Binance is Going to be Fine(d).

Headline:  What is happening with Binance, C.Z. and the $4 Billion fine?

Body:  OK, I have to admit here, I have no concept of $1 Billion.   (My bank account usually maxes out in the 4^th column.)  But, just recently, C.Z., the well-known CEO of Binance agreed to pay fines of $4.3 Billion.  Being a mere mortal, I have a lot of questions.  Is this unusual?  Does the DOJ really have a good chance of seeing any of this money?  Many others besides, too.  So, let’s get a cup of  tea (or whatever you like) and take a look at what happened.

So, what DID happen?

Binance, apparently, failed to take required steps to minimize money laundering opportunities, and many of the KYC protocols were not followed.. For years, Binance allowed users to open accounts and trade without submitting any identifying information beyond an email address.  When they did require identifying information for new customers, for about a year, they grandfathered in many of the pre-existing customer base.  . Between August 2017 and October 2022, U.S. users, including VIPs, conducted trillions of dollars in transactions on the platform, generating over $1.6 billion in profit for Binance.  In a quest to collect fees, Binance facilitated almost $900 Million in trades between U.S. persons and persons resident in Iran.

The DoJ was prepared to bring charges against both C.Z. and Binance, money laundering, amongst them.  C.Z. agreed to a settlement where he would step aside from the CEO position, he would personally pay a $50 Million fine, and Binance itself would pay a penalty of $4.3 Billion.  So, yeah, it would seem that the DOJ is becoming active within the cryptocurrency space.    “In just the past month, the Justice Department has successfully prosecuted the CEOs of two of the world’s largest cryptocurrency exchanges in two separate criminal cases,” the attorney general said. “The message here should be clear: using new technology to break the law does not make you a disruptor, it makes you a criminal.”  Despite these unprecedented penalties, Binance could face still more from the SEC.  Most of these  problems seem to stem from Binance not separating the transactions within the U.S. from the rest of the international transactions.  (Isn’t that interesting?  The U.S. requires the building of a Chinese wall to keep its own transactions separate?) 

The Treasury Department echoed these aggressive sentiments.  “If virtual currency exchanges and financial technology firms wish to realize the tremendous benefits of being part of the U.S. financial system and serving U.S. customers, they must play by the rules,” Yellen said. “And if they do not, the U.S. government will take action.”  As a part of this, there are several different investigations being undertaken by the Criminal Division of the IRS.

In a separate action, the CFTC has also won a $1.35 Billion settlement against Binance.  The CFTC claimed that Binance engaged in the selling of unregistered cryptocurrency derrivatives.  “The resolution of the action against Binance and Zhao – within just 8 months of its filing – solidifies the CFTC’s reputation as the proven leader in the civil enforcement space when it comes to digital assets,” the chairman said. “We are stalwart in ensuring CFTC registrants comply with our statute and regulations, which serve to protect broader financial health and that directly impacts millions of American investors.”

So, what will happen to Binance within the U.S?

The regional head, Mr. Richard Teng  will take over as CEO, and a compliance monitor will need to be appointed (if I read the piece correctly, appointed by Binance.)  C.Z. will continue to own a majority share of Binance, but be prohibited from making  management decisions.

The Verdict

Well, it would seem that different agencies within the Federal Government are going after Binance because they are righteously upset that Binance would thumb their noses so much at U.S. Law.   And, there is a logic to this, and a lot of proof to suggest that they are doing their jobs as required.   But, there also seems to be a degree of competition that indicates to me that each agency is playing for a higher degree of responsibility within the cryptocurrency space.  Along with this greater degree of responsibility would come a greater amount of budgetary authority, and I can’t help but see this as an  important impetus to action also.  It will be most interesting to me to see what happens to the other remaining exchanges, like Coinbase.

