History defines fiduciaries as these all-encompassing and powerful entities gnawing away at every breath of control we have over our lives and building systems to penetrate our souls. They don’t just want control. They want to own us.
The Army of Regulators is here. The ultimate fiduciaries who masquerade as Robin Hoods of the world and vow to protect the human in flesh and bone. But who are they after? What crimes have the swindlers committed? And why are the Decentralized Revolutionaries rising?
Come along as we dare into the wilderness of a world that lays down the building blocks of the future.
The Army of Regulators and the Centralized Swindlers
Binance has been sued. And that’s probably pretty unsettling for a lot of people given the fact that it processes over $4B assets daily.
What is the problem? The crux of the problem was that SEC sued Binance for misdirecting users’ capital to an entity that is purported to be owned by CZ. All of this is in an attempt to curtail the mishandling and mismanagement of users’ funds that several regulatory authorities such as the CFTC and SEC have come to the conclusion that exchanges often do.
Coinbase investors (especially traders on the NYSE riding the roller-coaster ride on their COIN shares) were being advised to “stay cautious”. And if this wasn’t enough, the SEC decided to freeze CZ’s assets alleging that he was utilizing them to buy BUSD and… unsurprisingly… a yacht. This was a restraining order filed in the interest of customers who had their assets deposited on Binance.US.
The most interesting allegations out of all of this were the ones that drew similarities to the ones made against FTX - that of wrongfully allocating funds elsewhere. Some even tweeted that a criminal charge - in collaboration with the DOJ - was underway.
The resulting actions from this were unsurprising. Binance quickly resorted to deregistering in Cyprus stating they were willing to continue business where they were more legally compliant such as countries in the EU. And well, they did not have much luck in France - as they were soon being investigated for money laundering. This was followed by a disappointed exit from the Netherlands as they were unable to acquire the required regulatory approval. They even deregistered from the UK - as the overall attitude towards the exchange started to shift. While they did express their intentions to register in the future, we don’t know when that change will happen.
Amid all this mess, there was a shine of light from within with a former advisor to the US SEC saying that a legal doctrine could potentially “end” the SEC’s crypto crackdown. This “major questions” doctrine demands clear authorizations by Congress on several national, economic, or political matters. While Binance and Coinbase might not be able to play that argument until the case reaches appellate courts, the argument still remains in their arsenal.
The shift to the EU was not unprecedented as Binance had been eyeing their spot in the region, saying it has, “…the potential to become the epicentre of the industry”.
If a court decides that Binance is indeed an unlicensed exchange, then that would signal the shutting off of Binance.US’ operations in the US, which would impact the exchange severely given how one of its main markets is in that country.
Before we make any assumptions about Binance failing, let’s understand what the core allegations even are.
Is Binance.US a scam?
It was sheer hope that even if FTX goes down, FTX.US may still stay afloat. Man, that hope got squished like an old wrinkly grape. While the leadership indulged in assuaging claims that even if FTX the parent company goes down, nothing would happen to FTX.US, it was all a farce - customers’ assets inside this American entity were frozen. Binance.US is perhaps a different story. If you were to venture along the almost-profound streets of Reddit, you’ll find the odd mentions of Binance.US as a not-so-trustworthy exchange owing to it taking painfully long to process users’ funds and add them to their accounts. But, this was a faint discussion two years ago.
The Binance.US subreddit has remained relatively quiet on these issues these past few weeks. But that isn’t the point of the story. The point is, if there is already a global entity for Binance, then why register an American entity?
One could reason that the down-trending market at the time was the propeller behind Binance wanting to register. And the most obvious reason then is the influx of North American (read: Wall Street) capital. That’s a huge market to conquer. Be that as it may, when Binance did announce the launch of its US entity, the entire process wasn’t a song-and-dance as would be expected from launching new businesses in the United States. The exchange had to literally ban 13 states from accessing the exchange. Hmm, not so good for an exchange looking to get dolla’ juice from the market.
But this wasn’t all.
