Sunday, December 31, 2023

Crypto: Binance and The Bond Villian Compliance Strategy

 From Bits About Money, November 24:

The Bond villain compliance strategy
James Bond films have a certain formula to them. It is more interesting when seen from the perspective of the villain.

He has long been adjacent to money and power, but craves more. Several years ago, he successfully escaped his low-on-the-ladder job at an existing institution. He built a base of power that is independent of institutions. From it, he successfully puppets any organization he needs to. He and his organization are from elsewhere, everywhere, all at once. They have no passport and fly no flags; these concepts are thoroughly beneath them. They move around frequently and are always where the plot requires them to be, exactly when it requires them to be there. No law constrains them. Governments scarcely exist in their universe. To the limited extent they come to any government’s attention, no effective action is taken. The villain rises to the heights of influence and power.

This continues for years.

Then we suddenly hear E minor major 9. We begin the film, telling the end of the story, mostly from Bond’s perspective. The villain is just another weirdo who dies at the climax in act three.

Life imitates art
For years I have used the phrase “Bond villain compliance strategy” to describe a common practice in the cryptocurrency industry.

In it, your operation is carefully based Far Away From Here. You are, critically, not like standard offshore finance, with a particular address in a particular country which just happens to be on the high-risk jurisdiction list. You are nowhere because you want to be everywhere. You tell any lie required to any party—government, bank, whatever—to get access to the banking rails and desirable counterparties located in rich countries with functioning governments. You abandon or evolve the lie a few years later after finally being caught in it.

Your users and counterparties understand it to be a lie the entire time, of course. You bragged about it on your site and explained it to adoring fans at conferences. You created guides to have your CS staff instruct users on how to use a VPN to evade your geofencing. The more clueful among your counterparties, who have competent lawyers and aspirations to continue making money in desirable jurisdictions, will come to describe your behavior as an “open secret” in the industry. They will claim you’ve turned over a new leaf given that the most current version of the lie only merely rhymes with the previous version of the lie.

And then we begin the third act.

So anyhow, Binance and its CEO Changpeng Zhao (known nearly universally as CZ) have recently pleaded guilty to operating the world’s largest criminal conspiracy to launder money, paying more than $4 billion in fines. This settles a long-running investigation involving the DOJ, CFTC, FinCEN, and assorted other parts of the U.S. regulatory state. Importantly, it does not resolve the SEC’s parallel action.

How’d we get here?

A brief history of Binance
Binance is, for the moment, the world’s largest crypto exchange. Its scale is gobsmacking and places it approximately the 100th largest financial institution in the world by revenue. The primary way it makes money is exacting a rake on cryptocurrency gambling, in particular, leveraged bets using cryptocurrency futures. To maintain its ability to do this, it runs a worldwide money laundering operation with the ongoing, knowing, active participation of many other players in the crypto industry, including Bitfinex/Tether, the Justin Sun empire, and (until recent changes in management) FTX/Alameda....