REFERENCES

https://www.npr.org/2023/11/21/1214466415/binance-cz-changpeng-zhao-pleads-guilty-settlement-crypto-doj

https://www.theverge.com/2023/11/21/23971066/binance-ceo-changpeng-zhao-step-down

https://www.coindesk.com/policy/2023/11/21/binance-changpeng-cz-zhao-to-pay-285b-fine-in-cftc-settlement/

https://www.justice.gov/opa/pr/binance-and-ceo-plead-guilty-federal-charges-4b-resolution

Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice.   Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or CPA.

 

The Fed has Cryptocurrency on its Feed.

Body:  The Federal Reserve is so important to the financial transactions of this nation.  It is vital to the underpinning of banking, as it ensures a lender of last resort and it ensures that a run on one bank will not translate to a run on multiple banks that could be a major shock to the financial system.  So, it makes sense that if cryptocurrencies are really important to financial well-being, the Federal Reserve would be involved.  But, despite all of the readings I have done, I have not yet found a reference to what portion of the governance they would have to do.  So, let’s look at this.

How the Federal Reserve regulates cryptocurrency

The Federal Reserve is focused on regulating banks and the United States dollar, so cryptocurrencies are generally outside its sphere of influence. Crypto and the Fed overlap when banks hold cryptocurrency as an asset on their balance sheets.  And given the performance of Bored Apes, cryptokitties, Bitcoin and Etherum, this collection of digital assets is immense.  (Are you flashing back to Silicon Valley Bank, Signature Bank or Silvergate?   Yes, digital assets can form an outsized portion of the holdings in a bank.)  In this regard, it makes sense that the Federal Reserve would become important in the governance of digital assets.

The Federal Reserve decided that cryptocurrency-related assets must be disclosed separately by banks. New cryptocurrency asset activities require notifying the Federal Reserve. Banks are urged to consider the risks of crypto to their asset portfolios.

A new digital dollar?

The Federal Reserve popped up in crypto news recently to explore a Central Bank Digital Currency (CBDC), or digital dollar. In this case, the Fed is looking at creating a digital version of the US dollar that’s managed by blockchain technology. Other countries, including China, are also exploring using a CBDC.  At this point, the Fed issued a paper looking at the pros and cons of creating a new CBDC and solicited public feedback. Currently, banks and credit unions hold digital ledgers for our money. With a digital dollar, dollars would become part of a more transparent system, but there are still plenty of risks and issues to iron out before we can expect the Fed to move forward.

The Fed made it clear that it does not intend to proceed with a CBDC without clear support from the executive branch and Congress, ideally in the form of a specific authorizing law. On February 7, the Fed’s Board of Governors issued a policy statement clarifying permissible activities by member banks which would “presumptively prohibit” member banks from holding most crypto assets as a principal. Member banks wishing to issue dollar tokens will need to prove certain security measures and receive formal approval prior to their use in banking transactions.

The Federal Reserve is putting together a “specialized team of experts” to help it supervise the crypto sector, Michael Barr, the central bank’s vice chairman for supervision, said Thursday.  The Fed’s top regulatory official said the digital-assets specialists are needed to “help us learn from new developments and make sure we’re up to date on innovation in this sector.”

 “While crypto assets are hyped as decentralized, there has been an emergence of new, quite centralized intermediaries that are either not subject to or not compliant with appropriate regulation and supervision, which has perpetuated harm to consumers,” said Barr, who once worked as an adviser for Ripple, the issuer of the XRP token. “Our overall stance is that, at this stage of the development, banks should take a careful and cautious approach to engaging in crypto asset-related activities and the crypto sector.”

 An Aug. 8 announcement by the Federal Reserve Board established the Novel Activities Supervision Program, which aims to limit certain crypto-related activities and facilitate a more fair playing field for banks involved in servicing the digital asset industry.  While the program looks to provide stricter oversight on U.S. banks, the Federal Reserve implied that it isn’t discouraging state banks from cutting ties with industry, presumably including the digital asset firm sector.

The Verdict

This is interesting because the Federal Reserve is not a government agency, so their approach appears to be slightly different.  Instead of staking out their portion of cryptocurrency to regulate, they seem to be more interested in getting Congress to act and provide legislative solutions.   At the same time, they seem to want to educate consumers as to the real risk of cryptocurrencies, as much of their attention appears to be on stablecoins.  I hope their approach wins the day.

