Close your eyes, lay back in your seat and imagine the following scenario playing out.
You are a person working for an FCA-regulated broker. You have just wandered into the kitchen at your office and are in the process of making one of those pod espressos, nodding awkwardly at the other people there who you are keen not to speak to. And then the compliance person walks in.
The conversation begins with some generic NPC chatter (“good weekend?” “Yea, good you?”) but swiftly moves on to work matters. How’s it going in marketing, the compliance person asks.
“Well,” you say happily. “We onboarded 100,000 people in the past couple of weeks, so it’s going pretty well.”
“Wow,” responds the compliance person. “That’s a lot of people, how are you managing to process all the documents?”
“Haha,” you laugh, a tinge of smugness to your voice. “We don’t bother with all those documents, we just take their email and that’s it.”
The compliance person almost drops their espresso pod. A ghoulish pall spreads over their face. You notice a bead of sweat dripping down the side of their face.
“B-b-but you are onboarding them to the UK entity, right?” asks the compliance person.
“Oh I don’t know,” you reply thoughtfully. “You know, we have 100 companies or something, it’s hard to figure out who is going where. I don’t even know which company owns all the other companies. But yea, it’s been great – we even did $1bn in volume with people from Iran and North Korea in the past few months.”
Compliance person now looks like they may be having a cardiac arrest. Their skin has taken on a cadaverous hue. At this point another person walks in.
“Have any of you seen the company accounts?” He asks. “Man, I’ve been looking all over for them.”
“Who are you?” Whimpers compliance person.
“I’m the chief financial officer,” he replies.
“But you must be new here?” says compliance person, grabbing their chest.
“Oh no,” say the CFO. “I’ve been here for almost four years now.”
Compliance person stumbles over to the window, opens it and leaps out.
“Wow,” says the CFO and turns to you. “….good weekend?”
Ok, this is probably never going to happen in reality. But if the report that Reuters published about Binance a month or so ago is true, then that company is toast. As the above suggests, some of the claims made in that piece were…
- Binance let people from Iran and North Korea carry out large size transactions on its exchange
- Bianance’s CFO never saw the company’s full accounts, despite working there for over three years.
- No one seems to know which entity actually owns Binance
- They let people onboard, including from the US, with just an email address until August 2021
- The company may be under investigation by the US DOJ (are you surprised!?)
Becoming toast in this instance means that executives at the company, as well as the company itself, are likely to get whacked with fines and potentially more. As I’ve said here before, and I’m open to being proven wrong, I think all companies in the crypto industry are ultimately toast because the assets they trade in are worth zero.
But in this instance, Binance’s problems are less about crypto as an asset than what they are doing with it. They could be letting people trade virtual monopoly money (aren’t they already?) – if you don’t do KYC, break sanctions and are onboarding people from the US, you are going to get screwed in the end.
As an example of this, you can see what happened to Coinbase this week. The cryptocurrency exchange was fined $50m by the New York State Department of Financial Services and has to invest an additional $50m in its own compliance team. Note that this was due to stuff which happened in 2018 and 2019 – ie. two years before Binance stopped allowing customers to sign up with just an email.
One thing that could happen as a result of this, which would be more relevant for CFD providers, is an unpegging of USDT if Binance does come under pressure and people freak out and start withdrawing as a result. As noted in a prior post, I think this is likely to happen at some point and Binance coming down could be the catalyst. For me this is the biggest danger area for the industry in 2023.
Happy new year everyone!
