Bankman-Fried Warns: Some Crypto Exchanges Already “Secretly Insolvent”

fter throwing lifelines to troubled digital currency platforms BlockFi and Voyager Digital, Sam Bankman-Fried, the 30-year-old billionaire founder of FTX, warns that some crypto exchanges will soon fail. The question on everybody’s mind in the crypto world is whether we’ve reached the market bottom. Nearly $2 trillion in crypto market value has evaporated since November.

Two bellwether digital assets Luna, a $40 billion crypto asset associated with TerraUSD, a $16 billion stablecoin designed to maintain parity with the U.S. dollar, have collapsed. Earlier this month bitcoin traded for below $20,000, its lowest level since December 2020. But the fallout is far from complete. Earlier this month, Singapore-based Three Arrows Capital (3AC), a highly levered crypto trading firm with $200 million of exposure to Luna revealed that it was nearly insolvent.

Three Arrows’ had borrowed large sums from numerous crypto firms including New Jersey’s Voyager Digital and New York-based BlockFi. In order to survive Three Arrows default, the two digital asset exchanges turned to billionaire Sam Bankman-Fried, founder of FTX and the richest person in crypto, worth some $20.5 billion. Between FTX and his quantitative trading firm Alameda, he provided the companies with $750 million in credit lines.

There is no guarantee that Bankman-Fried will recoup his investment. “You know, we’re willing to do a somewhat bad deal here, if that’s what it takes to sort of stabilize things and protect customers,” he says. We’re willing to do a somewhat bad deal here, if that’s what it takes to sort of stabilize things.”

Bankman-Fried’s cash infusions are far from altruistic. He has emerged as a smart vulture capitalist in the beleaguered crypto market, knowing full well that his own fortune depends on its healthy rebound and growth. Bankman-Fried has also bought into crypto brokerage Robinhood, where FTX has already accumulated a 7.6% stake, and is rumored to be considering an acquisition.

Bankman-Fried denies any active merger talks with Robinhood but tells Forbes that more crypto exchange failures are coming. “There are some third-tier exchanges that are already secretly insolvent,” says Bankman-Fried. Fried’s FTX, along with Coinbase, Kraken and Binance, are giants among digital asset exchanges. They have millions of customer accounts and functionally they operate similarly to online stock brokerages. But outside of these whales, there are more than 600 crypto exchanges around the world operating in a largely unregulated frontier.

Never heard of AAX, Billance and Hotbit? You aren’t alone, but like Coinbase they trade bitcoin, ether and dogecoin and offer generous margin loans–as much 20 times their initial capital— to their clients. Lacking any meaningful regulatory oversight many crypto exchanges have been vulnerable to scammers and hacks.

Japanese exchange Coincheck was hacked for $530 million in crypto in 2018, Singaporean exchange KuCoin lost $275 million in 2020, and then in December 2021 Cayman Island-based Bitmart was breached for $200 million. Back in 2016, Bitifinex was hacked to the tune of nearly 120,000 bitcoin worth $2.5 billion now.

But, despite the generous bailouts, not even Bankman-Fried is able, or willing, to throw good money after bad in perpetuity. “There are companies that are basically too far gone and it’s not practical to backstop them for reasons like a substantial hole in the balance sheet, regulatory issues, or that there is not much of a business left to be saved,” says Bankman-Fried, who declined to name any specific crypto exchanges.

As Forbes reported in its analysis of the world’s best 60 crypto exchanges, the digital asset exchange business generally lacks standards to certify a new entity before or after they start soliciting client funds. The SEC doesn’t regulate the exchanges and the Commodities Futures and Trading Commission has oversight of only a handful of crypto derivatives markets. In the United States there is no member organization like FINRA to self- regulate crypto exchanges.

Bankman-Fried is worried about continued failures because during the euphoria of rising crypto prices, exchanges kept upping the ante to attract customers with generous yields for deposits. BlockFi or Voyager were promising yield payments to customers, upwards of 12% per year that had to be paid for either by charging at least that much more interest to borrowers or more likely, by putting that money to work in decentralized finance DeFi applications.