REFERENCES

Does The Federal Reserve Regulate Cryptocurrency? (forbes.com)

The (somewhat lively) state of crypto regulation – Thomson Reuters Institute

Federal Reserve Setting Up New Squad of Crypto Specialists (coindesk.com)

US Fed steps up oversight of banks’ involvement with crypto firms (cointelegraph.com)

Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice.   Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or CPA.

 

The Monkey Business of Man in the Middle Attacks.

Headline: What is a “man in the middle” attack?

Date:

Body:  OK, think back to the days gone by in elementary school.   There was a game we played called monkey in the middle.    In this game, 2 partners would throw/bounce a ball or other item to each other, and between them would be a 3^rd person who played the “monkey  in the middle.”  The objective for this person was to catch the ball before it got to the other partner.   Please keep this  model in mind as you read the rest of this post.

The difference here is that a ball is not used, instead, it is data being passed around.   Also, both partners are blissfully unaware of the presence of the man in the middle, stealing their communications.  In practice a hacker sends you an e-mail ostensibly from your Bank, asking you to confirm account details, or something similar.  “Just click on this link”, and you are magically transported to a website that looks like your bank, but is not.  The information entered is captured by the man in the middle.

How do I protect myself from being victimized?

1.  Only go to websites that start with “HTTPS” as this is much more secure
2. Be suspicious of any fishing e-mails.
3. Make use of a VPN, a kind of tunnel that goes from your computer to the internet.
4. Install a good anti-virus program like Norton or Kaspersky.   Install updates as they become available.
5. Always use secure passwords including letters, numbers and special characters.
6. Be suspicious of intrusive pop-ups.
7. Especially if you have remote workers, encourage them to use a VPN.

The Verdict

The concept of a man in the middle attack is not new.   The fact is, armies have been doing these things for centuries.   One army would identify a message courier for the other army, lure them into some type of distraction, and while distracted, read and possibly replace the message with one engineered by them.  And I use armies as an example for a reason.   Though we are not fighting for our lives, there is certainly a disparate set of 2 groups of people.  One group, ostensibly much larger, are the innocents, call them the civilians.  Then, you have a much smaller group, quite elite,  and these are the hackers  and other bad actors.  Though this second group is diminutive in number, they can have an out-sized effect within the battle.  This leads us to the natural question: what can the civilians do  so that they can minimize risk and keep going about their normal activities?  Well,  just follow the steps above, and if you get something in e-mail where it affects you on an emotional level, please step back for a second and ask if this might be a portion of a man in the middle attack.

 REFERENCES

https://us.norton.com/internetsecurity-wifi-what-is-a-man-in-the-middle-attack.html#

https://www.trendmicro.com/vinfo/ru/security/news/cybercrime-and-digital-threats/infosec-guide-defending-against-man-in-the-middle-attacks

https://www.fool.com/the-ascent/small-business/endpoint-security/articles/mitm/

https://www.cnet.com/news/privacy/mcafee-source-code-is-easy-target-within-corporations/

Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice.   Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or CPA.

So, who leads the charge to regulate cryptocurrency?

Headline:  Who is Senator Lummis and what is she doing to help crypto?

What Exactly  is Senator Lummis doing to support crypto?

First, this is NOT a political blog, goodness knows that there are enough of them.  But, there seems to be one lawmaker more than most who is both clued in and interested in governing cryptocurrency.   Her name is Senator Cynthia Lummis, from Wyoming.   (She is often joined by another senator from “across the aisle” Senator Gillibrand.)  Together, they are introducing into the Senate, an Act that might help to bring certainty to cryptocurrency issues.  I genuinely wish the 2 senators lots of luck, and intestinal fortitude.  They already seem to be resolute enough.

I focused upon Senator Lummis because she seems to be the first name on the legislation, and, seems to have other leanings that suggest that cryptocurrency might not be on her short list of recommendations..  In point of fact, she is quoted as having said,   “I was skeptical,” said Lummis, R-Wyo. “The notion of having something of value on the internet that I could never get my hands on was foreign to me.”

