The Breakdown - WSJ Says Binance Facing Trouble Over Sanctions Violations

Episode Date: August 23, 2023

Something serious or just more FUD? NLW explores the latest dustup around Binance, as well as speculation around why the price of BNB has wobbled of late. 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 going on, guys? It is Wednesday, August 23rd, and today we are catching up with all the latest intrigue around Binance. 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 Find a link of the show notes or go to bit.L.Y slash breakdown pod. Hello, friends. Welcome back to the breakdown. When we survey the landscape, the wreckage, some might say, of this industry after the last year or year and a half, it is pretty clear what

the biggest hanging chat or threat left is. One might argue that there's still contentiousness around DCG and whether it will be able to successfully get itself out of this Genesis situation. There's obviously a lot of jawboning about that and recriminations flying back and forth between Barry and the Winklevosses, but the bigger threat at least that most people identify, or perhaps not threat but concern, is whether Binance is really doing as okay as they say they are. CZ has been quick to wipe away story after story with his customary four, indicating that everything is just fud, and it is certainly the case that there has been an extraordinary amount of leakage from various U.S. government offices around their investigations into Binance in ways that

have led some to assume that they don't actually have the goods on Binance, and so we're just trying to try them in the court of public opinion. This week we got even more of all of that when on Tuesday, the Wall Street Journal reported that Binance is still facilitating large amounts of Russian transactions, raising the question of whether the exchange is flouting Western sanctions. The article claimed that, quote, via layers of intermediaries, clients can turn funds at sanction banks into balances at Binance, while Binance also enables peer-to-peer trades of rubles for digital tokens that frequently involve banks that are on Western blacklists. A spokesperson for Binance said,

Binance follows the global sanctions rules and enforces sanctions on people, organizations, entities, and countries that have been blacklisted by the international community, denying such actors' access to the Binance platform. They added that in operating their peer-to-peer service, Binance has, quote, no relationship with any banks whatsoever, in Russia or elsewhere. Now, of course, U.S. sanctions have not been imposed on Russian citizens generally. However, most of the Russian banking and financial system is subject to sanctions, which prohibit U.S. citizens and firms from dealing with them. The EU and other U.S. allies have similar levels of

sanctions in place. In October, the EU tightened restrictions on crypto transfers to Russian wallets, removing a 10,000 euro limit to prohibit crypto transactions to Russian residents and entities entirely. The claim made by the WSJ is that Binance is facilitating international transactions for Russian citizens who have been cut off from the global financial system through their peer-to-peer platform. According to the Bank of Russia, around 428 million in peer-to-peer crypto transactions are taking place each month. The reporting claimed that there are hundreds of active peer-to-peer sellers, willing to buy and sell rubles for crypto, with a significant market for tether. The main centralized exchange is also seeing significant volume in rubles. Volume is massively down from its peak of

80 billion per month in May of last year, but still processed 8 billion in ruble to crypto trades in July, according to data from CC data. Tatyane Maximeco, a Russian businesswoman who formerly worked at a crypto exchange said, everyone uses cryptocurrencies, except perhaps for my grandmother. Now, according to a recent review of Binance's peer-to-peer services, as reported by the Wall Street Journal, the platform allows Russian clients to receive payment at at least five sanctioned Russian banks. Crypto sellers on the platform provide payment details to Binance, who allegedly disperse funds out of escrow after the on-chain transaction has been completed. The article raised further concerns that payment provider advanced cash continues to facilitate ruble-denominated

transactions with Binance through additional intermediaries. The Belize registered payments provider said it had severed ties with sanctioned Russian banks in March of 2022. However, its website provides links to, quote, independent exchange providers who can provide transfers between Russian banks and advanced cash. Now, of course, the report comes after months of speculation that the DOJ is investigating Binance for money laundering and sanctions evasion, but to date, no charges have been filed, and it's unclear whether any charges will be forthcoming. The reaction from the crypto community is basically one of, if this is true, it's a big deal. Investor Adam Cochran writes, WSJ article verifying something I noted from employee claims a few months back.

