Author: Reuters

(Reuters) – New York and U.S. federal finance regulators have opposed the $1.02 billion deal by Binance.US to purchase assets of defunct crypto lender Voyager, CoinDesk reported on Thursday, citing Securities and Exchange Commission (SEC) filings.

The SEC said the proposed deal terms may also infringe the law, given how the plan expects to repay Voyager’s former customers, the report said.

It added that the deal was opposed by New York State’s Department of Financial Services (NYDFS) and Attorney General Letitia James in two Feb. 22 filings, including allegations that Voyager was unlawfully serving customers in the state.

Binance.US and a lawyer representing Voyager Digital did not immediately respond to Reuters requests for comment sent outside U.S. business hours.

Last month, U.S. Bankruptcy Judge Michael Wiles in New York allowed Voyager to enter into an asset purchase agreement with Binance.US and to solicit creditor votes on the sale, which will not be finalized until a future court hearing.

(Reporting by Yana Gaur in Bengaluru; Editing by Devika Syamnath)

NEW YORK (Reuters) – CoinEx was sued on Wednesday by New York Attorney General Letitia James, who accused the cryptocurrency exchange of transacting business without registering with the state.

In a complaint filed with a New York state court in Manhattan, James said CoinEx’s activities violated the Martin Act, a powerful state law used to fight financial fraud.

(Reporting by Jonathan Stempel in New York; Editing by Chris Reese)

By Hannah Lang

(Reuters) – Cryptocurrency trade association Chamber of Digital Commerce is urging a federal court to dismiss a case brought by the U.S. securities regulator against ex-Coinbase employees accused of insider trading, arguing that the case unfairly labeled several crypto assets as securities.

The group said in an amicus brief filed Wednesday in a district court in Washington that if the court were to proceed with the case from the U.S. Securities and Exchange Commission (SEC), it could have wide-ranging consequences for the digital asset industry and harm crypto investors.

An amicus brief is a document filed in court by an organization or individual who is not named in the case, but has a strong interest in the matter. The Blockchain Association also filed an amicus brief in the case earlier this month.

“We consider this regulation by enforcement because it’s creating new legal precedent through an enforcement action, but it would be much better for the entire industry if we just had clear rules to the road,” said Perianne Boring, the founder and chief executive officer of the Chamber of Digital Commerce, in an interview.

The SEC brought charges in July against Ishan Wahi, a former product manager at Coinbase, and his brother Nikhil Wahi, as well as their friend Sameer Ramani, accusing them of purchasing and selling at least 25 crypto assets for a profit based on insider knowledge, nine of which the agency said it had identified as securities.

Federal prosecutors also brought related criminal charges against the Wahi brothers and Ramani, charging the defendants with wire fraud in the first-ever insider trading case involving cryptocurrency. Ishan Wahi pled guilty to two counts of conspiracy to commit wire fraud earlier this month.

But the Chamber of Digital Commerce is arguing that the SEC’s case is a backdoor attempt to label crypto tokens as securities, and that the regulator should have instead either promulgated a rule clarifying its expectations or waited for certainty from Congress.

“It’s in these types of situations where I think optimally, because you have an intra-governmental battle, you have Congress sort out the regulatory morass or at a minimum, have a typical ordinary notice and comment process,” said Daniel Stabile, the co-chair of the digital assets and blockchain technology group at Winston & Strawn LLP, who is one of the attorneys representing the Chamber of Digital Commerce.

The crypto industry has previously criticized the SEC for bringing enforcement cases against digital asset companies, arguing that the regulator should instead engage in formal rulemaking specific to cryptocurrency. The SEC has maintained that pre-existing securities laws also apply to digital assets, and that many crypto tokens meet the definition of a security.

Were the court to rule in the SEC’s favor, crypto exchanges that offer the nine tokens the SEC has labeled as securities could face state and federal regulatory actions as well as private litigation, the Chamber of Digital Commerce argued in its amicus brief. The move would also likely hurt the value of those tokens, which could harm retail investors, the group said.

(Reporting by Hannah Lang in Washington; Editing by Nick Zieminski)

By Hannah Lang

(Reuters) – The U.S. Security and Exchange Commission’s warning shot on Binance’s stablecoin over whether or not it is a security could offer a hint at what type of dollar-pegged tokens may draw regulatory scrutiny, critical information for other digital asset firms offering a less volatile way to trade crypto.

Stablecoins, with a market valued over $137 billion according to CoinGecko, are digital tokens typically backed by traditional assets like the U.S. dollar or U.S. treasuries that are designed to hold a steady value.

But usage is raising questions from regulators who have expressed concern about the disclosures stablecoin issuers provide, as well as the tokens’ potential instability during periods of stress.

Last week, the SEC told Paxos Trust Company, the firm behind Binance’s stablecoin, that it should have registered the product as a security and is considering taking action against the platform, Paxos disclosed. Paxos, a blockchain platform that partners with Binance to issue the token, said it disagreed with the SEC’s position. The firm is now in talks with regulators, according to an internal company email.

While the crypto industry has criticized the SEC’s broad industry crackdown, the move against Binance USD, the third-biggest stablecoin with about $16 billion in circulation, could lend some guidelines for which stablecoin activities may get scrutinized.

SEC Chairman Gary Gensler has previously said he believes some stablecoins are in fact securities, which require registration and additional regulatory oversight.

“Similar problems may await other cryptocurrencies, including stablecoins linked to some system or brand,” said Grzegorz Drozdz, a market analyst at Conotoxia Ltd.

Unlike Tether and USD Coin (USDC), the two largest stablecoins, Binance offers Binance USD holders certain advantages on its platform, including zero transaction fees when swapping Binance USD for certain other tokens, providing an incentive for Binance customers to hold the token.

Those incentives could be central to the SEC’s thinking that the product is a security, experts said.

An SEC spokesperson said the agency does not comment on the existence or nonexistence of a possible investigation.