So, what is her background to place her in this position?

In her time in state level politics, she served for several terms  as state Treasurer for Wyoming and on the Agriculture committee.   In both of these positions, she had to learn a lot about finance and law, and several different industries.

In 2013, she first became truly aware of (and concerned about) cryptocurrency.

In 2017, she attended a conference on cryptocurrency in Cancun.   She was so absorbed by the conversations at the conference, she never made it to the beach.

In 2019 she ran for Senate, and won election for the 2020 term.  She also became the first member of the Senate to own cryptocurrency.

In 2021, she attended The Bitcoin Conference in Miami with fellow cryptocurrency-aficionado, Rep. Warren Davidson.  At this conference, the main argument against cryptocurrency was that it was easier to commit crimes with it.   Senator Lummis replied, “It’s easier to hide a crime committed in U.S. dollars than it is to hide a crime committed in Bitcoin.”

Since then, she has been adding to her staff individuals who bring specific cryptocurrency experience and skills.  Earlier this year, she and several other parties filed amicus briefs with the federal courts in defense of Coinbase and BinanceUS. (Think of an amicus brief as a way of saying, hey, these guys might have a point.”) They are being pursued by the SEC, who claim that they fulfill mutually exclusive roles of exchange, and broker with relation to cryptocurrency.  Her ground is that cryptocurrency is not an investment contract, and therefore not a security.  In her own words, “Although the SEC seeks broad authority over crypto asset markets, most legislative proposals in Congress would instead grant much of that authority to other agencies. Unsatisfied, the SEC seeks to circumvent the political process to commandeer that authority for itself,”

What IS in this bill?

According to Lummis’ office, the draft bill they hope to introduce this spring gives “clear guidance to regulators about which assets belong to different asset classes, protects consumers through strong standards and mechanisms for policing bad actors, regulates stablecoins, and creates a new digital asset self-regulatory organization under the joint jurisdiction of the CFTC and SEC to oversee the digital asset markets.” 

This approach seems to have the support of the industry too.  Both the Crypto Council for Innovation and the Chamber of Digital Commerce  loudly sing her praises, calling her “a visionary,” among other accolades.

Lummis argued that Bitcoin fits in a well-diversified retirement portfolio — it can fluctuate in price day by day, but long term, she sees it going nowhere but up. “I think it makes sense as part of a diversified asset allocation,” she said. “It is the store of value. It’s not the one you want to spend, it’s not the one you want to throw off income. It’s the one that’s going to grow in value

The Verdict

In doing research for this post, I have made 2 observations that I think are worth making:

1.   All examples I have seen against cryptocurrency compare it to nuclear meltdowns, and that seems disingenuous.  Nuclear accidents leach into ground waters and affect people hundreds of miles away.  At worst, in a rug pull, the investor loses all of the money they have invested, and then, the financial blood-letting stops.
2. All examples I have seen suggest that hyper-inflation is an inherent problem with cryptocurrency, yet nobody in this camp mentions anything about the hard limit of $21,000,000 BTC.  This problem has been foreseen, and most cryptocurrencies have features to mitigate this problem.

Finally, it should be said that she believes in the central tenet of decentralized finance: It appears to be way too easy for the central authority to grow outrageously in authority.  This is echoed in her words within her amicus brief:

 “The SEC’s attempt to shoehorn an entire new class of assets into the existing definition of a ‘security,’ and thereby add to the definition enumerated by Congress, exceeds the SEC’s authority, encroaches on Congress’s lawmaking, and contravenes the separation of powers. The SEC cannot legislate by enforcement.”

REFERENCES

SEC’s Coinbase (COIN) Lawsuit Should Be Dismissed, U.S. Senator Lummis, Crypto Lobby Orgs Say (coindesk.com)

Senator Lummis files amicus brief supporting Coinbase’s dismissal motion against SEC (cointelegraph.com)

How Cynthia Lummis, a rancher and grandmother, was crowned the Senate’s queen of crypto – Roll Call

New York Senator Kirsten Gillibrand Joins Rep. Senator Cynthia Lummis’ Crypto Bill Proposal (cryptopotato.com)

Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice.   Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or CPA.