Finance violates sanctions on Russia by having customer support advise people to use their peer-to-peer partners to onboard and then use accounts under the KYC limit. Can you imagine the sheer level of chaos if finance is hit with OFAC violations? Like how do they deal with that seizure? If they blacklist the hot wallet, then your deposits are effed, would be way worse than any regular DOJ action. Travis Kling writes, sheesh, 428 million per month of P-to-P Reuble to Crypto, 8 billion per month of ruble to crypto trading on the main exchange. If you think the U.S. government isn't going to drop the hammer hard on that kind of

scale of sanctions violations, you've lost your mind. Now, as with basically every story that we've had on Binance this year, there are two possible explanations. One is, though, where there's smoke, there's fire, and these things are leaking out because there's just so much to leak out that it's coming out of all sides, and that we're we're still just in the period before some action comes. The other possibility, however, is, as some have claimed, that because the DOJ or OFAC or whomever don't actually have a good enough case to bring charges, they're instead trying finance in the court of public opinion,

and in so doing feeding sourcing for these types of articles. I don't know what the case is, and I think everyone is right, especially after the last 18 months, to be extraordinarily skeptical. A default position at this point in crypto of assuming there's fire where there's smoke is definitely sensible. But we're coming up on a year now of rumors of DOJ or criminal action. We still haven't seen anything yet. So I guess for now we just have to wait until the next article comes out with all sorts of its accusations, just so that CZ can say four, the people who are concerned can say they are concerned, the people who are Binance stands can just say four as well, and we're right back to the beginning where we started. Now elsewhere in the Binance Empire, some kind of

customers are reporting difficulties withdrawing euros. In response to a user complaint on Sunday, the Binance Help Desk responded that, quote, we have temporarily suspended Euro withdrawals and deposits via SEPA. SEPA is the single Euro payments area network, a bank transfer protocol similar to ACH. Now, Binance later deleted and revised this public statement stating that the SEPA deposit and withdrawal service will continue until September 25th as originally communicated. The customer service message was sent in error. We apologize for the inconvenience. And we will have alternatives for our users in place before then, so stay tuned. Making their feelings known, the user experiencing the problem simply replied,

Lies. The issue comes a few months after Binance informed users that its European banking partner, PaySafe, would be discontinuing services on September 25th. A Binance spokesperson addressing the specific users issue said, some users may occasionally be asked for more information as part of routine compliance checks, which could lead to early closure of their accounts. They said that Binance will have alternatives for our users in place before the end the SEPA service. Now, trouble processing Europayments comes just a few days after news broke that

Binance were also being cut off by London-based credit card processing company checkout.com. Binance were the single largest customer for the payments firm. Forbes reporting cited letters sent in early August, which cited concerns over anti-money laundering, sanctions, and compliance controls at Binance. The letters said termination of service would occur on August 17th, and a finance spokesperson said that the exchange disagreed with the reasoning for the cutoff, but stated that it would have, quote, no impact on our services. Finally, making everything so much the worse for Binance, their native token, BNB, has been on a renewed slide. The token reached a low of $204 on Tuesday, but is since recovered and is now

trading at around 217 as of Wednesday afternoon. Tuesday's level was B&B's lowest point since June of last year and represented a 14% drawdown in under a week. Part of the downwards pressure on BNB relates to a massive $150 million loan on Binance smart chain lending platform Venus Protocol. The position was opened up by a hacker in October of last year. After exploiting a cross-chain bridge to mint a half a billion dollars worth of BNB, the hacker took a loan against some of the fraudulently created funds, presumably as an exit strategy with no intention to ever repay the debt. In November, a governance vote was taken on how to avoid a massive impairment accumulating on Venus Protocol. The BNB core team proposed

becoming the sole liquidator of the position to ensure they could prevent any liquidation cascades. On Thursday night, the liquidation began with $33 million worth of B&B cleared to shore up the loan. Venus Protocol tweeted out that the account was, quote, made healthy, but there's still another 126 million in outstanding debt sitting on the Venus Protocol waiting to be liquidated if the B&B price continues to fall. Now, summing up all of the chaos, Travis Kling, who it should be noted is warning, and intentionally so about Binance after being caught up in the FTX collapse, tweeted, Pretty wild price action in BNB, not sure what's going on. It's almost as if finance was sued by the SECC on numerous charges with damning evidence, was sued by the CFTC on

numerous charges with damning evidence. Had three senior executives quit in the same week. Had a billion dollar plus collateral hole in Binance Peg BUSD. Had Paxos forced them to wind down BUSD? Got kicked out of Canada, Germany, Netherlands, and Belgium. About to be charged by the DOJ strong evidence of massive money laundering terrorist financing and sanctions violations. Under investigation in France for aggravated money laundering, had their auditor quit and remove attestation, lost multiple banking partners and payment processors can't process fiat in most countries, had Binance U.S. effectively closed, laid off thousands of employees cut benefits for remaining employees. Dot-da-dot. Oh, wait.