The New York Department of Financial Services also ordered Paxos last week to stop minting Binance USD.

“To the extent the SEC is looking at stablecoins, I suspect it’s something along these lines [of], are these instruments actually unregistered shares in a mutual fund potentially?” said Jason Allegrante, the chief legal and compliance officer at Fireblocks, an institutional digital asset platform.

Some argue stablecoins should be regulated because they track other assets like gold or the U.S. dollar, similar to an exchange-trade fund.

Paxos declined to comment beyond the statement it previoulsy issued. Binance did not respond to a request for comment. Tether referred to a blog post published Thursday about its reserves.

But the specific features of tokens like Binance USD have some stablecoin issuers keen to highlight their differences.

“Facts and circumstances in any type of regulatory action like this are all different, as are the structural and regulatory considerations with each of the cryptocurrencies that are in circulation around the world,” said Dante Disparte, the chief strategy officer and head of global policy at Circle, the principal operator of USDC.

REGULATION DEBATE

Stablecoins are used for trading between volatile tokens like bitcoin and, in some emerging economies, as a means to protect savings against inflation.

Today, stablecoins operate under a wide range of policies under a patchwork of state regulations governing disclosures, what assets are held in reserve to back the coins and redemption rights.

The Biden administration has called on Congress to regulate issuers of stablecoins akin to banks and subject them to strict supervision by banking regulators.

While lawmakers have yet to pass any legislation governing stablecoins, senior U.S. House lawmakers made substantial progress on a draft last year that would subject stablecoin issuers to certain prudential banking standards.

The crypto industry has faced more scrutiny after the high-profile collapse of crypto exchange FTX in November. Earlier this month, crypto exchange Kraken agreed to shut down its U.S. cryptocurrency staking service and pay $30 million in penalties to settle SEC charges that it failed to register the program.

“Within the broader enforcement trends that we’re seeing, the SEC is really asserting a lot of jurisdiction and it’s trying to bring as much of this activity within its control, I think as it can reasonably do at this point,” said Allegrante.

(Reporting by Hannah Lang in Washington; editing by Pete Schroeder, Megan Davies and Anna Driver)

(Reuters) – Coinbase Global Inc reported a loss for the fourth quarter on Tuesday, as trading volumes at the cryptocurrency exchange came under pressure from an industry-wide downturn triggered by a string of high-profile bankruptcies.

The market for digital assets has suffered from dour sentiment over the last year, as investors shunned risky assets amid spiraling market volatility and worries of an upcoming recession.

But the biggest blow to the sector came from the bankruptcy of Sam Bankman-Fried’s major crypto exchange FTX in November. The collapse has since drawn tough global regulatory scrutiny on companies operating in the crypto sector and fueled worries of a contagion hitting other firms.

The company reported net revenue of $605 million in the quarter, compared with $2.49 billion a year earlier.

Coinbase reported a net loss of $557 million in the three months ended Dec. 31, compared with a profit of $840 million a year earlier.

(Reporting by Manya Saini in Bengaluru; Editing by Krishna Chandra Eluri)

By Medha Singh and Lisa Pauline Mattackal

(Reuters) – The world of stablecoins is suddenly looking shaky.

Seismic shifts may be afoot in the $137 billion market after New York-based Paxos Trust Company, which mints Binance’s stablecoin, said it would cease issuing new BUSD tokens after U.S. regulators labeled the asset an unregistered security.

The U.S. move has left investors questioning the future shape of the market for stablecoins, tokens that are usually backed by traditional assets like dollars and U.S. Treasuries to tame the wild swings that characterize cryptocurrencies.

The immediate impact hasn’t been negative for the stablecoin market as a whole, though; it’s actually seen its total value grow by $2 billion since the Paxos announcement on Feb. 13.

“There’s way too much demand for dollar-based stablecoins for them to go away,” said Alex Miller, CEO at bitcoin developer network Hiro.

Instead rivals are vying to cash in on the woes of BUSD, the world’s third-biggest stablecoin, whose market value has shrunk to $12.9 billion from $16.1 billion, with its market share narrowing to 9.4% from 12.1%, according to CoinGecko.com.

Market leader tether (USDT) has been a big beneficiary, adding $1.9 billion to its market capitalization to hit $70.3 billion since the news. It now commands 52.6% of the stablecoin market, up from just over 51%.

Circle’s USD Coin, the second-biggest stablecoin, edged up over $700 million to $42 billion, lifting its market share to 31.3% from 30.9%.

Graphic: Unstable stablecoin https://www.reuters.com/graphics/FINTECH-CRYPTO/WEEKLY/lgpdknrdovo/chart.png

AND THE WINNER IS.. TETHER

Stablecoins are a key part of the cryptosphere, with their steadier value meaning they’re used as to facilitate transfers between cryptocurrencies or into regular cash. Traders also use these tokens to hedge their positions, and hence dwindling market value is associated with falling liquidity and leverage in the broader crypto market.

Markus Thielen, head of research and strategy at crypto firm Matrixport, said the Paxos announcement and subsequent slump in BUSD had caused a big shift in the stablecoin market.

“And tether wins.”

Broader crypto market impact also seems to have been contained with bitcoin rising 14% over the past week to $24,902, shrugging off worries that central banks will keep raising rates.

Among the reasons for the sanguine reaction is that BUSD is largely used to trade on Binance, the world’s largest crypto trading platform, while its usage is limited in other parts of the crypto world, according to analytics firm Kaiko. 

“While BUSD is used in DeFi, it is not systemically important to the ecosystem,” Kaiko’s Riyad Carey said.

BETTING ON FUTURE PRICES

The developments around Binance’s stablecoin have also boosted trading on competing platforms; since Feb. 1, Binance’s bitcoin liquidity is down almost 30% while U.S.-based Coinbase’s is up nearly 15%, according to Kaiko.