It turns out that it is significantly easier to register an exchange in Colorado, thanks to an accounting firm that has a record of registering over 1100 companies. It was the firm that helped register Bitdogex, a fake crypto exchange that was reported to have swindled over $60M from users. This accounting firm made it easier for a company to register as a money services business (MSB), which is usually the license you need to register as an exchange. Cautious note: MEXC exchange is purported to be linked to this infamous accounting firm.
Don’t look for Binance.US here; it’s not there.
But wait a second, Binance.US wasn’t serviced by this accounting firm. Then why the mention…
Well, as it turns out, on October 29, 2020 Forbes released an article saying that they had gotten hold of a document that detailed how Binance had come up with an elaborate corporate structure to deceive regulators. The name of the document? Tai Chi, which means using your opponent’s weight against him.
It is believed that the document was created by a former Binance employee named Harry Zhou, who happens to be the man behind Koi Trading, a San Fran-based cryptocurrency exchange firm, which was partially owned by Binance. While all of the contents of the document have not been revealed, from what we do know, it was found that it proposed ways for Binance to successfully “distract” the major financial enforcement dawgs in the United States namely the FinCEN, OFAC, SEC, CFTC, and NYDFS. The solution was to participate in the US Department of Homeland Security (DHS) Cornerstone Program. And guess what, Binance did participate. But when confronted if this was an attempt to evade regulatory compliance, CZ naturally tweeted that that wasn’t the case. Don’t worry finding the tweet, because it has been deleted.
Interesting side note: a DHS-funded entity known as CipherTrace signed a contract with Binance to track illicit activity on its Binance Smart Chain (BSC), which CipherTrace termed as a “community-driven and open-sourced” blockchain.
The entire agenda, as outlined by Forbes, behind Tai Chi was to ensure that the US entity became the target for any regulatory scrutiny, potentially alienating the main Binance entity. The relationship between the Cayman Islands-based Binance and Binance.US was supposed to be contractual, ensuring that funds could be funnelled from the latter entity to the former. The document continued to share how Binance would use various self-regulatory organizations that would reflect its apparent compliance with the law. It also joined the non-profit Blockchain Association.
But guess what? Coinbase, that was a member of this association quit soon after, citing the association’s credibility issues.
Interestingly, though, while these allegations may have seemed false it so turned out that Reuters published a report on October 17, 2022, which confirmed the very arguments the Forbes report had made. Moreover, the mysterious exit of the former CEO Catherine Coley and then the four-month service of her successor Brian Brooks as CEO made the mystery behind the exchange more concerning.
But the major question that arises among all this discussion is: why create a separate smoke-screen entity in the US? Well, the answer is quite simple. Because it allows for the seamless transfer of funds between Binance and Binance.US. A notable instance to support this claim comes from when Binance.US halted its Tether (USDT) withdrawals after the FTX collapse in mid-December 2022. The USDT balance on their account plummeted to a little less than $200K. But this wallet was soon restored with about $9M USDT injected from an address that was linked to Binance.com. This leads us to a clear assumption:
The funds from Binance.US were transferred to Binance.com to be used for whatever reasons they needed to be used for.
In an investigative report, Dirty Bubble Media found out that there were two wallets that were a) transferring funds from Binance.US to Binance.com and b) from Binance.com to Binance.US.
While their terms and conditions do state that Binance incorporates market makers that facilitate trading on the platform and these MMs may be operating “outside” of the United States. The organization that does this is Binance America (BAM), which is a C-corporation domiciled in Delaware. When Coley (the now-vanished CEO) was questioned on who owned BAM, she refused to respond with any ties to CZ and/or Binance, even though the former was one of the directors for BAM.
But then all of this begs the question: where the actual f*ck does my money go when I deposit it into Binance.US? Well, now you (probably) have an idea of the answer.
The same regulatory watchdogs that Binance has tried to avoid have come back and sued them. For instance, the Commodities and Futures Trading Commission (CFTC) filed for a civil enforcement action against CZ and Binance. This lawsuit has allegations that the SEC echoes in their subsequent charges against Binance - that of running the exchange with intentionally opaque common enterprises. And the worst of the best, in this case, is that the CFTC sought permanent trading bans and penalties, among other recourse against the exchange.