Like I said, I don't know what the truth is. The fog of war is thick. But a default position of defensiveness and assuming that things are as bad or worse than they seem, it's probably the safest approach right now. Speaking of things being as bad or as worse as they seem, let's close on a quick Sam update. Sam Bankman-Fried has pleaded not guilty to a superseding indictment. Prosecutors formally presented the indictment during an arraignment.

hearing before a magistrate judge. The fraud and money laundering charges remain the same, but the campaign finance charge has been dropped. The details of campaign finance violations will be folded in as evidence for the remaining charges. Prosecutors said they were required to drop the campaign finance charge due to complications with their extradition arrangement with the Bahamas government. Now, this was Sam's first appearance in court since he was remanded to jail earlier this month. The judge has not yet dealt with Sam's request to be released to prepare his defense at the courthouse on a daily basis. However, Sam was allowed to meet with his lawyers on Tuesday until 3 p.m. when he was transported back to the Brooklyn Metropolitan Detention Center. During Tuesday's

hearing, the issue of Sam's inability to review documents due to a lack of internet was raised, with his lawyer stating, quote, there's no way for him to effectively communicate his work product, his analyses to us. He needs to be performing analyses. Prosecutors noted that the matter had already been briefed to the judge overseeing the case. The magistrate responded to Sam's lawyer by noting that, quote, you know magistrate judges don't typically outrank, dot, dot, dot, dot. Sam's lawyers also bemoaned conditions at the jail. He said that Sam had been denied vegan food options and stated that, quote, they are serving him a flesh diet. He's only eating bread and water and sometimes peanut butter. This is one of the most complex cases in this courthouse. This is outrageous and it needs to be remedied.

The lawyer also noted that in the past 11 days of confinement, the jail has not provided Sam with Adderall, a drug for treating ADHD. And according to his lawyer, Sam is also running low on his supply of M-SAM, which is a depression treatment. Prosecutors quibbled over the suitability of the jail conditions to enable Sam to prepare his case ahead of an October 2nd trial date, with ultimately the magistrate saying they would look into the issues once the hearing was adjourned, hoping to resolve them that day. Sam is still yet to provide details of legal advice regarding his conduct at FTCS, despite prosecutor requests. He's seeking to rely on this as an advice of counsel defense. The judge set a deadline of documentation of this advice to be submitted by Wednesday.

Now, also the night before the arraignment, prosecutors and Sam's lawyers submitted competing sets of jury instructions for trial. The DOJ's document laid out the basis for each charge in detail and explained the difference between substantive crimes and crimes of conspiracy. Prosecutors outlined what jurors would need to determine if they decide to convict. Specifically, that there was a scheme to defraud, that Sam knowingly and willfully participated, and that the defendant used interstate wires to conduct the scheme, which includes the internet. SBF's filing suggested that he may argue that he had an honest belief that use of customer funds was not unlawful. The filing suggests that his behavior amounted to do honest mistakes in judgment and errors of management

rather than crimes. It leaned heavily on the idea that unregulated crypto firms are in something of a gray area. Sam's filing said, if Mr. Bankman-Fried acted in good faith with respect to the use of FTC's customer funds, and with the belief that as a business matter, FDX would be able to cover all customer withdrawal requests, he did not act with specific intent to defraud. It is also not relevant whether you believe certain conduct should have been regulated even though it was not regulated at the time. Now, to put it mildly, the community does not have a lot of sympathy. However, somewhat more sympathy is being extended for Nate Chastain, OpenC's former head of product, who was convicted of fraud and money laundering in May and has now been sentenced to three months

in prison for insider trading. Chastain was responsible for deciding which NFT collections would be featured prominently on OpenC's homepage. The scheme involved him purchasing NFTs ahead of them being featured on the website. All told, Chastain was accused of making over 50,000 in profits from this scheme across dozens of trades in 2021. At the time of his arrest, authorities referred to this case as the first-ever insider trading scheme involving digital assets. Chastain's lawyers argued that the case should be dismissed because NFTs are not securities, and Chastain leveraged information that was not confidential. The judge, however, was unconvinced and allowed the case to proceed to a jury trial in May, ultimately ending in his conviction. In addition to the three months

behind bars, Chastain has been ordered to serve three months of home detention, to conduct 200 hours of community service, to pay fines of $50,200, and to surrender 15.98eath the spoils of his crime. U.S. Attorney Damien Williams said, Nathaniel Chastain faced justice today for violating the trust that his employer placed in him by using OpenC's confidential information for his own profit. Today's sentence should serve as a warning to other corporate insiders that insider trading in any marketplace will not be tolerated. So there you have it, friends.

That's the update from here. Another set of dreary but important events as we try to close the door on the last chapter of this industry and move to something hopefully a little bit better. Thanks for listening as always, and until tomorrow, be safe and take care of each other. Peace.