Binance takes page out of online gambling playbook as regulators bring hammer down
6 min read
The beleaguered Binance cryptocurrency exchange continues to rein in its excesses in a bid to avoid the fate suffered by some U.S.-facing online gambling sites.
On July 26, Binance announced that its customers will soon lose the capacity to engage in margin trades involving the Australian dollar, Euro or British pound. Digital currency pairs based on any of those fiat currencies will no longer be accepted as of August 10, while existing orders and pairs will be automatically settled and delisted by August 12.
The announcement came two weeks after Clear Junction, a major European payments partner, announced that it would no longer permit Euro or pound deposits or withdrawals to Binance. The move was the latest in a long line of financial rails that Binance has lost following warnings by financial watchdogs on multiple continents.
Binanceâs product list has also been shrinking under regulatory pressure. Earlier this month, Binance announced an immediate halt to new sales of stock tokens, with existing token holders given 90 days in which to close their positions. That move followed a warning by Hong Kongâs Securities and Future Commission that Binance was an âunlicensed platform operatorâ against which the regulator would not hesitate to take enforcement action.
Breaking up is hard to do
Stock tokens are also offered by the FTX exchange, in which Binance was an early investor. Not that long ago, FTX called Binance âa trustworthy partner and strong supporterâ whose âexperience and know-how will help FTX grow faster and larger.â But Binance divested itself of its entire FTX stake last week during the latter firmâs record $900 million funding round.
Binance CEO Changpeng âCZâ Zhao told Forbes that having FTX buy out its stake was âpart of a normal investment cycleâ but itâs hard not to see FTX founder Sam Bankman-Fried trying to put as much distance as possible between his firm and the toxic regulatory soup that Binance has become.
Bankman-Fried told Decrypt that heâd had a âcordial discussionâ with CZ regarding their divorce, but the FTX boss also said that âwhen you sort of appear less flexible or responsive [to regulatory concerns], I think thatâs more likely to lead to cases where regulators might feel like they have no choice but to start bringing the hammer.â
Compared to Zhao, Bankman-Fried may (for the moment) have a modestly larger fig leaf of respectability but, as a recent New York Times profile revealed, FTX has taken equally great pains to keep itself free from the clutches of U.S. regulators while offering products to U.S. citizens without local approval.
Deleveraging the goods
The former union of Binance and FTX saw both companies become magnets for investors looking to parlay small stakes into big bonanzas by offering leverage trades as high as 125x. Despite the publicly stated demise of their partnership, the two companies issued near-simultaneous announcements over the weekend that leverage on these products will now be capped at 20x.
Bankman-Fried disingenuously tweeted that the cap was âpartially because we try to encourage responsible tradingâ while CZ said it was done âin the interest of Consumer Protectionâ but also because Binance âdidnât want to make this a thingy.â
1) An effective margin system is integral to an efficient economic system.
There are limits to everything, though.
â SBF (@SBF_Alameda) July 25, 2021
.@binance futures started limiting new users to max 20x leverage last Monday, Jul 19th, 7 days ago. (We didn’t want to make this a thingy).
In the interest of Consumer Protection, we will apply this to existing users progressively over the next few weeks.
Stay #SAFU. đ
â CZ đ¶ Binance (@cz_binance) July 26, 2021
Concerns over products offering excessive leverage was already a âthingyâ with financial regulators, including the U.K.âs Financial Conduct Authority (FCA), which issued a warning in June regarding Binanceâs lack of approval to operate in the U.K. that convinced most U.K. banks to shun the controversial exchange.
In 2019, the FCA brought the hammer down on companies offering high-leverage Contracts for Difference after concluding that neophyte retail customers were being taken to the cleaners. Given the FCAâs mounting interest in Binanceâs activitiesâand the resulting action by the FCAâs counterparts in other jurisdictionsâit was only a matter of time before the high-leverage products came under the microscope.
Rolling the digital dice
Studies have shown that over 80% of CFD traders lose moneyâthe number is said to be even higher for overall margin tradesâso both Binance and FTX were effectively trawling for gamblers when they introduced their high-leverage derivatives. And now that regulators are shining the spotlight, both exchanges are declaring themselves shockedâShocked!âthat the house edge in their casinos is so stacked against their customers.
As someone who has covered the gambling industry since 2006, the quest for math-challenged customers isnât the only parallel one can find with todayâs digital currency exchanges. In fact, the current regulatory climate bears a striking resemblance to the situation that preceded the clampdown by U.S. authorities on internationally licensed gambling sites catering to U.S. customers.
In both cases, a number of high-profile sites based outside the U.S. paid lip service to their declared legal obligation to block U.S. customers while secretly accepting all the Benjamins they could through the use of virtual private networks and elaborate account-funding schemes.
This didnât end well for gambling site operators, most of whom utilized U.S.-registered dot-com domains that could be seized without warning. The sitesâ not-so-under-the-radar dealings with the U.S. banking system also enabled federal authorities to target the sitesâ operations in other markets, thanks to Washingtonâs traditionally expansive view of extraterritorial jurisdiction.
Nowadays, itâs common for digital currency exchanges to omit a number of U.S. states from their areas of operation and deny U.S. customers access to certain digital currency products. Much as U.S.-facing gambling sites would block customers in states with stricter rules and curtail their more legally dubious activitiesâso, no sports betting, only pokerâin reaction to increasingly bellicose statements by local authorities.
Given these parallels, we feel confident in predicting the short- to mid-term future of these digital currency exchanges. Basically, once the U.S. Department of Justice suspects an exchange is preying on vulnerable consumers or engaging in criminality, includingâknowingly or otherwiseâhelping criminals move money around, the DoJ wonât hesitate to act. And when it does, all the compliance theater in the world wonât wash Binanceâs hands clean.
IP-NO
Last Friday, Binanceâs CZ took yet another page out of the online gambling playbook by declaring that his company was looking to hire a new CEO with a âvery strong regulatory background.â In reality, what CZ is looking for is a fresh-faced, weak-willed stand-in to provide the illusion of propriety, much as PartyGaming hired Mitch Garber following its U.S. legal problems.
CZ also revealed that Binanceâs U.S. offshoot (and compliance decoy) Binance.US was âlooking at the potential IPO routeâ to snag some of that sweet public market action. CZ qualified that the IPO plan was ânot 100% fixed,â which is sort of like saying Vladimir Putin is still on the fence regarding a dark horse bid to be elected U.S. president in 2024.
You have to give CZ props for trying to bluff his way out of a very bad hand. With reports of Binance being investigated by U.S. authorities for alleged money laundering and tax evasion, itâs hard to think of a company less likely to win approval to list in New York. And while the CEO of Binance.US likes to claim that his site merely licenses Binanceâs brand and technology, nowadays Binanceâs brand is non-compliance, which generally doesnât sit well with securities regulators.Â
In keeping with their online gambling forebears, CZ and other âdigital nomadsâ like Bankman-Fried appear to believe they can continue to kick the compliance can down the road while reaping the benefits of U.S. operations and avoiding regulatory blowback. Itâs a bad bet.
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