A Binance crash and the future of crypto

With help from Derek Robertson

The big news today is a new federal lawsuit brought by the Commodities Futures Trading Commission at unloads a slew of offenses against Binance.

Like FTX, Binance is an offshore crypto exchange with a tamer US-based offshoot that complies with US regulations. The version of Binance available to the rest of the world allows riskier, more exotic forms of crypto trading. But as of 2020, about one in six users of the much larger offshore exchange were Americans who had avoided the ban, according to figures cited in the complaint.

While the exchange’s flamboyant founder, Changpeng Zhao, currently works out of Dubai, the exact location of Binance, and as a result who has the authority to regulate it, has been something of a puzzle. Originally based in China, it moved much of its operations to Japan ahead of Beijing’s 2017 crypto crash. But Zhao has said in the years since the company has no specific headquartersan attitude that has served to keep the exchange’s regulatory status unclear.

The CFTC’s complaint, which cites statements from an internal company meeting in 2019, alleges that the practice is a deliberate attempt to defy legal oversight anywhere, not just in the United States.

Well, according to the CFTC, Binance is subject it is legal oversight even if the exchange targeted in the lawsuit will only operate outside the United States. That’s because Binance is allegedly complicit in helping US customers avoid the existing ban on that exchange, including by instructing them to use virtual private networks to hide their positions.

The crackdown on Binance’s alleged role in bringing US customers to its offshore exchange serves to draw a brighter line around the boundaries of US jurisdiction. It is one of several moves by regulators and financial firms in recent weeks that are pushing the industry towards a future where there is a clear distinction between a regulated cryptosphere in the US and a more free-wheeling offshore version. That would create room for large banks and other established financial institutions that were slow to adopt crypto to gain a larger share of a more heavily regulated domestic market.

Last week, Coinbase, the world’s second largest crypto exchange, revealed that the Securities and Exchange Commission had notified it of its intention to bring charges as the regulator and industry grapple with which crypto-tokens must be registered as securities.

Earlier this month, Bloomberg reported that US-based Coinbase is considering setting up an offshore exchange to circumvent domestic regulatory risks.

With all this legal uncertainty surrounding post-crash crypto, more stable financial institutions stay well away from digital assets, right?

Not completely. The asset manager Fidelity rolled out Bitcoin and Ethereum were traded to retail customers in eligible US states a couple of weeks ago.

And on Friday, Bloomberg reported that Nasdaq is on track to launch a crypto custody service for institutional investors by early summer.

There is widespread suspicion in crypto circles that the ongoing attack is intended to clear the field for the creation of a digital dollar. But Washington’s progress toward a digital dollar has been slow, tentative and limited by a patchwork of competing political interests.

Instead, a plausible consequence of all this action is a more bifurcated global landscape where a wild west atmosphere continues to prevail offshore, while established financial players in the US are increasingly trying to find a tamer version of crypto.

One of the most successful virtual world builders shines a little more light on his vision for the metaverse.

Tim Sweeney, founder and CEO of Fortnite developer Epic Games, laid it out in no uncertain terms in an in-depth interview with The Verge late last week: “It’s just an online social entertainment experience in a real-time 3D setting. You and your friends go around and have fun together, in a 3D world.” Simple enough!

Sweeney distinguishes between today’s existing metaverse, which often requires expensive high-end hardware that many people cannot afford, and what we will see in the future. In his words, it’s “no longer something for elite computer geeks.”

He also argues at length that metaverse developers will be able to overcome their basic self-interest and build a truly “interoperable” virtual world, in a similar fashion to the Internet’s open HTML architecture. “In the gaming industry, there are enough ecosystems and publishers with their own ecosystems that there’s no chance that one company will just dominate them all,” Sweeney said. “…[E]very one of these companies would be better off right now, would be making more money right now, would be reaching more players right now, if all these systems talked to each other.” — Derek Robertson

The blockchain faith celebrated in Paris last week as it was, uh… 2021.

Like POLITICO’s Bjarke Smith-Meyer reported for Pro subscribers this morning from Paris Blockchain Week, the annual gathering was “a rude rebuke to anyone who thought that crypto – or its die-hard financial bridge culture – was on the way out.”

The reason for the celebration? The Silicon Valley Bank disaster, as crypto enthusiasts have taken as evidence that their digital assets are a necessary supplement to, or even replacement for, state-issued ones. Paolo Ardoino, chief technology officer at stablecoin giant Tether, told Bjarke that “Bitcoin is the hard resource that no one can take away from you,” and a “safe hedge” against debacles like SVB.

Like most parties, however, this one comes with a morning-after reality check: As Bjarke points out, the overall crypto market has still lost nearly two thirds of the value since the heady days of late 2021, and regulators continue to swarm both in Europe and stateside in the ongoing aftermath of FTX’s collapse. — Derek Robertson