Headline: Why is Binance being removed from the SWIFT network?

Body:  OK, buckle up because this one is an interesting one.   Several months ago, I published an entry about the SWIFT network.   To summarize a summary, SWIFT is an international network between banks, and what is sent back and forth is information about transactions.  Now, cryptocurrency is not fiat currency, and Binance was able to use this network as a reliable way to make all of their transactions, large and small.  The trick is, they needed an actual bank to act as their partner.   That partner is Signature Bank.

What are we talking about?

SWIFT is a network that acts as an on-ramp and off-ramp for cryptocurrency transactions.  Up to now, Signature Bank would get a commission every time they turned around a transaction using the SWIFT network, no matter how large or small.  Now, it appears that Signature Bank is refusing to do any transactions for less than $100,000.  This change is effective February 1st.  Corporate entities are also unaffected.

When and how was this change announced?

Binance announced the news via a January 21st e-mail to its customers.   In the letter, Binance emphasized a few things:

  1.  Binance was not the only one affected.  Signature Bank is applying this decision to all cryptocurrency exchanges with which they do business.
  2. Changing cryptocurrencies into other fiat currencies (e.g. Euros) are unaffected by this event.
  3. Binance is actively looking for a new partner bank.
  4. Binance said that customers would still be able to use a credit or debit card to buy and sell cryptocurrencies.

Interestingly, ETH was also temporarily barred from transactions, pending the outcome of The Merge.   (The 2 chains of ETH transactions will be merged.)

Why is Signature Bank doing this?

In a previous entry, I suggested that the FTX blow-up and several other exchanges  declaring Bankruptcy were making retail investors anxious and so they were often selling off their cryptocurrency positions, leading to a slide in valuations.  In a very similar manner, many financial intermediaries have also been  cutting back on their exposure to cryptocurrency.    (Signature Bank is cutting back by about half, to $10 Billion.)  Silvergate is a similar financial intermediary, and reported a billion dollar loss in the final quarter of 2022, and 90% of that loss was attributed to investment in cryptocurrency firms.   But, there are some transactions that are too juicy to pass up, and these are the corporate ones and the individual transactions over $100,000. (Interestingly, this was an important topic at a New York conference hosted by Goldman Sachs.  This is interesting because Goldman has already invested in 11 digital currency firms, and plans to spend millions more in this area.)

Is this at all related to the efforts of Russia?

The short answer is I don’t know.   What I do know is that in April 2021, Russian finance officials met with Binance and tried to get names and other information related to transactions by political dissidents.  Binance did decide to share this client data.  Binance has continued to operate in Russia since Putin ordered his troops into Ukraine on Feb. 24, despite requests from the government in Kyiv to Binance and other exchanges to ban Russian users. Other major payment and fintech companies, such as PayPal and American Express, have halted services in Russia since the Kremlin launched what it calls a “special operation” to demilitarise and “denazify” Ukraine. One of Binance’s main rivals in Russia, EXMO.com, said on Monday it would no longer serve Russian and Belarusian clients.

So, let’s review.     The government of Russia persuaded Binance to turn over a lot of their customer data.   Binance turned over this client data to the Russian government, ostensibly to ensure future business within the massive markets of Russia.  President Putin then asked the government agencies to come to “unanimous opinion” on cryptocurrency regulation, because they want to encourage firms to do business in Russia.   Toward this end, he cited their “certain competitive advantages” like a very healthy supply of electricity, vital to cryptocurrency firms.  Then, Putin invaded Ukraine.   Many western nations decided to freeze assets.  Six days later, the rouble trading increased 400%.

The Verdict

Binance is in a delicate situation here.   One hallmark of decentralized finance is that there is no central authority.   However, when doing business with an authoritarian-controlled country, this is likely an impossibility.  But, Russia is an exceedingly tempting target for expansion of such a business because of their exclusion from some of the Wester-based banking networks; As a result of this exclusion, the government and businesses are salivating over any way to get money to international  locations.  Binance has apparently made their stand, shoulder to shoulder with any regulators.   I guess what we all have to ask is do we feel comfortable doing business with this exchange, given their track record.   There is no right or wrong answer here, and since we are in the U.S., the sharing of information with regulators is not nearly as frightening.    But, it does violate the prime directive of decentralized finance, so one must be very clear about one’s objectives, and the red lines one is unwilling to cross.






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.

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