Daily open interest for bitcoin to BUSD perpetual swaps has dropped from over 17,000 bitcoin at the beginning of February to 13,726 bitcoin, Binance data showed, pointing to traders withdrawing bets on future prices for BUSD.

While some uncertainty remains on the impact of the U.S. Securities and Exchange Commission ruling on other stablecoins, the market appears to have adjusted, according to some crypto players.

“This is unlikely to represent a critical large structural change to the market, for now,” said Vetle Lunde, analyst at Arcane Research. He added: “Enforcement against USDC or the non-U.S. domiciled USDT, could have more dramatic implications.”

(Reporting by Medha Singh and Lisa Pauline Mattackal in Bengaluru; Editing by Tom Wilson and Pravin Char)

(Reuters) – The firm behind Binance’s stablecoin, Paxos Trust Company, is having constructive discussions with the U.S. Securities and Exchange Commission after the firm disclosed that the regulator told the company it should have registered the token as a security, according to an internal email from Paxos’ chief executive officer.

“We are engaged in constructive discussions with the SEC, and we look forward to continuing that dialogue in private,” said Paxos CEO Charles Cascarilla in an email sent Saturday to Paxos employees.

He added that if necessary, Paxos would defend its position that Binance USD is not a security through litigation.

(Reporting by Hannah Lang in Washington)

TOKYO (Reuters) – The Japanese unit of failed cryptocurrency exchange FTX said on Monday it would allow customers to withdraw deposits of fiat currency and crypto assets beginning Tuesday after months of suspension.

FTX Japan said its customers could withdraw assets through the website of Liquid Japan, a crypto exchange it bought in February last year.

FTX filed for U.S. bankruptcy protection in November.

(Reporting by Makiko Yamazaki; Editing by Bradley Perrett)

By Huw Jones

LONDON (Reuters) – Tough capital rules for banks holding cryptoassets must be fast-tracked in the European Union’s pending banking law if Europe wants to avoid missing a globally-agreed deadline, the bloc’s executive has said.

The global Basel Committee of banking regulators from the world’s main financial centres has set a January 2025 deadline for implementing capital requirements for banks’ exposures to cryptoassets such as stablecoins and bitcoin.

“For the time being, banks have very low crypto-asset exposures and only a limited involvement in providing crypto-asset-related services,” the European Commission said in an informal discussion paper seen by Reuters.

“Banks have expressed interest in trading crypto-assets on behalf of their clients and to provide crypto-assets-related services.”

Basel’s standards are applied in the EU with a law, and a delay could mean that banks have to wait longer to enter the cryptomarket as separate EU rules for trading cryptoassets come into force in 2024.

To enforce Basel’s crypto rules, the EU could either propose a new law, or expand the banking law it is now finalising as called for by the European Parliament.

Parliament and EU states have equal say on the banking law and are due to start negotiating the final text, which could include the provisions on cryptoassets, the paper said.

This would give banks clarity on their requirements for crypto-asset exposures and would ensure that risks stemming from these are adequately addressed, the Commission paper said.

“From an international perspective, it would also allow the EU to fully align itself with the implementation deadline agreed on at Basel level.”

A separate draft law would not be forthcoming until the end of 2023 at the earliest, the paper said. Parliament goes to the polls mid-2024, making it harder to approve a new law in time for 2025.

The Commission paper also suggests that the bloc’s European Banking Authority (EBA) could coordinate with the EU’s securities watchdog ESMA to ensure that cryptoassets are properly categorised.

Basel has set punitive capital charges on unbacked crypto currencies like bitcoin, and less conservative charges on stablecoins, which are backed by an asset or fiat currency.

It could also be useful to mandate EBA, in cooperation with ESMA, to maintain a list of how existing cryptoassets are categorised, the paper said.

(Reporting by Huw Jones, Editing by Louise Heavens)

By Douglas Gillison and Pete Schroeder

WASHINGTON (Reuters) – Former pro US basketball star Paul Pierce has agreed to pay more than $1.4 million to settle charges he illegally promoted digital assets, Wall Street’s top regulator said Friday.

The U.S. Securities and Exchange Commission said Pierce promoted crypto tokens sold by EthereumMax on social media without disclosing he was paid to do so, and made misleading statements about the product.

The settlement with the former Boston Celtic and NBA Hall-of-Famer marks the latest move by the SEC to crack down on celebrity endorsements of crypto products.

Pierce settled the charges without admitting or denying them, agreeing to pay $1.1 million in fines and another $240,000 representing the disgorgement of ill-gotten gains plus interest, according to the SEC.

“This case is yet another reminder to celebrities: The law requires you to disclose to the public from whom and how much you are getting paid to promote investment in securities, and you can’t lie to investors when you tout a security,” SEC Chairman Gary Gensler said in a statement.

A representative for Pierce did not immediately respond to a request for comment.

Last year, the SEC penalized several celebrities, including reality TV star Kim Kardashian and former boxer Floyd Mayweather Jr for their roles in improperly promoting crypto tokens through social media.

Under Gensler, the SEC has taken a hard line against the nascent cryptocurrency industry, multiplying enforcement actions against trading platforms accused of operating outside investor protection laws. The agency this week proposed new rules governing custody of assets under management by hedge funds and others which critics said would hinder investment in digital currencies.

(Reporting by Pete Schroeder, Editing by Franklin Paul and David Gregorio)

(Reuters) – Cryptocurrency exchange giant Binance is considering ending relationships with U.S. business partners, Bloomberg News reported on Friday, citing a person familiar with the matter.

The company is weighing the retreat after its relationships with a key banking partner and stablecoin issuer ran into trouble amid intense scrutiny from authorities, the report said.

Binance did not immediately respond to a Reuters request for comment.