The evidence was clear - Binance had facilitated criminal activity in the past. Just between the period of 2017 to 2021, Binance saw transactions worth $2.35B from hacks and frauds alone on its exchange. While these figures were called out by CZ saying they were “inaccurate”, he adamantly declined to reveal these exact figures that he would surely have access to on the platform. The leaked chats among Binance executives are quite…umm…revealing to say the least. Here’s a now-infamous screenshot.
There’s enough evidence on Binance that could drive massive panic in the industry - if it were to become readily available. While the intention of this analysis isn’t to see the panic but to show that while many claim that it’s the regulators that are creating trouble for the exchange isn’t entirely true. They have strong grounds on which they are alleging Binance for what it has been doing. But as it has turned out, Binance isn’t the only exchange under the regulatory scanner.
Coinbase, you’re cornered
When the fire rises, it attempts to burn everything to the ground.
The regulatory fire hasn’t evaded the high-and-mighty at Coinbase, the biggest American crypto exchange, Coinbase. In a press release published on June 6, 2023, the SEC alleged that Coinbase was operating an unregistered securities exchange. But the Coinbase story is interesting. Because on one hand, you have the allegations that it is an unregulated exchange. But on the other hand, when Coinbase posted its S-1 filing in 2021, the exchange was approved to offer the trading of securities on its platform. In fact, this was a watershed moment for the entire crypto industry because a leading crypto exchange with millions of monthly users was now going public.
But, wait. Hold on.
At the heart of the allegation was the Coinbase Earn program, which offered users the ability to stake their PoS crypto assets (such as ETH) and accrue consistent yields in return. Since the exchange did not register this offering, it was due under law to be tried.
But Coinbase was not to back down from this allegation. The exchange had been hiring top legal sharks from all over the industry to put up a fight if the regulators come with knives up their throats. The exchange filed several amicus briefs in an attempt to get the “ball rolling” in the direction of legal issues that are being discussed.
One of the main reasons behind Coinbase relying on these briefs is to question SEC’s authority over these matters since most of these digital assets are not securities. The exchange has been amping up its legal arsenal by integrating with major legal firms such as Gibson Dunn and Cahill Gordon, which are known for putting up a strong legal defence for corporates. They are also relying on the “Fair Notice” argument, which basically boils down to giving a duration of time to the entity before they are sued.
Legalities aside, Coinbase seems an interesting investigation because the exchange has been accused - several times - of selling unregistered securities. That was their primary business model back in 2021 when the crypto market was booming. Since 2022, however, the market has taken a major hit. And that has affected Coinbase by cutting down on its expenses such as even laying off a significant portion of its staff. And to sprinkle regulatory doubts over its operations, it is backed into a corner hoarding money to secure for itself enough legal runway to fight against the incoming regulators.
Perhaps this is the reason why it was soon to jump into the staking business, announcing its liquid staked ETH (cbETH), and launching its own L2, Base, in collaboration with Optimism.
While Kraken paid a $30M fine for offering its staking services, Coinbase wasn’t bogged down and continues to offer its users the same services. They could argue that staking is not a security because there is no investment contract. But the truth is that since all users invest in Coinbase with an expectation of receiving profits in the long term, per SEC, that’s what defines an investment contract!
In fact, Coinbase seems to have a more uproarious attitude towards regulations, often hiding under the shade of, “what we offer are innovative investments” - almost to the point where they make it seem that because they are offering these innovative investments they do not need to follow any legal compliance. While liquid staking may be innovative, it sure as hell shouldn’t escape the SEC’s regulatory whip, especially given how they have been staunchly against such investment offerings.
Another piece of evidence is the recent SEC lawsuit against KuCoin.
Coinbase has always been under the scanner of regulators, and whether their CEO Brian Armstrong agrees with the overall regulators’ scrutiny or not, the truth is that unless they abide by the regulations, they are in deep trouble. No amount of assuaging investors that Coinbase won’t go bankrupt won’t help. But legal compliance will.
But why such an emphasis on exchanges? What gives?