That worked fine when crypto was going nowhere but up. It looks disastrous now. “There are companies that are basically too far gone and it’s not practical to backstop them.”

Like J.P. Morgan during the stock market panic and crash of 1907, Bankman-Fried is taking advantage of the crypto chaos to expand his empire. He recently closed the acquisition of Liquid, a troubled Japanese exchange. BlockFi and Voyager Digital are in his grip and despite his denials, Robinhood may be next. According to sources familiar with his loans to Voyager, Alameda is likely to lose at least $70 million of the credit it has already extended. In 2021, publicly-traded Voyager’s Digital had a market value of more than $3 billion.

Today it shares trade for pennies and its market cap of $62 million points to an imminent bankruptcy filing. Despite the carnage, Bankman-Fried tells Forbes that FTX remains profitable and has been for the past 10 quarters. FTX’s biggest rival Coinbase lost $432 million in the first quarter of 2022 and its stock is down almost 90% from its all-time high.

Bankman-Fried also has his eye on crypto miners, many of whom leveraged their balance sheet at breakneck pace to quickly scale and take advantage of this 21st century digital gold rush. The stocks of publicly-trading crypto miners including Marathon Digital Holdings and Riot Blockchain are down more than 60% year to date.

One bellwether crypto asset Bankman-Fried is not worried about is Tether, world’s largest dollar-pegged stablecoin with a market cap exceeding $70 billion. Many industry watchers have deemed it a ticking time bomb with questionable collateral whose failure would almost certainly be an existential threat to the entire cryptocurrency market. Tested during the Luna collapse Tether briefly lost its $1 peg and fell to a price 95 cents. However, it successfully processed over $10 billion worth of withdrawals and has since recovered.

Says Bankman-Fried, “I think that the really bearish views on Tether are wrong…I don’t think there is any evidence to support them.”

Steven Ehrlich

I am director of research for digital assets at Forbes. I was recently at Kraken, a cryptocurrency exchange based in the United States.

Source: Bankman-Fried Warns: Some Crypto Exchanges Already “Secretly Insolvent”

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07:42

Binance Disputes Claim Its Exchange Hosted $2.35 Billion In Laundered Illicit Funds

Binance, the world’s largest cryptocurrency exchange, has processed transactions totaling at least $2.35 billion stemming from hacks, investment frauds and illegal drug sales, according to a Reuters investigation, published Monday. The data provided by Amsterdam-based analysis firm Crystal Blockchain showed that from 2017 to 2022 buyers and sellers on the world’s largest darknet drugs market, a Russian-language site called Hydra, used the exchange to make and receive payments worth $780 million.

Additionally, the German police said investigators began seeing criminals in Europe turn to Binance in 2020 to launder some of the proceeds from investment fraud schemes that caused victims, many of them pensioners, to lose a total of $750 million euros ($800 million).

The flow of illicit funds through the exchange represents a very small portion of Binance’s overall trading volume (over $9.5 trillion in 2021 according to The Block) but is still significant as regulators and policymakers, including U.S. Treasury Secretary Janet Yellen and European Central Bank President Christine Lagarde, raise concerns over the illegal use of cryptocurrencies. The FTC last week reported that more than $1 billion had been illicitly obtained from crypto fraud and scams between January 2021 and March 2022.

Reuters has also revealed for the first time how North Korea’s hacking group Lazarus, which allegedly helps fund Pyongyang’s nuclear weapons program, used Binance to launder some $5.4 million of cryptocurrency stolen in September 2020 from Slovakian crypto exchange Eterbase. In January, Reuters reported that Binance has kept weak money-laundering checks on its users until mid-2021 despite concerns raised by senior company officials.

Binance’s chief communications officer Patrick Hillmann told Reuters in an email that Binance did not consider the news outlet’s calculation to be accurate. Hillmann reportedly said that the exchange uses transaction monitoring and risk assessments to “ensure that any illegal funds are tracked, frozen, recovered and/or returned to their rightful owner” and is working closely with law enforcement to disrupt criminal networks using cryptocurrencies, including in Russia.