(Reporting by Jaiveer Singh Shekhawat and Niket Nishant in Bengaluru; Editing by Shailesh Kuber)

By Tom Wilson and Angus Berwick

LONDON (Reuters) – The U.S. partner of global cryptocurrency exchange Binance has confirmed that a trading firm managed by Binance CEO Changpeng Zhao operated as a market maker on its platform.

Reuters reported on Thursday that Binance had secret access to a bank account belonging to its purportedly independent U.S. partner and transferred large sums of money from the account to the trading firm, Merit Peak Ltd.

“While there was a market making firm named Merit Peak that operated on the Binance.US platform, it stopped all activity on the platform in 2021,” Binance.US said in a tweet on Thursday after the Reuters story was published. It did not elaborate on when in 2021 the activity ceased, or comment on Zhao’s role at the trading firm.

The global Binance exchange is not licensed to operate in the United States but the transfers to Merit Peak revealed by Reuters suggest that Binance controlled the finances of Binance.US, despite saying publicly that the American entity is “fully independent” and operates as its “US partner.”

Binance transferred over $400 million from the account at California-based Silvergate Bank to Merit Peak between January and March 2021, Reuters reported on Thursday.

Before that story’s publication, Binance.US had told Reuters that “Merit Peak is neither trading nor providing any kind of services on the Binance.US platform,” without giving further details.

Binance.US’s executives were concerned by the outflows from the Silvergate account to Merit Peak because the transfers were taking place without their knowledge, according to the messages reviewed by Reuters.

A spokesperson for the global Binance exchange, which did not respond to Reuters’ questions for the article on Thursday, told crypto news outlet CoinDesk that the transfers were “a Binance.US issue.”

The activities of crypto platforms’ market makers – firms that typically buy and sell assets at exchanges to deepen trading volumes – have come under growing scrutiny from U.S. financial regulators since the collapse of major exchange FTX in November.

‘TREMENDOUS BURDEN’

Zhao has not directly addressed the report, but on Friday he tweeted, “Remember 4.,” tagging a previous post in which he listed his “Do’s and Don’ts” for 2023. The fourth item on the list was “Ignore FUD, fake news, attacks,” using an acronym for “fear, uncertainty and doubt” often used in crypto in relation to news perceived as negative.

The day before Reuters’ article, Binance’s chief strategy officer, Patrick Hillmann, told the Wall Street Journal and Bloomberg that Binance expected to pay penalties to resolve U.S. investigations into the company. Hillmann said Binance had been built by software engineers unfamiliar with laws and rules on bribery and corruption, money laundering and economic sanctions, but earlier “gaps” in its regulatory compliance had since been closed.

“It’s a tremendous burden,” Hillmann told Bloomberg. “We just want to put it behind us.”

Hillmann did not respond to detailed questions Reuters sent him for the article that was published on Thursday.

Regulators are concerned that some market makers have received undisclosed special treatment from crypto exchanges that may disadvantage customers.

The U.S. Securities and Exchange Commission accused FTX founder Sam Bankman-Fried in December of granting “special privileges” to his trading firm Alameda Research, allowing him to siphon off billions of dollars in FTX customer money. Bankman-Fried has pleaded not guilty.

The bankruptcy in 2022 of a string of major crypto firms has also stoked calls from politicians for greater clarity on how regulators assess ties between U.S. banking and the cryptocurrency sector.

In December, U.S. Senators Elizabeth Warren and Tina Smith wrote to top financial regulators including U.S. Federal Reserve Chair Jerome Powell, asking about their assessment of the risks to banks and the banking system stemming from exposure to crypto. The letter cited Silvergate Capital Corp as among the banks that “relied heavily on their crypto customers.”

Shares in Silvergate Capital Corp, Silvergate Bank’s parent company, fell sharply on the Reuters report, closing down over 22%. They have lost nearly 90% of their value since hitting an all-time high in November 2021.

(Reporting by Tom Wilson and Angus Berwick; Editing by Susan Fenton)

By Leika Kihara

TOKYO (Reuters) – The Bank of Japan (BOJ) said on Friday it has decided to launch a pilot programme in April for issuing a digital yen, moving a step closer to launching a central bank digital currency (CBDC) in a country that lags in digitising its payment systems.

The move, which was widely expected, will follow two years of experiments the central bank has been conducting to decide whether to issue a CBDC.

“Our hope is that the pilot programme will lead to improved designs through discussion with private businesses,” BOJ Executive Director Shinichi Uchida said in opening remarks at the central bank’s meeting with private-sector executives.

While it was up to the public to decide whether to actually issue a digital yen, the BOJ will “continue to make thorough preparations” when circumstances lead to the launch of a CBDC, the central bank said in a statement.

(Reporting by Leika Kihara; Editing by Christian Schmollinger)

By Huw Jones

LONDON (Reuters) – The G20’s Financial Stability Board (FSB) said on Thursday it would take steps to tackle “vulnerabilities” and data gaps in decentralised finance (DeFi) highlighted by the collapse of cryptocurrency exchange FTX last year.

The fast-growing and unregulated DeFi segment offers trading, borrowing and lending in cryptocurrency assets by using public blockchains to record transactions, with no central control.

“The fact that crypto-assets underpinning much of DeFi lack inherent value and are highly volatile magnifies the impact of these vulnerabilities when they materialise, as recent incidents demonstrate,” the FSB said in a report to ministers from the Group of 20 (G20) major economies meeting next week.

FSB member countries will now “proactively” analyse vulnerabilities from DeFi as part of regular monitoring of crypto markets, the report said.

“Potential policy responses may include, for example, regulatory and supervisory requirements concerning traditional financial institutions’ direct exposures to DeFi,” it said.

The collapse of FTX last November exposed vulnerabilities in intermediaries and DeFi, the report said.

“The full extent of the impacts of this failure, including on DeFi projects that were owned by FTX or depended on it for trading flows, will take time to become apparent given the lack of disclosure and transparency in these markets,” the report said.

