News Updates December 15, 2022
1. Changpeng Zhao Won't Rescue Binance by Selling out Crypto Self-Custody
Amid a surge in withdrawals, Binance's chief executive is seemingly working to reestablish trust and keep assets on the centralized exchange. I "recommend no more news like these."
In the aftermath of the collapse of FTX, many are justifiably concerned about the solvency of crypto exchanges. Sam Bankman-Fried’s fraudulent bucket shop may have been an outlier – court documents filed earlier this week by U.S. authorities allege that some $8 billion in FTX customer deposits were transferred to and lost by SBF’s “hedge fund” Alameda Research.
But following a decline in crypto prices, a drawdown of debt between highly interconnected firms and several bankruptcy filings that have locked up billions worth of assets in legal proceedings, it’s reasonable to wonder if there is as much money held on centralized, largely unaudited crypto exchanges as there should be.
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This is part of the reason why users are taking possession of their own coins in recent weeks. Binance, the industry leading centralized crypto exchange, in particular has seen a significant drawdown in funds. Some of its largest clients, such as Jump Trading, have taken coins out, and the exchange moved to temporarily halt USDC withdrawals amid the surge (potentially to execute a token swap to its own stablecoin).
Earlier this week, Binance CEO Changpeng "CZ" Zhao referred to this trend as “business as usual.” He also reportedly told employees to brace for a few “bumpy” months ahead. The exchange had published a so-called “proof-of-reserves” report conducted by auditing firm Mazars showing, depending on which figures you include, it was either over- or under-collateralized in its bitcoin holdings.
Not to draw an unnecessary comparison to FTX, but CZ’s public comments this week are reminiscent of Bankman-Fried’s attempts to quell fears in early November amid a “run” on the exchange before it filed for bankruptcy protection. On Nov. 7, SBF tweeted that client funds were safe and backed by deposits – a message he deleted after it became clear FTX was deeply in the red. It’s a comparison CZ himself is drawing.
“With Sam Bankman-Fried’s arrest, I think people generalize. So if you get hurt by one bank, you're gonna think all the other banks are bad. If one politician is corrupt, you think all politicians are corrupt,” he wrote. “But the fact is that because one bank is bad doesn't mean all the other banks are bad. And just because one politician is bad doesn't mean all the other politicians are bad.”
This is all well and good – except that crypto exchanges are not, in fact, banks. As my colleague David Z. Morris notes, the term “run on the bank” has been misapplied when talking about recent withdrawals on crypto exchanges. The phenomenon is similar: withdrawals beget withdrawals, fears over insolvency can compound and become self-fulfilling. But unlike banks, users simply have to take it as a matter of faith that exchange operators haven’t misused or lost customer funds.
Centralized crypto exchanges reintroduce an element of trust that trustless protocols like Bitcoin and Ethereum remove from finance. Users take on the risks, even if rare, of hacks, frozen withdrawals and other business failures, Casa’s Nick Neuman said recently. And so, amid a period of uncertainty, Zhao’s primary responsibility is to reestablish confidence in his exchange.
Binance has certainly made moves to keep funds on its platform. On Wednesday, crypto critic Bitfinex’ed tweeted a screenshot of a Binance offering to pay 50% APR on staked USDT, seemingly to keep assets on the exchange. Later in the day, Zhao took to Twitter Spaces to criticize self-custodying crypto, alleging that “99% of people … will end up losing” their funds if they have to be responsible for their own keys.
This is no doubt a challenging time for Zhao. On Monday, Reuters reported the U.S. Department of Justice was nearing the end of a multi-year investigation into Binance – one of several ongoing probes into the firm from global law enforcement agencies. Federal prosecutors may ultimately charge CZ and other Binance executives with money-laundering violations, a risk that has accelerated withdrawals.
His comments spreading fears about self-custody are entirely unjustified. Not only is it seemingly in allegiance with U.S. Sen. Elizabeth Warren’s recent Digital Asset Anti-Money Laundering Act that would put unnecessary guardrails around so-called un-hosted wallets but also contradictory to Zhao’s comments just last month calling self-custody a “fundamental human right.”
