BKCoin Fraud Allegations, Binance Drama, Bybit MasterCard Debit Card, Kraken Bank Launch Plans and More

Centralized crypto exchanges have remained the target of enforcement activity from the various regulatory bodies in the US. The new week has, expectedly, started with this narrative weighing down on crypto companies operating trading platforms. Here is a rundown of the latest developments around exchanges:

Bybit to roll out physical debit card in collaboration with MasterCard

Dubai-headquartered crypto exchange Bybit on Saturday announced that it suspended USD deposits via bank for its national and international customers, citing service outages from a partner. The exchange’s announcement post said the funding option wouldn’t be available until further notice. Though Bybit did not name the troubled end-point processing partner, its announcement came just a day after crypto-friendly bank Silvergate said it would shut down its Silvergate Exchange Network (SEN), terming it a risk-based decision.

Wire deposits in dollars were suspended immediately following the announcement, and the exchange told users they have until Mar 10 at 12:00 am UTC to complete any withdrawals they wished to. To avoid any potential disturbances arising from the current circumstances, Bybit advised customers to withdraw their USD as soon as possible. Bybit confirmed that other methods to initiate deposits and withdrawals remain fully operational, including the option to buy crypto via credit card and Advcash – a crypto wallet withdrawal service launching soon to expedite the user experience.

The exchange added that the customers’ dollar assets are safe, despite the temporary suspension of deposits via wire transfer, emphasizing that its platform employs robust security measures to safeguard all user funds. Markedly, Binance was in a similar situation last month when it said it was disabling US dollar bank transfers. Though it did not give a reason for the decision, the exchange said it would restore the service soon.

Following the decision to halt USD transfers, Bybit has on Monday updated users that it plans to bring a new debit card offering that will allow users to settle payments for goods and services using held crypto. In addition to Bitcoin and Ethereum, the MasterCard-powered card will support other tokens, including Ripple (XRP). The user’s crypto holdings will be converted into fiat – Pounds or Euros – when making payments. The card offering will be made possible by a partnership with Mastercard, whose network will facilitate the transactions. Users will also be able to withdraw in fiat from their cryptocurrency balances. The service will be available as a free virtual card for online purchases at launch. The physical Bybit cards, issued by London-based payments solutions provider Moorwand, are expected to arrive next month.

Kraken still focused on launching Kraken Bank

In September 2020, Kraken revealed it had received approval from the Wyoming State to form a Special Purpose Depository Institution (SPDI). Kraken Bank would be headquartered in Cheyenne, operating under federal and state laws as a custody bank for digital assets. It would be the first regulated US bank to provide “deposit-taking, custody and fiduciary services for digital assets,” according to the announcement. The bank would initially have its operations limited to within the US (across 49 states) with expansion plans to extend the bank accounts outside in place.

In a more recent update, Kraken’s support team confirmed that the exchange still looks to “operate a fully independent bank that will reduce [its] reliance on third-party financial institutions” in a tweet response. The vague post, however, didn’t reveal when the bank would be open. Kraken’s chief legal officer, Marco Santori, also appeared to confirm that the exchange hasn’t changed its focus on the same in a podcast session.

Fresh concerns emerge around Binance and Binance.US

The activities of Binance’s global business and its US affiliate Binance.US have come under serious scrutiny as regulators and lawmakers alike lay measures to protect market participants. Last week, a trio of US Senators wrote to Binance requesting documents confirming compliance and explaining the relationship with its US unit, Binance.US. The letter added to concerns around the exchange, which has been the subject of several investigations for a while. A more recent report from the Wall Street Journal citing company documents and interviews with ex-employees detailed that Binance approached SEC chairman Gary Gensler in 2018 and 2019 before his appointment to head the agency.

