributed by CoinDesk. What's going on, guys? It is Friday, May 14th, and today we are talking about why the Department of Justice and IRS investigations into Binance could actually be good for Bitcoin. First up, however, let's do the brief. First on the brief, a little follow-up to our Elon show. If you had any doubt that this man is just a total agent of chaos, yesterday should have absolved you of that. Obviously, yesterday's show was all about interpretations of Tesla's decision to stop supporting Bitcoin payments. One point that I might have not even made strongly enough has to do with the aspect of Tesla's business model that's based around interaction with the government. On the same day that Elon posted his note about Bitcoin, Reuters ran a story titled Exclusive,

Tesla seeks entry into U.S. renewable fuel credit market. So in short, Tesla is one of at least eight companies that has a pending application at the EPA, the Environmental Protection Agency, that is tied to power generation and renewable credits. This is a program that was created in the mid-2000s with the intention of boosting investment in the U.S. biofuel industry and having us less reliant on foreign oil. If they got this, this would be effectively a subsidy for an electric car company at the cost of traditional petro- chemical fuel refiners. The point is that this is happening literally at the same time as this announcement comes through. Regardless, let's go back to Elon himself. He came back on Twitter yesterday and his first tweet was fine. He said, to be clear, I strongly believe in crypto, but it can't drive a massive increase in fossil fuel use, especially coal. I jokingly replied asking when he's going to announce Tesla's clean Bitcoin miners, and frankly, that doesn't seem that outlandish. But then Elon proved once again that he is nothing if not a fickle trickster when he tweeted, quote, working with Doge devs to improve system transaction efficiency, potentially promising.

Doge, of course, rocketed up. It's up nearly 30% in a day. I don't need to explain to you guys that Doge is also proof of work and only doesn't consume energy because it isn't secure or really used for anything or that there aren't really Doge devs, but here we are. So in short, someone needs to take this guy's phone away, stat. All right, next on the brief, let's look at some hedge funds coming into defy. CoinDisc and the block are reporting that three large US hedge funds, Millennium Management, 0.72, and Matrix are all in the process of setting up crypto trading funds. Importantly, these aren't just intended to spot trade Bitcoin and ETH,

but are actually planning to start messing around with defy. And by that, the sources say they don't just mean trading defy tokens, but engaging with the protocols, in other words, actually earning yield. I obviously think we need more information, but this would definitely be a boom to that sector, and confirmation of the rumblings that we've been hearing that there is growing institutional interest. Keep in mind that these aren't small funds. Matrix is the smallest with 10 billion assets under management, while 0.72 has $17 billion, and millennium has $50 billion under management.

Finally on the brief today, Tether attestations. As part of their settlement with the New York Attorney General, Tether has agreed to regular attestations of its reserves. The first of those has come out, and almost exactly like you'd expect, how people feel about it is pretty much entirely colored by their priors on tether. Here's the top line on the reserves. 75.85% is in cash and cash equivalence. More on that in a second. 12.55% is in secured loans. 9.96% is in corporate bonds, funds and precious metals. 1.64% is in other investments. The real question for some is in the cash equivalent section where a large portion of that is in commercial paper. Commercial paper is a form of short-dated corporate debt that theoretically can be easily converted to cash. Of course, in practice,

has a lot to do with who is actually issuing the debt and the market conditions that surround them, which we don't know. Given that about 49% of the overall reserves of Tether are in commercial paper, it's stuck out as an issue. Another issue that some had is the lack of independence of the auditors, and frankly, to me, this is the most obvious thing Tether could do to increase confidence, independent auditors who can actually give real details. Like I said, the reactions mostly come down to whether people already liked or didn't like Tether. So the saga continues. Looking for the best way to unlock your crypto's liquidity, NXO.I.O. is exactly what you need. Borrow against your digital assets at just 5.9% APR. Earn passive income with yields of up to 12%,

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And speaking of sagas, it is absolutely fud season out there. In the middle of all this Elon BS and the rejuvenation of the Tether Truthers, we get this absolute gem of a headline from Bloomberg. Quote, Binance Faces Probe by U.S. money laundering and tax sluice. Sounds pretty bad, right? Well, maybe not. In fact, if you look at the subheadline, Justice Department IRS seek information about crypto exchange, the federal agencies haven't accused

Binance of wrongdoing. Well, wait a second, that seems a lot less bad. Is it possible, just possible, that the headline was designed for Max's attention? Anyway, I suppose it's worth seeing what was actually said, and first of all, there were some things that we know. Binance is the world's biggest exchange by volume. It operates largely outside the U.S.'s regulatory purview. Indeed, it seems likely to me that case studies will be written in the future about Binance's willing to to pick up and move headquarters for the sake of regulatory arbitrage. It's one of the first large companies to do so as part of their DNA, and it will not be the last. The piece also points out that last year, an analysis from chain analysis showed that, quote, more funds tied to criminal

activity flowed through Binance than any other exchange. On the one hand, this sounds bad. On the other, the question is whether the overall percentage of transactions that was criminal was higher. In other words, is it more but just proportional to overall volume, which is all also more. What the piece doesn't say is the nature of the investigation, which makes sense, as theoretically these things are supposed to be quiet and behind the scenes. From the article, quote, while the Justice Department and IRS probe potential criminal violations, the specifics of what the agencies are examining couldn't be determined, and not all inquiries lead to allegations of wrongdoing. What the article did give us, though, is some information about who is involved.

