Crypto’s CFD moment

The CFDs Weekly Podcast is back. This week we have Michael Pearl, the COO of blockchain tech firm Kirobo. We discuss the fallout from the SEC complaint against Binance, crypto regulations, regions for expansion and ask the most important question – who even trades crypto now?

Note that we recorded this prior to the complaint against Coinbase going live, so there is no discussion of that. You can listen via the links below.

Crypto’s CFD moment

Whenever I write about crypto I have to take a second to pretend that it’s really a ‘thing’ and not a bizarre consequence of ultra low interest rates. The trouble is that crypto people usually make this harder than it already is.

For instance, readers probably know that when you type something into your Chrome browser it can either act as a Google search or take you directly to a URL. I wanted to Google search ‘Crypto.com’ when checking something for this article. As it’s a URL, I typed ‘Crypto.com derp’ so that it would take me to the search results – ‘derp’ being a dumb word from an old South Park episode.

But then it turns out there is actually a ‘derp’ coin listed on Crypto.com. Its official URL is derp.gay. The creators say they got Chat GPT to create the coin concept by asking it to come up with the dumbest cryptocurrency possible. I guess there’s an argument to be made that this is actually more legit than other cryptocurrencies, given the people that made derp seem to have some ironic understanding of how silly crypto can be.

But anyway, we can talk about derp coin another time. This week we’re looking at the SEC’s actions against Coinbase and Binance. As you are probably aware, the US regulator launched two complaints against the crypto exchanges last week. These are civil cases, meaning no one is going to prison on the back of them.

That is perhaps the most remarkable feature of the case. If you look at the SEC’s charges against Sam Bankman-Fried, the former CEO of FTX, then it seems like Binance is doing quite similar things. For instance, client funds were allegedly commingled with a market making company that Binance CEO CZ controlled. The SEC also claims that Binance engaged in wash trading to pump up assets listed on its exchange.

Coinbase does not appear to have done this stuff. For instance, the firm claims that it doesn’t operate a market making or prop trading desk of any kind. They also put some procedures in place to mimic the sorts of securities laws the SEC has for its listings.

As a result, and perhaps counterintuitively, Binance comes out of this in a better situation than Coinbase does. The charges against the two companies are quite similar. However, Coinbase has made a huge amount of effort to be a US business, attract clients there and, to some extent, do things according to US regulations.

As Bloomberg author Matt Levine wrote earlier this, Binance has not bothered to do any of that – the SEC even has a quote from their Chief Compliance Officer saying “we are operating as a fking unlicensed securities exchange in the USA bro” – but the consequences seem on par with Coinbase.

Not only that, but Binance has not pinned all its efforts on being a US-focused business. Even though it’s clear they were still taking US clients via their offshore entity, it seems like it was mainly bigger players and not mass market retail. In other words, Binance’s US client base is already quite detached from its wider offshore one. Combined with the fact they’ve expanded massively in emerging markets, this means losing the US is bad, but not as bad as it may end up being for Coinbase.

Having said that, one thing I wonder is how sustainable Binance’s banking relationships are going to be. Over the past six months we’ve seen them have problems with USD, GBP and AUD. There have also been problems in the past with EUR. This was not exactly unforeseeable.

One of the other questions you have as a result is how sustainable or even viable the company’s stablecoin is. Binance’s US entity is halting dollar deposits and withdrawals. The company’s stablecoin was issued via partnership with Paxos, which is a US firm. According to Binance, BUSD is backed by cash and treasury bills. What happens if the entity holding that cash / those treasury bills won’t do business with them anymore?

All of these problems are probably familiar to most readers of this newsletter. CFD providers have long had trouble dealing with payments and getting banking relationships. They’ve also been banished by the US regulator in the past, which is why there are almost no providers left operating in the Land of the Free.

This is arguably a lesson that crypto people should learn. Rather than trying to ‘please’ or win over US regulators, they should just realise the regulator doesn’t want them there and expand into other markets where they can still do business.

And to be honest most crypto ‘exchanges’ act a lot like CFD providers anyway. From what I see, the basic model they operate is to get people on to a trading platform and then push them into trading leveraged products, which they then b-book the client on. The other fees applied, particularly on conversions, are insanely high as well.

This is not the normal exchange model at all. If I go to buy shares in Plus500 on the London Stock Exchange, I don’t log into a brokerage account offered by the LSE – a third party broker provides that service. I will not be buying the shares from a market maker or prop desk operated by the LSE, I’ll get it from a market maker like Winterflood or Peel Hunt. After I buy the shares, they will likely be held in a nominee account. Again, a third party provides this custodial service, not the LSE. Only clearing is done by an LSE-owned entity, although even then the exchange group does not own the whole company.

Contrast this with Binance, who act as broker, market maker, custodian and exchange operator. Leaving aside the ‘moral hazard’ that exists in playing all of these various roles, this is not an exchange or at least not just an exchange!

This takes me to my final question, which is when the biggest company in the world offering crypto is purportedly engaging in all of these activities, who the hell still trades this stuff?!
The argument I tend to hear is, ‘bro you don’t get it, you get paid in GBP and don’t have sanctions or capital controls imposed on you’. Fair enough. And if you look at the five largest sources of traffic for Binance, they are…

1. Turkey (hyperinflation, capital controls)
2. Argentina (hyperinflation, capital controls)
3. Russia (capital controls, sanctions)
4. Vietnam (capital controls)
5. Ukraine (special military operation, capital controls)

From this my impression is that crypto’s main innovations are…

1. Avoiding capital controls and sanctions
2. Helping people in emerging markets access…USD