In a statement to Forbes, Binance has called the report a “woefully misinformed op-ed that uses outdated information from 2019 and unverified personal attestations.” “The fact is that Binance has some of the strictest AML policies in the fintech industry and plays a significant leadership role in helping law enforcement deal with cyber and financial crime. Since the article ran, we have received an outpouring of support from partners in law enforcement across the globe,” a Binance spokesperson said.

Editor’s note: the story and headline were updated to reflect Binance’s response.

I report on cryptocurrencies and other applications of blockchain technology. I also edit the weekly Forbes Crypto Confidential newsletter

Source: Binance Disputes Claim Its Exchange Hosted $2.35 Billion In Laundered Illicit Funds

Critics by

Binance, the world’s largest cryptocurrency exchange by volume, has disputed claims that it has acted as a vehicle for the laundering of at least $2.35 billion in illicit funds.

  • A Reuters report claimed that Binance has become a “hub for hackers, fraudsters and drug traffickers” with strong links to Russia-based dark web market Hydra.
  • Matthew Price, Binance’s senior director of investigations who was the lead investigator on Hydra when he worked at the IRS criminal investigation, told CoinDesk: “What I think is very skewed in this report is that every exchange has exposure to dark net markets.”
  • Tigran Gambaryan, the exchange’s global head of intelligence who also worked at the IRS’ cyber crimes unit, added: “It’s something that completely disregards facts to get an agenda across.”
  • “The biggest part of this story is completely ignored. You can’t control deposits, you can only control what you can do afterwards,” Gambaryan added.
  • Price and Gambaryan said that Binance has a stringent process in place that handles exposure to fraud, dark net markets and scams using blockchain analytics software provided by Chainalysis and Elliptic.
  • “There is a system in place. We do have risk scoring for everything you can think of. We have everything tagged internally based on our tools, then we are able to do post-transaction monitoring with Chainalysis,” Gambaryan noted.
  • Binance published 50 pages of email exchanges between its intelligence team and Reuters, in which it comments on recovering $5.8 million from the Ronin hack, as well as its assistance in multiple fraud cases.
  • The email exchange reiterates that the reporter was confusing “indirect” exposure to dark net markets and “direct exposure.”
  • Data from Chainalysis reveals that 0.15% of all cryptocurrency transactions in 2021 were associated with illicit activity, while the U.N. estimates that between 2% and 5% of fiat currency is linked to some form of criminal activity.

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India’s Young Investors Prefer Crypto To Gold and Boring Stocks

Indian businesswoman Swati Daga first bought bitcoin in 2017, when the cryptocurrency was trading well under $3,000. Her decision to invest in digital currencies was met with wariness by her family, she recalls.

“The elders in my family told me not to throw my money away,” said Daga, who runs a food business near New Delhi.But the 33-year-old hasn’t regretted her decision — bitcoin’s value has increased 15 times since then — and she continues to invest as much as 10% of her savings in cryptocurrencies, including bitcoin and ethereum.

“I find stock markets boring,” she told CNN Business, adding that she enjoys the “thrill” and “recklessness” that comes with investing in volatile currencies. She is not the only one. India has seen a huge boom in cryptocurrency trading since the start of the pandemic, even though authorities in Asia’s third largest economy have for years expressed concerns about digital currencies, and even banning them.

Entrepreneurs in the industry told CNN Business that the country has the potential to become a crypto superpower, since it is one of the hottest internet markets in the world, with 750 million users, and hundreds of millions more yet to come online for the first time. India ranked second behind only Vietnam last year in a list of countries seeing the fastest growth in cryptocurrency adoption, according to a report published in October by blockchain data platform Chainalysis.

While the government does not keep estimates of how many people trade cryptocurrencies, industry experts have suggested that the country may now have more than 20 million crypto investors. The growth is driven by younger investors — mostly under the age of 35 — and many of them are coming from smaller cities and towns, founders of two of India’s biggest crypto exchanges told CNN Business.