FSB DeFi Graphic 1 https://fingfx.thomsonreuters.com/gfx/mkt/xmpjkrmoqvr/FSB%20DeFi%20Graphic%201.PNG

SUPERVISION GAPS

The most worrying vulnerability in DeFi relates to “mismatches” in liquidity from different maturities in liabilities and assets, the report said.

Some DeFi arrangements may be “purposefully” cross-border to exploit gaps in supervision, hence the need for international coordination, it added.

Until the sharp retreat in bitcoin prices and the FTX crash, regulators had largely focused on cryptoassets rather than related technology.

The FSB said it would also study the tokenisation – or digital representation – of real assets which could increase links between crypto markets and DeFi with the wider financial system and economy.

The FSB’s existing recommendations for regulating cryptoassets may need to be enhanced to cover risks from DeFi, the report said.

FSB members will also study how DeFi activities could come under existing rules for mainstream finance.

“If DeFi activities and entities are deemed to fall within the regulatory perimeter, the enforcement of compliance with applicable regulations is warranted,” the report said.

For DeFi activities outside existing rules, new policies could be needed, it said.

FSB DeFi Graphic 2 https://fingfx.thomsonreuters.com/gfx/mkt/mypmokenypr/FSB%20DeFI%20Graphic%202.PNG

(Reporting by Huw Jones; Editing by Helen Popper)

By Angus Berwick and Tom Wilson

(Reuters) – Global cryptocurrency exchange Binance had secret access to a bank account belonging to its purportedly independent U.S. partner and transferred large sums of money from the account to a trading firm managed by Binance CEO Changpeng Zhao, banking records and company messages show.

Over the first three months of 2021, more than $400 million flowed from the Binance.US account at California-based Silvergate Bank to this trading firm, Merit Peak Ltd, according to records for the quarter, which were reviewed by Reuters. The Binance.US account was registered under the name of BAM Trading, the U.S. exchange’s operating company, according to the records. Company messages show the transfers to Merit Peak began in late 2020.

Reuters couldn’t determine the reason for the transfers or whether any of the money belonged to Binance.US customers. The exchange’s public terms of use at the time said its customers’ dollar deposits were held at Silvergate and a Nevada-based custodian firm called Prime Trust LLC. Prime Trust made $650 million in wire transfer deposits into the Binance.US account during the quarter, the bank records show.

A Binance.US spokesperson, Kimberly Soward, did not address Reuters’ questions about the transfers detailed in the bank records. In a statement, she said Reuters’ reporting used “outdated information” without elaborating further. She added: “Merit Peak is neither trading nor providing any kind of services on the Binance.US platform” and “only Binance.US employees have access” to the bank accounts of the U.S. company. Soward didn’t specify when Merit Peak’s activities ceased.

The Binance global exchange, Binance CEO Zhao and Prime Trust did not respond to detailed questions about the transfers. A Silvergate spokesperson said the bank does not comment on individual customers.

Binance.US’s executives were concerned by the outflows because the transfers were taking place without their knowledge, according to messages reviewed by Reuters. The CEO of Binance.US at the time, Catherine Coley, wrote to a Binance finance executive in late 2020 asking for an explanation for the transfers, calling them “unexpected” and saying “no one mentioned them.”

“Where are those funds coming from?” she wrote in one message.

In a response to Coley, seen by Reuters, the Binance executive, Susan Li, did not explain the transfers. Li wrote that Merit Peak was a “vendor that facilitated trading” on Binance.US and also provided loans and capital injections to the American exchange.

Coley, who left Binance.US later in 2021, didn’t respond to questions sent via her legal representatives. Li also didn’t respond.

Reuters was unable to trace what became of the $400 million. An unspecified portion of the money was subsequently sent to the Silvergate account of a Seychelles-incorporated firm called Key Vision Development Limited, according to a person with direct knowledge of the transfers. A 2021 corporate filing by another Binance unit identified CEO Zhao as a director of Key Vision. A former Silvergate executive confirmed that Key Vision held an account at Silvergate at the time.

Key Vision’s local registered agent did not respond to requests for comment.

The money transfers suggest that the global Binance exchange, which is not licensed to operate in the United States, controlled the finances of Binance.US, despite maintaining that the American entity is entirely independent and operates as its “US partner.” The Department of Justice and the Securities and Exchange Commission have sought information from Binance and Binance.US about their relationship as part of ongoing investigations into potential breaches of financial rules, including whether Binance is using the American exchange as cover for doing business in the U.S. The SEC and the Justice Department declined to comment for this article.

Reuters reported last year that Binance created Binance.US as a de facto subsidiary in 2019 in order to draw the scrutiny of U.S. regulators away from the global exchange. Binance.US’s operator, California-based BAM Trading Services, is registered with the U.S. Treasury as a money services business, a category that includes foreign currency traders and money transmitters. BAM’s beneficial owner is Zhao.

Binance.US’s chief financial officer, Jasmine Lee, told the Wall Street Journal on Feb. 8 that “the extent of our relationship” with Binance.com is a shared name and a licensing agreement for technology. “We do not transfer our funds back and forth,” Lee said.

Susan Li, the Binance finance executive, had access to the Binance.US Silvergate account, however, along with several senior Binance.US employees, according to the messages and the person with direct knowledge of the transfers. In one message, a Binance.US finance manager asked Li to give another Binance.US employee authority to approve payments from the account. A 2021 Binance.US document that described the American exchange’s technology architecture identified Silvergate as a payment channel controlled at the time by Binance.com.

The Binance.US account records reviewed by Reuters detail each transaction between January and the end of March 2021. Reuters has not reviewed account records for other periods.

The transfers to Merit Peak took place on the bank’s proprietary Silvergate Exchange Network (SEN), which Binance.US joined in November 2020 to serve its corporate clients. SEN allows these clients to transfer dollars between their accounts at the bank. Silvergate’s investor prospectus says SEN transfers are “push only,” which means they must be authorized by the account’s controller.