Prosecutors within the Justice Department's Bank Integrity Unit, which focuses on complex cases that involve financial firms, and investigators from the U.S. Attorney's Office in Seattle. Apparently, as well, the IRS has been at this for months. One source said they're reviewing both the conduct of Binance's customers, aka whether Americans are using VPNs to get access to Binance, as well as conduct of its employees. Separately, the CFTC has also been investigating Binance, which is something we already knew. Its question is similar, whether Binance had permitted Americans to make illegal trades, specifically buying unregistered derivatives products. Given all this, it shed some light on why Binance has so notably increased its Washington, D.C. presence

of late. It has retained a former Treasury Department official to represent it in these cases. It also hired former U.S. Senator Max Bacchus to advise it on policy and government relations. And of course, biggest of all was its hiring of Brian Brooks to run Binance.us. Brooks was the former Coinbase lawyer who became the head of the office of the comptroller for the currency under President Trump, and who was massively influential in reshaping many of the rules around how banks can engage with the crypto industry. Interestingly, CZ did take to Twitter to comment on the piece, saying, first, so much fud today. It's a pain for some, an opportunity for others. NFA. He then followed this up with, quote,

The news title is bad. Article itself isn't so bad actually, but who reads? It described how Binance collaborated with law enforcement agencies to fight bad players, but somehow made it look like a bad thing. Anyways, back to work. The official Binance account also tweeted, we take our legal obligations very seriously and engage with regulators and law enforcement in a collaborative fashion. We've worked hard to build a robust compliance program that incorporates anti-money laundering principles and tools used by financial institutions to detect and address suspicious activity.

We have a strong record of assisting law enforcement agencies around the world, including the United States. So let's discuss now the premise that I led with that this could be good for Bitcoin in the crypto industry as a whole. Why is that? Well, used for crime continues to be one of the most persistent and lingering fuds around. Regular listeners and industry participants know that it is largely an exaggerated perception left over from a different time. But that hasn't stopped it from being repeated again and again, most recently in notable fashion by Treasury Secretary Janet Yellen in hearings last month. What's more, you have high-profile stories like the Colonial Pipeline attack from last week where the criminals demanded payment in Bitcoin. On top of all of this,

in some of his first comments on the crypto industry, new SEC chair Gary Gensler noted the lack of regulation around crypto exchanges specifically as an issue. He said it wasn't something that was really within the SEC's mandate to address, but that Congress might want to look into it. Those comments, combined with the staff statement from the SEC this week, has many thinking that the SEC sees the market as too unregulated still to support a Bitcoin ETF. So given all that, how could these probes actually be beneficial? Well, let's think in terms of possible outcomes. And let's start with the worst case scenario. Imagine these agencies find major wrongdoing on the part of finance and pursue some severe punitive measures. Let's be clear. That would suck in the

short term for the whole industry. It would be a major knock on credibility. Over the medium to long term, however, it would be good because it would disentangle a genuine bad actor from what is ultimately a neutral technology and a neutral financial asset. It would clear space, in other words, for more good faith actors. Now, this doesn't seem at all likely to me as the outcome, but again, we're talking about possibilities. A second possible outcome is that these probes find some isolated cases of wrongdoing. But the issues are mostly around how hard Binances work to prevent U.S. citizens from having access to unregulated products. This could be good because, one, it would mean that that first scenario of major wrongdoing was officially not true, which would kill a

source of fud going forward. Second, it would create potentially some sort of standard for what an offshore exchange needed to do to be determined to be acting in good faith as it related to preventing U.S. citizens from accessing their platform. As in right now, there's not necessarily a clear standard for how hard or in what ways a global exchange has to fight to keep U.S. citizens off. Are there specific types of software tools? Are there specific procedures? This is the type of thing we're having guidance from the authorities in question around what is expected would be really valuable. This scenario I see similar to the outcome of the NYUAG's settlement with Tether. Remember, Tether paid a fine, admitted no wrongdoing, and agreed to regular attestation of their reserves.

That was massively positive for the industry. It basically said that they had done some dubious things but weren't some super criminal enterprise. It got us in this industry the reserve reveals that we'd wanted for years. And in all of this, it massively reduced the traction of Tether Fudd, the idea of tether as a systemic risk, at least from a regulatory standpoint, was just gone. Some lightweight Binance settlement that added clarity to the responsibility of international exchanges could have a similar effect. Now, there is, of course, a third possibility, that actually they find no wrongdoing, that there becomes a better relationship between regulators and the world's biggest exchange, that other exchanges get better clarity on expectations for stopping

U.S. customers from using them. This would significantly increase trust in the system. It would undermine the for criminals' fud even further, and it would eliminate regulators targeting a big exchange from the concern list. Now, if you've been around at all, you know that we Bitcoiners have a tendency to see everything in a positive light. It's just part of our social resilience. However, in this case, I genuinely believe these positive outcome scenarios to be true. Regulatory exchange risk is a real thing, and in any of these outcomes, that risk gets addressed and reduced one way or another. Anyways, guys, let me know what you think. I'm interested to see if you think it's all just a bunch of fud, if there's something more there.

But either way, I appreciate you listening. I hope you're getting excited for a great weekend. Until tomorrow, guys, be safe and take care of each other. Peace. We're witnessing the greatest paradigm shift in finance in modern history. Join thousands of newsmakers and influencers talking the future of money at Consensus by CoinDesk. A live virtual experience of leaders, change makers,

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