According to Sumit Gupta, CEO and co-founder of exchange CoinDCX, many Indian millennials have started “their investing journey with crypto.” While 20 years ago, their parents chose to invest in gold, these youngsters “are more interested in having bitcoin as part of their portfolio,” Gupta told CNN Business, referring to the fact that traditionally Indians chose to park their money in gold or savings accounts.

Buying gold is both an investment and a cultural habit in India, which is one of the largest markets for the precious metal, according to the World Gold Council. It also considered auspicious by Hindus and Jains, and plays a fundamental role in many religious ceremonies. Mumbai-based CoinDCX became India’s first crypto unicorn last year, achieving a valuation of $1.1 billion after raising money from investors such as Coinbase Ventures and B Capital Group.

The company says 70% of its 10 million users are between the age of 18 and 34. The CoinDCX app is seen on a phone screen in West Bengal, India, in August 2021. Data shared by rival firm WazirX tell a similar story. WazirX also has over 10 million users, and called 2021 a phenomenal year for crypto trading in India. The company was acquired by Binance,  one of the world’s biggest cryptocurrency exchanges, in 2019.

Over 65% of its users are under the age of 35, according to a recent company report, and it has seen a “700% increase in the number of participants from smaller cities like Guwahati, Karnal, Bareilly, thereby signaling the growing interest from rural and semi-urban areas.”

Pritish Kumawat, a crypto trader from a small town in the western state of Rajasthan, said that he now finds conversations about cryptocurrencies in almost every tea shop in his area.

Often, the most engaged participants are college students, he said, adding that bitcoin’s massive spike last year has fueled the frenzy in India. In November, bitcoin was trading at a record high of $68000 but it has since fallen to around $43,000. In addition to bitcoin, meme currencies such as dogecoin and shiba inu are also popular among Indians, the WazirX report added.

Apart from investors from smaller towns, both companies saw an increase of more than 1000% in the number of women users on their platforms, albeit on a small base. Gupta said that participation of crypto by Indian women has seen “a massive upside” in the past 18 months and is “fairly high, fairly healthy, relative to equity markets.” The company’s data shows that 15% of their overall users are women — which is the global trend as well.

On-again, off-again relationship

The excitement over crypto is rising in India despite the country’s on-again, off-again relationship with digital currencies. The central bank has long expressed concerns that cryptocurrencies can be used for money laundering and to finance terrorism. A cryptically worded proposal posted on the Indian parliament website last year even suggested the government was exploring plans to “prohibit all private cryptocurrencies in India.”

This year, however, started on a more cheerful note for enthusiasts. Earlier this month, the Indian government announced it would impose a 30% tax on income from virtual digital assets, which many industry experts took as a sign that crypto trading won’t be banned after all. The government also said it would launch a digital rupee in the coming months.

“Taxation of virtual digital assets or crypto is a step in the right direction. It gives much-needed clarity and confidence to the industry,” Gupta said at the time of the announcement. Siddharth Menon, the co-founder of WazirX, told CNN Business that following the announcement, his platform saw daily sign-ups jump by over 50%. He also noticed rising interest among Indian developers and other professionals in joining the crypto industry.WazirX's website is shown in New York, USA, in April 2021.

“I’m getting LinkedIn messages” from senior executives in India, who are now more optimistic about the business, he said. In the past, Indian exchanges have struggled to hire and retain experienced people due to the lack of clear regulations. But the Indian government soon put a damper on the mood, by clarifying that the cryptocurrencies are not yet legal in the country.

“I am not doing anything to legalize it or ban it or not legalize it,” Finance Minister Nirmala Sitharama said in parliament a few days after announcing the tax rate. “Banning or not banning will come subsequently … But I will tax because it is a sovereign right.” “I think the government is not entirely sure what it wants to do from a policy perspective,” said Anirudh Rastogi, founder of tech law firm Ikigaw Law, which works with crypto exchanges in India.

“It knows where it wants to land broadly. It wants to find the right balance where it is not disconnected from the global progress in blockchain and other tech, but it wants to also address concerns regarding cryptocurrency.” Rastogi added that the “extraordinarily high” tax on crypto is a short-term fix, which will also acts as a deterrent to many investors.