The former Silvergate executive told Reuters the movement of funds from a company account without approval of that firm’s management would be a breach of the bank’s compliance rules. Silvergate’s prospectus says “multiple steps are required to create, authorize and approve a SEN transfer.” The Silvergate spokesperson didn’t address the transfers in their response to Reuters.

Over the January-March 2021 quarter, the Binance.US account received $1.3 billion in SEN transfers from corporate clients trading on Binance.US, along with the $650 million in wire transfer deposits from Prime Trust.

BLACK BOX

The role of trading firms at crypto exchanges such as industry leader Binance has been under scrutiny since rival FTX collapsed in November. Trading firms often play a “market-making” role, typically buying and selling assets to deepen an exchange’s trading volume and thus facilitate dealing. The market maker profits from the difference, or “spread,” between the prices bid by buyers and asked by sellers.

The SEC has accused FTX founder Sam Bankman-Fried of secretly diverting billions of dollars in customer funds to his trading firm, Alameda Research, which functioned as a market maker on the exchange. Alameda received “undisclosed special treatment” on the FTX platform that concealed the flows, the SEC alleged in its December complaint against Bankman-Fried, who has pleaded not guilty.

The SEC’s chair, Gary Gensler, told Bloomberg TV on Feb. 10 that crypto exchanges, in general, were “co-mingling customer funds with their businesses” by also operating as broker-dealers and hedge funds that were trading against their own clients. He didn’t single out Binance or other exchanges in his comments, but said firms should expect more enforcement actions by the agency.

“We don’t let the New York Stock Exchange also run a hedge fund and trade on the exchange. Why would we do it here?” Gensler said.

Among the dealers on Binance.US was Merit Peak, according to company messages, the trading firm managed by CEO Zhao.

Binance.US employees had little visibility into how Merit Peak was executing trades, the person with knowledge of the transfers said, because the software that matched customers’ orders was managed by Binance as part of the technology licensing agreement between the two exchanges. The document that described Binance.US’s technology architecture designated this software as “BlackBox” because, ex-staff said, Binance.US employees didn’t know how it functioned.

Former regulators, along with former executives at Binance and Silvergate, told Reuters that Merit Peak’s role on Binance.US created potential conflicts of interest between the exchange and its customers because Binance.US disclosed no information about Merit Peak’s activities or its owner. The SEC described Merit Peak as a Binance entity when it sought information about the trading firm as part of a subpoena issued to Binance.US in December 2020.

“When you have that lack of transparency, you don’t know if Binance customers are being disadvantaged,” said Howard Fischer, a former senior SEC trial counsel and now a partner at U.S. law firm Moses Singer.

Merit Peak was incorporated in the British Virgin Islands in January 2019. That December, Zhao signed a purchase agreement for Merit Peak to invest $1 million into Binance.US operator BAM Trading’s holding company in return for a portion of the holding company’s preferred shares. The agreement identified Zhao as Merit Peak’s “Manager.”

The BVI corporate registry does not name Merit Peak’s directors or shareholders, and only identifies its local registered agent. The agent did not respond to requests for comment about Merit Peak’s ownership. Like Binance.US, Binance too has not provided any public information about Merit Peak, nor mentioned it in submissions to regulators and corporate registries that were reviewed by Reuters.

The 2021 document that described Binance.US’s technology architecture noted that an unidentified “Market Maker” was under the control of Binance.com. In a Twitter Spaces event last November, Zhao said he was a shareholder in one unspecified market maker, but stressed that it did not earn profits and was “just providing liquidity in the market.”

The SEC’s subpoena, addressed to Coley, requested information on all of Binance.US’s market makers, their owners, and their trading activity. The Wall Street Journal reported the subpoena last year. Reuters could not establish how Binance.US responded to the SEC.

Binance.US and Binance didn’t respond to Reuters’ questions about the SEC’s case, but Binance’s chief strategy officer, Patrick Hillmann, told the Wall Street Journal on Wednesday the company was “working with regulators to figure out what are the remediations” to resolve investigations. The Justice Department is also investigating Binance for suspected money laundering and sanctions violations, Reuters has previously reported.

Silvergate, the bank used by Binance and other crypto exchanges, is also drawing scrutiny. It is under investigation by the Justice Department’s fraud section, which is examining Silvergate’s hosting of accounts tied to Bankman-Fried’s businesses. Silvergate didn’t comment and the Justice Department declined to comment.

After this article published, Silvergate’s shares extended losses, hitting a daily low of $17.35, and were last down around 22%. They have fallen 86% over the past year.

“STEADY CASH DRAIN”

Coley announced Binance.US had joined the Silvergate Exchange Network in November 2020, telling a crypto news outlet, “We’ve launched SEN for our corporate clients.”

Merit Peak gave Binance.US $5 million to fund the “minimum balance” of the exchange’s new SEN account, according to a message a senior Binance.US employee later sent to counterparts at Binance.com. The transfers to Merit Peak began soon after, the messages show.

Coley, on the morning of Dec. 23, flagged a “very large withdrawal” by Merit Peak of $7.5 million from the Binance.US account. Binance.US staff referred to the transfers to Merit Peak as “withdrawals,” messages show, because Binance.com employees were initiating them.

“This transaction is unexpected,” Coley wrote. As a result, she told Susan Li, who was named as team leader of Binance’s finance department in a company employee list that year, that Binance.US’s SEN account had hit its daily withdrawal limit of $10 million and she would lift the threshold to $20 million.

Coley asked Li to advise Binance.US staff in the future when the SEN account was close to hitting its limit. “Given we do not have portal access, can we have eyes and ears helping us,” she messaged. She didn’t identify the portal, but Silvergate says SEN accounts can be accessed via an “online banking portal.”

Coley followed up with Li again later that day. “Can you explain more – maybe over the phone – about the flows that are happening via SEN? I want to understand them better as no one mentioned them until today when they got caught in our limit,” Coley wrote.