Exchanges are the first ones to get hit when it comes to anything that goes awry in crypto. Binance’s share of the exchange market plummeted to 4.35% from 16% in April 2023. Exchanges are perhaps one of the first ones to get hit when regulatory scrutiny starts
The lawsuit pointed out that there were 12 tokens that were being considered securities by SEC.
The problem? The ambiguity around crypto regulations.
US’ share of spot Bitcoin and Ether have declined to 70% in trading, which was originally 90% in March, according to a report by CoinShares.
Hold on, we wish to enter
There is a new exchange on the way that is being backed by Citadel Securities, Fidelity Investments and Charles Schwab and it is known as EDX Markets. This signals a defining moment for crypto as it shows that there are still entities that are interested in doing business in crypto. Naturally so, since exchanges can make a lot on the fees from the volume. EDX plans to be a non-custodial exchange that will let the trades be executed only when the traders agree on a price, rather than storing customer assets. They have been careful in selecting the assets for which they’ll offer trading such as bitcoin, bitcoin cash, among others, which are not considered securities at the moment.
Moreover, Andreessen Horowitz is opening an international office in London, against a rising ambiguity around regulations in the US, as opposed to the UK. This is most certainly good news because a16z has been quite positive about investing heavily into crypto, dating back to their launch of a fund of about $4.5B during a time when the entire market was seething with burns and losses.
The Great Handshake
Switzerland, the UK, Hong Kong and the UAE have shown friendly glances towards crypto, in general. Hong Kong stands out among all the rest as its regulators have been the most forthcoming to crypto companies. They recently allowed crypto exchanges to provide trading services to both individuals and institutions provided they offer investor protection against risks.
Hong Kong has been in the news for offering relaxed cryptocurrency trading services to users since last year. This is part of their effort to be more welcoming to crypto exchanges and businesses of all shapes and sizes. The only caveat to this serenading of crypto exchanges is whether the regulatory watchdogs will continue to do so given the highly volatile nature of the market; not to mention the countless scams that exchanges are often accused of.
Dubai, too, has been quite welcoming to crypto. It set up a legal entity known as Virtual Asset Regulatory Authority back in 2022, which is one of the world’s first (and perhaps) only independent crypto regulators. Among the well-known exchanges, Binance and WazirX (one of India’s largest exchanges) have started to launch their operations from
United Arab Emirates (UAE) and Coinbase are also making headways in doing so. Both Hong Kong and Dubai seem to now be competing with each other to gain a fair share of the cryptocurrency market, given how the United States has been bitter towards several crypto establishments in the country.
Is everything ending?
The short answer? No. If you look at major assets like Bitcoin, Ethereum, and even stablecoins they are out of the regulatory scrutiny ambit. This might sound reassuring - and it most certainly is - but it doesn’t imply that the clouds of ambiguity have hovered away from crypto.
This isn’t the first that Binance has been sued by the SEC. In fact, the CFTC first sued Binance and CZ in March in a civil lawsuit that is still being played out in Chicago federal court. At the heart of the case is the fact that Binance is offering derivatives without being registered with the CFTC. Moreover, they do not have any ways to curtail terrorist activities on the exchange.
Moreover, if the SEC loses the case, which itself could pan out for several years, this would be a huge setback for the entire government and would be deemed a failure as they are unable to regulate the crypto market.
The SEC points out that the crypto industry and its various players have failed to comply with the regulations that exist for securities products and offerings. On the other hand, the crypto players say that the regulators have not provided enough clarity on what they have to do. The stalemate came to a head when Coinbase requested information, but the SEC didn’t give it.
This leaves everyone in a pickle. But that’s not the point. The point is that the regulation is against exchanges that might actually be commingling users’ funds and using them willy-nilly to maximize their own profits. Also, what must be culled out of the recent march against digital assets is that the regulators haven’t said that blockchain is bad. In fact, what they are pointing out is the fact that how some of these exchanges can actually hurt users’ investments deliberately. And therefore, it is users’ freedom which is at stake.
1/ The rise of the NASD holds lessons for Digital Assets regulation.
Remember 'pink sheet' stocks?