“This rate is typically used to tax activities that are not considered economically productive, such as lottery,” he said. “So this could be an indication that the government wants to make revenue, but it does not see crypto trading as economically productive.” For equities, India applies a 15% short-term capital gains tax if shares are sold in less than a year, and 10% if sold after a year.

Gupta hopes that the government makes up its mind soon. India, with its vast pool of developers and enthusiastic young population, could be a “superpower in the next five to 10 years,” in cryptocurrency and blockchain industry, he said. “What is missing right now is a clear regulatory framework,” he added.

Source: India’s young investors prefer crypto to gold and ‘boring’ stocks – CNN

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Binance Forges Links In The Gulf As It Seeks Fixed Base

Crypto-trading platform’s lack of formal headquarters has added to regulators’ concerns. Binance, the world’s largest cryptocurrency exchange, is setting down roots in the Gulf as it seeks to placate global regulators by establishing a fixed home base and regulatory ties for its international business.

The group this week announced that it had secured cryptoasset licences from both Dubai and Bahrain, as it moves away from portraying itself as a decentralised organisation with no fixed headquarters. Binance’s decision to seek a more traditional structure — with regional offices, headquarters and key regulatory links — marks a big concession to sustained pressure from financial watchdogs around the world.

Binance chief executive Changpeng Zhao described the licence from Bahrain as “a milestone in our journey to being fully licensed and regulated around the world” and praised Dubai for its “unique operating model” for the crypto industry. The green light from Bahrain on Monday marked the first big regulatory relationship for Binance’s global business.

Local units in the group’s sprawling web of corporate entities have applied for supervision or based key operations in several countries including the UK, Singapore, Lithuania and Malta, but the international business — which is registered in the Cayman Islands — has resisted being tied to a particular jurisdiction.

Binance said the cryptoasset license, the first such permit issued by Bahrain, would allow the company to provide cryptoasset trading, custodial services and portfolio management to customers. The company on Wednesday said it had been granted a virtual asset license by a new Dubai virtual asset regulator, enabling it to operate within the emirate’s “test-adapt-scale” model as a base for regional expansion.

The Dubai permissions will allow Binance to extend limited exchange products to pre-qualified investors and professional financial service providers. The firm will also locate a “blockchain technology hub” in the Dubai World Trade Centre. Weekly newsletter For the latest news and views on fintech from the FT’s network of correspondents around the world. But the exchange’s search for a home base is not over.

A source close to the company said it did not plan to establish its headquarters in Bahrain. The license in Bahrain also may not be enough to convince western regulators that Binance is adequately supervised in key areas such as anti-money laundering controls and consumer protection. “It’s better than nothing but not enough to make a material difference in the US and Europe,” a former US regulatory official said.

Rival exchange FTX also received a license from Dubai on Tuesday, and said it would set up a regional headquarters in the city. Binance’s Zhao told the Financial Times recently that he was now based in Dubai, where he bought a home last year, having previously run the global group from Singapore.

Binance last year appointed Richard Teng, a former Singaporean regulator and senior official at Abu Dhabi’s international financial centre, as chief executive of its Singapore arm, fuelling speculation that the company might try to make the city state its official home. However, the exchange’s Singapore unit in December dropped its application for a licence to run a crypto business in the country after regulators ordered Binance Singapore to stop all crypto transfers with the global exchange Binance.com, which the regulator placed on an investor alert list and said “may be in breach” of local law.

Teng has since been appointed the exchange’s regional head for the Middle East and north Africa. Recommended Cryptocurrencies Binance plots M&A spree as regulators scrutinise crypto trading unit Binance’s licensing by the Bahrain central bank marks the opening of a tussle among regional financial centres for dominance of the cryptocurrency space.

Bahrain, once the financial hub of the Middle East, has identified cryptocurrencies and fintech as areas in which it can regain momentum against its regional competitors. Dubai’s move into cryptocurrencies comes at a sensitive time for the United Arab Emirates. Earlier this month, the country was placed on the Financial Action Task Force’s “grey list” of jurisdictions under enhanced monitoring of their compliance with anti-money laundering measures.