“Who is directing this?” Coley asked, noting that other senior Binance.US employees were not aware of the transfers either.

Li replied in a message to Coley that Merit Peak’s role was as an “OTC vendor.” She didn’t elaborate or directly address Coley’s questions.

In OTC or over-the-counter trades, two parties agree on a price outside an exchange. Reuters could not establish what trades Merit Peak was involved in. But in a message to a colleague in early 2021, seen by Reuters, a senior Binance.US employee said Binance.com was sending crypto to Binance.US to sell to American traders, and then “withdrawing” the income via Merit Peak. This led to a “steady cash drain out of SEN,” despite a booming crypto market, the employee wrote.

From January to March 2021, the account records show that Merit Peak received 89 transfers from the Binance.US SEN account totalling $404 million. Over that period, Merit Peak made four payments into the Binance.US account, for a total of around $160,000.

The transfers to Merit Peak were almost all for precise million-dollar figures, made at one- or two-day intervals. These transfers often immediately followed a deposit into the Binance.US account by Prime Trust, the crypto custodian firm for Binance.US client funds.

Merit Peak then transferred funds from its Silvergate account to the account belonging to Key Vision, the Seychelles firm, said the person with direct knowledge of the transfers.

Reuters was unable to determine why the money was moved around in this way.

That year, Binance.com was also directing international customers on its platform to deposit dollars into Key Vision’s Silvergate account, according to screenshots of the instructions posted on a crypto blog. The Seychelles’ business registry says Key Vision, which was incorporated the same day as Merit Peak, remains active and is in “Good Standing.”

Binance.US in April 2021 unexpectedly announced it would replace Coley as CEO. She has not made any public statements since leaving.

(Reporting by Angus Berwick and Tom Wilson in London; Additional reporting by Chris Prentice in New York; Editing by Janet McBride)

By Luc Cohen

NEW YORK (Reuters) – A U.S. judge on Thursday is set to weigh tighter restrictions on Sam Bankman-Fried’s internet use, after prosecutors said the indicted FTX cryptocurrency exchange founder may be trying to hide some of his online activity.

Federal prosecutors in Manhattan on Wednesday urged U.S. District Judge Lewis Kaplan to bar him from using the internet except to review evidence against him or use email on his Gmail account, citing his use of a virtual private network (VPN).

Bankman-Fried is out on bail after pleading not guilty to fraud charges.

Kaplan has banned the 30-year-old former billionaire from contacting current or former employees at his now-bankrupt exchange and Alameda Research hedge fund, and from using encrypted messaging apps such as Signal that let users auto-delete messages.

On Tuesday, Kaplan banned Bankman-Fried from using VPNs which can disguise an internet user’s physical location.

But on Wednesday, prosecutors said the current conditions “leave too much room for inappropriate conduct.”

Prosecutors have raised concerns he may be trying to tamper with witnesses ahead of his October trial on charges of diverting billions of dollars in FTX customer funds to Alameda.

Bankman-Fried’s lawyers said his attempts to contact FTX’s current chief executive and general counsel were efforts to help, not interfere. They said he used a VPN to watch National Football League playoff games on an international subscription he had bought while living in the Bahamas.

The defense nonetheless proposed adding a bail condition that barred him from using a VPN unless one was needed to access evidence to prepare his defense. They proposed letting him communicate by phone, email, SMS text messaging and Twitter direct messaging, while disabling iMessage from his phone.

FTX collapsed in November as customers raced to withdraw funds amid concerns about commingling of their deposits with Alameda assets. Bankman-Fried has acknowledged inadequate risk management, but said he did not steal any funds.

(Reporting by Luc Cohen in New York; Editing by Matthew Lewis)

LONDON (Reuters) – Bitcoin touched a six-month high on Thursday, swept higher with equities and other relatively risky assets as investors gained confidence in the economic outlook and dismissed concern about regulatory scrutiny of the sector.

The world’s largest cryptocurrency reached $24,895 on Thursday, its highest since August 2022, after jumping 9.5% on Wednesday. It was last at $24,400.

Bitcoin has risen nearly 50% so far this year from around $16,500, where it languished in early January bruised by the collapse of major crypto exchange FTX and a sell-off in many assets caused by global central banks raising interest rates aggressively.

Other than during crypto-specific events, such as regulatory changes and collapses of major industry players, larger cryptocurrencies have traded in a similar manner to other assets considered risky, especially in economically uncertain times, such as equities.

Global stocks rose on Thursday as economic data from around the world drove hopes the economy might face a softer landing than feared a few months ago, even as interest rates threaten to remain higher for longer than expected. [MKTS/GLOB]

“Bitcoin bolted past $24,000 for the first time in two weeks after surging more than 8% over the past 24 hours. The asset had dropped below $21,600 in recent days amid growing anxiety about crypto regulation and future Fed moves to tame inflation, but those concerns seemed to fade quickly,” crypto investment platform Q9 Capital said in a note on Thursday.

On Monday, in the latest regulatory challenge for the crypto sector, Paxos Trust Company the firm behind leading exchange Binance’s stablecoin said the U.S. Securities and Exchange Commission told the company it should have registered the product as a security and is considering taking action against the platform.

(Reporting by Alun John; editing by Barbara Lewis)

By Aftab Ahmed and Christian Kraemer

NEW DELHI (Reuters) – G20 finance and central bank chiefs meet in India next week at the first-year anniversary of Russia’s invasion of Ukraine to discuss rising debt troubles among developing countries, the regulation of cryptocurrencies and the global slowdown.

The Feb. 22-25 meeting in the Nandi Hills summer retreat near Bengaluru is the first major event of India’s G20 presidency and will be followed by a March 1-2 meeting of foreign ministers in New Delhi.

