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Binance Anticipates Fines from US Regulators, Crypto Custody Services on SEC Radar, and More

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The recent probe into Paxos' BUSD stablecoin offering; first by the New York State Department of Financial Services (NYDFS) towards the end of last week and then by the US Securities and Exchange Commission (SEC) this week, has put some heat on Binance itself.

A Feb 15 story by Wall Street Journal detailed that the CZ-led exchange is prepared to settle with the domestic regulators should it be found culpable for regulatory violations. Binance chief strategy officer Patrick Hillmann highlighted the phase when the trading platform witnessed tremendous growth as a stage where it could have been liable. The Wednesday report indicated that the exchange anticipates fines from regulators in the US to make up for past regulatory issues arising during that period. Th exchange also welcomed guidelines on the remediation process if found at fault.

Blemished past

Markedly, Binance has taken a conciliatory approach to resolve disputes with relevant authorities in jurisdictions where it has been accused of being non-compliant. In the US, the exchange has been named in several probes by various agencies, including the SEC, which stepped into the acquisition of Voyager Digital by the US-operating unit of Binance. The Department of Justice previously initiated an investigation into the exchange in 2018 over suspected violation of anti-money-laundering (AML) sanctions.

A Dec 12 Reuters report, citing four people familiar with the latest developments on the probe, detailed that federal prosecutors failed to agree on a date to move against the exchange and its founder Changpeng Zhao. One group is of the opinion of laying charges due to the compelling evidence already gathered, while the other recommends taking more time before making a move. Meanwhile, the Commodity Futures Trading Commission started looking into the exchange in March 2021 to determine if it offered US-based investors unregistered crypto derivatives. The agency didn't bring any accusations against the exchange though.

Binance CEO dismisses rumors of Circle raising the alarm

Unconfirmed reports surfacing on Tuesday claimed that rival stablecoin issuer Circle sounded the alarm on Paxos' probe by notifying the New York regulator about the lack of enough reserves backing the BUSD stablecoin. Binance CEO Changpeng Zhao dismissed the reports in a Feb 14 Twitter Spaces talk, ruling out that such an act would be unprofessional.

Remarking on the intensified actions by regulatory authorities, CZ urged potential investors and entrepreneurs in the sector to consider moving to jurisdictions like Dubai, Bahrain and France that have been receptive to digital assets in recent days. The heat in the US digital assets landscape has already proved unbearable to some firms, with most resorting to exploring friendlier jurisdictions. Several key figures in the sectors have called for US regulators to change their approach to practicing oversight, including Coinbase CEO Brian Armstrong.

 “America risks losing its status as a financial hub long term, with no clear regs on crypto, and a hostile environment from regulators. Congress should act soon to pass clear legislation. Crypto is open to everyone in the world and others are leading. The EU, the UK, and now HK,” the Coinbase executive wrote in a tweet.

Similar views are shared by Algorand Foundation CEO Staci Warden who averred in an interview on Monday that crypto companies are being walloped instead of being given directions in the form of clear and well-defined rules.

“It's not the regulation so much, it's the way that regulation is taking place,” she said. “They [exchanges] are trying to do the right thing […] and with some better regulatory clarity upfront, they would have, in my view, probably done exactly what the SEC needed them to do.”

The US markets regulator (SEC) confirmed on Wednesday that it is out to extend the latest series of enforcement actions aimed at managing crypto risks beyond centralized exchange and crypto lending firm circles.

Equity firms and pension funds targets of latest SEC proposal

The implosion of FTX group in November triggered a knock-on effect on companies that had exposure to the exchange, extending losses registered last May after the crash of Terra. Market-making firm Auros Global, whose funds have been locked on FTX, missed its second payment of $7.5 million on decentralized finance loans to Maple Finance this week. The market maker filed for bankruptcy in December and missed a wrapped ether (WETH) repayment worth $10.8 million. A Wednesday statement from its primary creditor M11 Credit said that the trading firm had restructured the debt on Maple totaling around $18 million.

Hedge funds and venture capital firms could as well be caught up under the agency's reach in a proposal that was voted upon by a five-member SEC team on Wednesday. Led by Gensler, the commission argued that crypto firms have not been adhering to custodial rules meant to protect investors and involved participants. Narrowing the censure down on exchanges, the SEC chair said current trading platforms are modelled such that they “do not meet the qualified custodian standards of the current rule. Crypto exchanges must comply with a comprehensive registration process under federal custody requirements that mandate the separation of funds belonging to the company and users.

In reaction to the proposal, SEC Commissioner Hester Peirce faulted the market watchdog for rushing the draft, arguing that it could have heavy effects hence the need to review it properly.

“This rule will require a lot of work, and a year seems too short to accomplish all of it,” she said in a statement, adding, “I appreciate the extended time for smaller advisers, but even eighteen months seems like an aggressive timeline for the changes contemplated here.”

Following Gensler's clarification around what entails ‘qualified custodians,' Coinbase notified its users that its Coinbase Custody Trust is in the clear as a qualified custodian. Still, the increased inquiry on centralized exchanges and stablecoin offerings in the US has worked in favor of the native tokens of decentralized solutions like GMX. Market data shows GMX, the token of the GMX derivatives exchange, is trading around an all-time high of $84.

Sam is a financial content specialist with a keen interest in the blockchain space. He has worked with several firms and media outlets in the Finance and Cybersecurity fields.