Some UAE officials, keen to extricate the country from the grey list as soon as possible, have said they fear that welcoming cryptocurrency firms such as Binance will hinder the country’s recent attempts to clamp down on illicit money.

By: in London and in Dubai

Source: Binance forges links in the Gulf as it seeks fixed base | Financial Times

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Critics:

Financial regulators across the world have targeted Binance. However, Khalid Humaidan, CEO of the Bahrain Economic Development Board (EDB), believes the collaboration with the major cryptocurrency exchange will further advance the investment promotion agency’s mission to establish the Kingdom of Bahrain as a leading business hub.

The mounting regulatory pressure has had little effect on Binance’s expansion plans. To further boost its presence in the Middle East, the exchange was reportedly in talks of obtaining an operational license in Dubai.

Binance also made a comeback in Malaysia after an equity investment in MX Global, a regulated digital asset trading platform. Besides, the crypto giant was also eyeing an expansion to countries like Russia, Ukraine, Kazakhstan, and Uzbekistan. This came after the Russian President’s comment that the digital asset mining industry could benefit the country.

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Crypto Staking Firm Figment Becomes Unicorn With Fresh $110 Million Fundraise

Canadian blockchain infrastructure and services provider Figment raised $110 million in Series C funding at a $1.4 billion valuation. The announcement closely follows the firm’s $50 million Series B, closed in August, which valued the company at $500 million. 

Revealed exclusively to Forbes, the current round was led by software investment firm Thoma Bravo, with participation from Counterpoint Global (Morgan Stanley), Binance Labs, ParaFi Capital, Avon Ventures, a venture capital fund affiliated with FMR LLC (the parent company of Fidelity Investments), CMS Holdings, Franklin Templeton, 2TM (the parent company of Brazilian cryptocurrency exchange Mercado Bitcoin), and StarkWare, among others. The investment brings Figment’s total capital raised to date to approximately $165 million.

Launched in 2018, the Toronto-based firm supports the Web 3.0 ecosystem by making it easy for investors to stake their tokens, earn yield and participate in blockchain governance across more than 50 networks, including Ethereum (still on track to full PoS transition), Cardano, Solana and Polkadot. 

Competing with other staking-focused platforms like Blockdaemon, Everstake, Chorus One and staking services offered by crypto exchanges including Binance, Coinbase and Kraken, Figment says that it has staked over $7.5 billion in assets while expanding its institutional client base from 31 to more than 130 this year. Among Figment’s largest customers are Coinbase, Crypto.com, Anchorage, The Graph and Ether Capital.

“Figment’s rapid growth over the past few years combined with its institutional focus from both a technological and service perspective sets Figment apart as a highly strategic player poised for significant scale,” said Tre Sayle, partner at Thoma Bravo (lead investor in the round), in e-mailed comments. 

While “increasing hiring and headcount is the number one priority” for the fast growing firm, said Figment’s cofounder and CEO, Lorien Gabel, the new capital should also help it to become much more involved in the overall development of Web 3.0, which will in turn increase demand for staking.

Figment plans to develop its DataHub 2.0 platform, designed to remove the complexities of building on Web 3 blockchains. The funds “will also go toward supporting and expanding our 50+ protocols network, as well as Figment’s investment arm, which is focused on fostering the development of new decentralized protocols and applications,” Gabel added.

The startup’s own $17.5 million investment fund, Figment Capital, launched in April and has since invested in teams and networks with a focus on proof-of-stake consensus models, interoperability, and privacy. Investments include Osmosis, decentralized exchange based on the Cosmos network, crypto staking protocol Obol and Ethereum scaling and privacy engine zkSync, among others. Follow me on Twitter or LinkedIn

Nina Bambysheva

Nina Bambysheva

I report on cryptocurrencies and other applications of blockchain technology. I also write the weekly Forbes Crypto Confidential newsletter and contribute to our premium research service…

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