They lacked clear regs, were high risk due to poor liquidity, lack of reporting, and fraud. Prone to pump & dump.
Let’s dive into the rise of the NASD and how to build an SRO🧵
— Ram Ahluwalia, higher for longer crypto CFA (@ramahluwalia) June 26, 2023
The Decentralized Revolutionaries
These revolutionaries are the reason why we live today. Bitcoin and Ethereum are their brainchild. Proof-of-stake is their moat. Staking is their democracy. And creating a self-sustainable, all-encompassing financial ecosystem is their vision. And against a fiery storm of regulators, they haven’t backed down. Not one inch (pun not intended).
These revolutionaries lurk in the shadows of the night, building relentlessly for those who are held hostage by history’s most powerful. They are the rising force against the centralized swindlers. And they are here to offer the red pill.
The decentralized protocol ecosystem has been gradually rising over the past few months - especially as trust in centralized authorities has eroded. What most people have learned from the FTX fiasco is that relying on fiduciaries yields nothing but stress. At any point in their financial journey, they can lose a significant portion of their savings and/or investments if they were to solely rely on these centralized entities.
A good example of that gradual erosion of trust is the continual rise in the decentralized exchanges market. While the trading volume of the top 5 decentralized exchanges ($2.2B) is dwarfed by the massive trading volume of the leading centralized exchange alone ($7.7B), the rate of innovation within the former has not stopped.
Note that the trading volume of DEXes has been calculated for the most traded pair on the top 5 DEXes listed on Coingecko.
One of the main reasons why decentralized exchanges do not see earth-shattering volumes in trading is because of several inefficiencies such as slippage, impermanent loss etc. Most of these DEXes rely on AMMs (Automated Market Makers) which - at the base protocol level - are replete with these issues.
But this doesn’t stop the innovation in the DEX market as there are exchanges like AirSwap (which uses a Request-for-Quote model that allows participants to request orders directly from market makers). Lighter, a spot order book exchange built on Arbitrum is another great example that aims to offer execution of trades without incurring any slippage and/or MEV-related losses for the user. It is built on Arbitrum and has been making headways in the past few months.
The overall trading volume in the DEX market is gradually shifting to major L2 chains like Arbitrum, the promising L2 that has taken the market by storm since its airdrop a couple of months ago. To speak numbers, Uniswap v3 currently sees a daily trading volume of $534M on Arbitrum One. In fact, the blockchain has also seen a great number of withdrawals on the Ethereum chain and deposits via the bridge to Arbitrum.
The DEX market isn’t the only market that has seen steady growth. One of the hottest topics in the crypto industry in 2023 has been the rise of the LSD market. Since Shapella alone, the amount of ETH staked via various staking pools, exchanges, liquid staking protocols, and other entities has grown from a 15% to about 19.76% as of writing this piece. That’s a 31% rise in the figure in just a few months since withdrawals were enabled!
In total, the USD value of the total amount of ETH staked today stands at a whopping $45B. The reason why I point this number out is that the liquid staking market has the ability to absorb potentially >50% of the circulating ETH market since it is the easiest investment anyone can make.
Moreover, it also unlocks capital efficiency by letting users trade their liquid staking derivatives (known as LSDs) in DeFi and generate consistently higher returns. The potential for this market is huge, and we are only seeing the tip of the iceberg right now.
For decentralized freedom, we fight
We must remind ourselves that the regulators’ fight isn’t against the core technology that blockchain brings, but against a few centralized players who may be misusing their power for their own benefit. While there are corners that think the actions that the SEC is taking are unwarranted and stifle innovation, our objective should be clear: to build a decentralized world of freedom for ourselves. We must relentlessly focus on building truly permissionless solutions that enable inclusivity.
If you dare to embark upon this profound odyssey, reflect upon this, dear wanderer: heed the teachings of the enigmatic Satoshi Nakamoto, akin to a deity among mortals. In our pursuit to vanquish the very essence of fiduciary, we must ascend beyond conventional boundaries, for those consumed by their insatiable lust for dominion remain unaware of the true essence they pursue.