 

The Casino is Being Built as You Play.

Headline:  Take your Chances, TWICE!!!!

Body: 

Well, once again, I find myself resorting to the analogy of using 2 stacked rolling chairs to change a lightbulb.  Let me explain.    Casinos are one thing: You walk in with a small amount of money that you are willing to lose, for the small chance of winning a REALLY BIG payday.  This is very risky, but in moderation, can be exciting and done responsibly.  But, now, the casinos are beginning to accept cryptocurrency and the boil-out is often, one doesn’t even know how much they are “down” until it is well and truly too late.   On the other hand, if you win big, it can really be BIG!!!!  So, this seemed like a really good basis for an entry.

OK, so what is this thing that we are talking about?

We are talking about an online casino, known as Stake.com (Hereinafter referred to as “Stake.”).   Doubtless, you’ve seen ads for the slot machine games?   Same sort of thing, only, the account that you setup has kinds of cryptocurrency instead of fiat currency.     This casino was launched in 2017 by Mr. Craven and his co-founder Bijan Tehrani; and they have a really interesting history.   They met playing a fantasy-based role-playing game where they first tested the concept of online gambling.    In observance of their efforts, they were banned from the game.  Their real enterprise has been growing FAST!!  The $105 Million in revenues in 2020 increased to $26 Billion in 2022.   Currently based in Curacao, they provide crypto and non-crypto gambling services all over the world.  

Why was it so successful?

Star power is a large portion of this answer.   I only know the name of 1 current rapper, and that’s Drake.  Drake had some gambling in this casino and on the basis of Bitcoin, he had won $38 Million USD.  The owner, Mr. Craven, might’ve displayed displeasure having to pay this out, but I suspect that such a high-exposure winner will make him lots of money over the longer term.  (And I think he knows it.)  And it’s not only Drake: There are Premier League teams and F1 teams that endorse this business.

So, is it falling apart?

Yes.  Former partners of the duo are suing for stealing their intellectual property.  In a separate action, there is a class of people claiming that Craven and Tehrani helped FTX owner Sam Bankman-Fried cover up a loss of several Billion dollars.    In the latest news, Stake has had to deal with a hack of $41 Million held within “hot” wallets on the site.     Amazingly, they were only out of business for a few hours before resuming operations.

That’s A LOT of money!!  How was it not seen?

The hack started with some unusual transactions just after noon on a Monday.    Little by little, bits of cryptocurrency were moved off-chain and transferred to fiat currencies.  This happened at both Stake.com and at Binance.  An additional $25 million was siphoned off of Binance Smart Chain and Polygon, according to blockchain investigator ZachXBT.  I have read many descriptions of this attack, and the miscreants are repeatedly described as “methodical.”  They would drain only the “hot” wallets, and they wouldn’t drain them completely.

So, what can I learn from this?

You can learn a few things:

1.   Keep most of your digital assets in a cold wallet, one which you keep secured in a safe or other secured environment.  Hot wallets should only contain a VERY small percentage of your digital assets.  And for Heaven’s sake, please record your password legibly in several places.
2. Stay out of casinos, usually.   When you do go, have a firm budget, and only bet currencies that you know the true value of.  (This dis-qualifies cryptocurrencies.)
3. If you do go with a hot wallet, make sure that it is hosted by Coinbase, Binance,  or some other trusted custodian.  They have professionals who know a lot more about cyber-security than you and I do.

REFERENCES

Crypto casino Stake reopens withdrawals just 5 hours after $41M hack (cointelegraph.com)

Drake-Backed Crypto Casino Stake Loses $40M in ‘Unauthorized’ Transfers – Decrypt

Crypto Casino Stake Opens Withdrawals After Reported $40M Exploit (cryptonews.com)

Stake.com: the Aussie gambling minnow that made it big on crypto | Financial Times (ft.com)

Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice.   Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or CPA.