2. ECB And Bank Of England Lift Interest Rates; Crypto Market Reacts
With the ECB & Bank of England raising interest rates by half a percentage, the cryptocurrency market dipped down to further lows.
European Central Bank (ECB) slightly reduced its record rate of interest rate increases, joining the U.S. Federal Reserve and other central banks around the world in stepping up their fight against inflation. Interest rates were raised by 0.5 percentage points by the central banks of Switzerland, the eurozone, and the United Kingdom in a fight against the high prices that are burdening consumers in the nations.
Rate Increases To 2%
In a statement, the European Central Bank announced it would increase its benchmark interest rate to 2% from 1.5%, the highest level since 2009. It stated that it expects to raise [rates] even further, because inflation is forecasted to remain above the norm for far too long.
3. Mithril demands $53 million BNB refund from Binance following delisting.
Mithril, a blockchain social media project, has asked Binance to refund 200,000 BNB ($53 million) after the crypto exchange delisted its token from the platform earlier today.
The project stated that it paid a 200,000 BNB deposit to Binance as part of the initial listing in November 2018. “Given that Binance has unilaterally decided to end this partnership, we respectfully ask to have our 200,000 BNB deposit returned,” the project tweeted.
At the time of listing in 2018, the BNB deposit would have been worth about $1 million.
Mithril also claimed that the project had been a longtime collaborator of the crypto exchange. Mithril's token, which carries the ticker MITH, was the first token on the Binance Chain when it launched in April 2019. It was also the first listed pair on the Binance decentralized exchange. Mithril also added it made donations to Binance Charity and collaborated on other initiatives as part of a longstanding working relationship with the company since 2018. The listing announcement from 2018 shows a 20,000 BNB donation to the Blockchain Charity Foundation.
4. Crypto Investors Misguided: Binance Stablecoin BUSD Isn’t Fully Regulated.
Binance-Peg BUSD is a Binance product but is not issued by Paxos nor regulated by the New York State Department of Financial Services. Only ERC20 BUSD is issued by Paxos and regulated in New York. Can this be a concern in the global scale of the stablecoin rise?
Stablecoins: There are over $100 billion outstanding; more crypto is traded against it than any fiat currency. Over the past year, it has grown by over five times in market capitalization, crossing $140 billion and representing 15% of the crypto market cap. It also plays a crucial role in global liquidity in the cryptocurrency markets.
While the growing operations, it has created a stir in the crypto-verse, there are potential risks beneath these cohorts. This article highlights such risks while highlighting a critical concern regarding the largest crypto exchange’s stablecoin and regulation.
5. THE DIGITAL ASSET ANTI-MONEY LAUNDERING ACT: AN UNCONSTITUTIONAL BILL FOR AN UNCONSTITUTIONAL WORLD.
The Digital Asset Anti-Money Laundering Act Of 2022 from Elizabeth Warren proposes unconstitutional privacy restrictions for bitcoin users.
Yesterday, the U.S. Senate proposed the Digital Asset Anti-Money Laundering Act Of 2022 — a bill that is not only deeply concerning to international human rights, but unconstitutional and in direct opposition to current U.S. consumer privacy regulations.
WHAT’S IN THE BILL?
The Digital Asset Anti-Money Laundering Act Of 2022, proposed by Senator Elizabeth Warren, proposes the following regulations, among others:
Section three, part a: The classification of custodial wallets and “unhosted wallet providers,” likely meaning developers of non-custodial wallets, as well as cryptocurrency miners, validators or other nodes that may act to validate or secure third-party transactions, independent network participants and other validators with control over network protocols as money service businesses.
Section three, part d: Promulgation of a rule that prohibits financial institutions from handling, using or transacting with digital asset mixers, privacy coins and other anonymity-enhancing technologies, as specified by the secretary of the U.S. Treasury; and handling, using or transacting business with digital assets that have been anonymized.
Section three, part a of the Digital Asset Anti-Money Laundering Act Of 2022 would deem anyone developing non-custodial wallets as money transmitters, requiring them to obtain a license. The problem: “unhosted wallet providers” do not exist. “Unhosted wallets,” or non-custodial wallets, are simply software.