As global borrowing costs rise, India – whose neighbours Sri Lanka, Pakistan and Bangladesh have all sought International Monetary Fund support in recent months – wants to put debt relief at the forefront of discussions at the finance talks.

It is drafting a proposal for G20 countries to help debtor nations badly hit by the economic impact from the pandemic and the Ukraine war, by asking big lenders including China to take a large haircut on loans, Reuters reported on Wednesday.

New Delhi also supports a push by the IMF, the World Bank and the United States for the so-called Common Framework (CF) – a G20 initiative launched in 2020 to help poor countries delay debt repayments – to be expanded to include middle-income countries, though China has resisted.

“We support exploring a possible extension of the CF to middle-income countries facing debt vulnerabilities,” said a European Union paper, signalling its backing for such moves ahead of the meeting.

The World Bank said in December the world’s poorest countries owed $62 billion in annual debt service to bilateral creditors, a year-on-year increase of 35%, triggering a higher risk of defaults. Two-thirds of the debt burden is owed to China, the world’s largest sovereign creditor.

For India, the other priority is to agree on global rules for cryptocurrencies. India’s central bank governor said last year cryptocurrencies were a “huge threat” to economic and financial stability” and some officials even called for a ban.

The country is now keen on international views on it.

“Crypto assets are by definition borderless and require international collaboration to prevent regulatory arbitrage,” India’s Ministry of Finance told parliament this week.

“Therefore, any legislation for regulation or for banning can be effective only with significant international collaboration on evaluation of the risks and benefits and evolution of common taxonomy and standards.”

The meeting comes amid attempts to ensure that sanctions on Russia do not deprive nations like Sri Lanka, Zambia and Pakistan – whose economies are still struggling to recover from the pandemic – access to vital oil and fertilizer supplies.

After a video call between Indian Finance Minister Nirmala Sitharaman and IMF Managing Director Kristalina Georgieva last week, New Delhi said it had asked the global lender to work on policy guidance to ensure energy and food security.

“Food shortages and higher food and fertiliser prices triggered by the war are exacerbating global food insecurity, which disproportionately affects the most vulnerable,” the EU paper said, urging the G20 to step up efforts to address the problem.

Neither the Russian finance minister nor the central bank chief were expected to attend the meeting.

(Writing by Krishna N. Das; editing by Mark John and Jonathan Oatis)

By Jonathan Stempel

(Reuters) – Former customers of Sam Bankman-Fried’s FTX have sued three venture capital and private equity firms, accusing them in a proposed class action of fraudulently promoting the cryptocurrency exchange before it went bankrupt.

According to a complaint filed late Tuesday in San Francisco federal court, Sequoia Capital, Thoma Bravo and Paradigm were “incentivized” in 2021 and 2022 to tout FTX by the more than $550 million they invested prior to its sudden collapse.

The customers said the defendants lent FTX an “air of legitimacy” by vouching that they had examined its operations–with a Sequoia executive once saying “we did our homework”–and found them “safe and secure” for cryptocurrency investors.

“Billions of dollars’ worth of customer assets became a casualty of the greed of Bankman-Fried and of his co-conspirators, such as the defendants,” the complaint said.

The lawsuit seeks unspecified damages for alleged violations of California consumer protection laws, as well as fraudulent inducement, intentional misrepresentation and civil conspiracy.

Earlier litigation accused celebrities like football quarterback Tom Brady, basketball guard Stephen Curry and actor Larry David of improperly inducing people to invest with FTX.

Sequoia, Thoma Bravo and Paradigm did not immediately respond on Wednesday to requests for comment.

Bankman-Fried is not a defendant.

The 30-year-old son of Stanford Law School professors has pleaded not guilty to fraud and other charges for allegedly looting billions of dollars from FTX customers. He is living with his parents as part of his $250 million bail package.

A Manhattan federal court hearing on whether to tighten bail is scheduled for Thursday, after Bankman-Fried allegedly tried to communicate improperly with potential government witnesses.

The case is Rabbitte v Sequoia Capital Operations LLC et al, U.S. District Court, Northern District of California, No. 23-00655.

(Reporting by Jonathan Stempel in New York)

By Luc Cohen

NEW YORK (Reuters) – U.S. prosecutors on Wednesday urged a judge to impose sharp restrictions on indicted FTX cryptocurrency exchange founder Sam Bankman-Fried’s internet use, arguing existing conditions “leave too much room for inappropriate conduct.”

U.S. District Judge Lewis Kaplan has barred the 30-year-old former billionaire, out on $250 million bail, from contacting current or former employees at his exchange and Alameda Research hedge fund, and from using encrypted messaging apps such as Signal that let users auto-delete messages.

That came after federal prosecutors in Manhattan raised concerns Bankman-Fried may be trying to influence potential witnesses ahead of his October trial.

He has pleaded not guilty to eight charges including wire fraud and money laundering conspiracy over the collapse of now-bankrupt FTX.

On Wednesday, prosecutors said Bankman-Fried’s use of a virtual private network (VPN) to access the internet raised further concerns. They urged Kaplan to bar him altogether from using the internet except to review evidence against him or use email on his Gmail account.

He should remain permitted to use voice calls and SMS messages on his cell phone, but should only be allowed to use Zoom to communicate with his lawyers, prosecutors wrote.

Bankman-Fried’s lawyers said his efforts to contact FTX’s current general counsel and chief executive were attempts to help, not to interfere. They said he only used a VPN to watch National Football League playoff games.

They nonetheless proposed adding a bail condition that barred him from using a VPN unless required to access databases that contained prosecutors’ evidence that he needed to prepare his defense.

They proposed letting him communicate by phone, email, SMS text messaging and Twitter direct messaging, while disabling iMessage from his phone.

Kaplan is set to hold a hearing on Bankman-Fried’s bail conditions on Thursday.

(Reporting by Luc Cohen in New York; Editing by Daniel Wallis and Lincoln Feast.)