Plans to avoid scrutiny and maintain a good rapport with market watchdogs

The exchange specifically sought the services of the former Commodities and Futures Commission as an advisor while he was working at the Massachusetts Institute of Technology, according to the Mar 5 report. A Binance employee, Ella Zhang, met with Gensler in October 2018 to discuss the opportunity, but he declined the offer. Binance's founder CZ, too, met with Gensler in another meeting in March 2019. The report implied that Binance wanted Gensler on its side based on rumors that he would end up in a key regulatory position if Democrats won the elections.

It also suggested Binance executives set up the US-serving unit, Binance.US, to draw regulatory inquiries while keeping Binance out of the limelight. The exchange executives hatched the plan to mitigate the potential legal consequences for its unapproved Stateside operations. Some employees proposed that Binance maintain a “purely contractual” relationship with the subsidiary so they would identify as separate operations. The exchanges, however, had more ties with each other than they let on, at some point even “mixing staff and finances and sharing an affiliated entity,” according to the report. The claims come barely three weeks since Binance chief strategy officer Patrick Hillmann said the exchange anticipated fines from US regulators for non-compliance in its early days.

Court hearing to approve Binance.US acquisition enters third day

Last Friday, during the Voyager Digital bankruptcy hearing, a lawyer for the SEC, William Uptegrove, argued in court that Binance.US has been running a securities exchange without registration. The SEC staff raised concerns that the offering and sale of Voyager’s VGX token constituted securities transactions. Worth mentioning his argument doesn’t represent the stance of the commission. Advisors from the bankrupt crypto brokerage firm, seeking approval for its acquisition deal by Binance.US, have since dismissed the claims. The lender denied the same in a court filing submitted on Sunday seeking to accelerate the proceedings of its bankruptcy case. Voyager said it wants to avoid incurring ‘losses’ to its acquisition offer, currently at $10 million monthly until the deal is sealed.

Australian regulators were looking into Binance’s derivatives platform

Binance has barely had a relief from its legal troubles. On Feb 23, Binance revealed that it closed the derivatives positions of some 500 Australian users who it had incorrectly classified as wholesale retailers. In a notification sent to the affected users, the Binance Australia Derivatives platform required that they must provide the evidence that they meet the requirements of being classified as a “wholesale investor” to continue using the platform and that it was working on a remediation and compensation plan to address any refunds owed to users in response to this update.

A subsequent Feb 24 Bloomberg report said the Australian Securities and Investments Commission (ASIC) had initiated a “targeted review” of Binance's local derivatives business over its classification of retail and wholesale clients. Before the news broke, CEO Changpeng Zhao noted the exchange would review and consider whether to restart futures offerings in the country. Binance previously said it complies with Australian regulations in closing user positions. However, the ASIC has raised concerns over its adherence to financial services license obligations, as it had yet to report the matter to the regulator but only made a social media post about it.

CZ-linked market maker received $400M from independent US affiliate of the exchange in Q1 2021

A Feb 16 Reuters report hinted at a possible contagion between the global platform and its American subsidiary, Binance.US. The news outlet said that an investigation into Binance's banking records and company messages showed it had access to a Silvergate Capital-hosted bank account that allegedly belonged to the US subsidiary. The report disclosed that Binance.US operating firm BAM Trading started sending money to market maker Merit Peak, registered as managed by Binance CEO Changpeng Zhao. In excess of $400 million was sent to this entity.

While it is not clear whether these were customer funds, the exchange's publicly available terms of use indicate that Binance.US held customer funds on Silvergate Capital and custodian Prime Trust. Moreover, Reuters says that some Binance.US executives were apprehensive about these transfers because they occurred without their knowledge. CEO of Binance.US at the time, Catherine Coley, sought clarification from Binance finance executive Susan Li regarding the outflows, terming them unexpected. She also enquired about the origin of the funds in question but did not get details on the money transfers.

It was also determined that apart from the finance executive, several other high-ranking Binance.US personnel had access to the Binance.US Silvergate account. Several ex-regulators and executives at Binance and Silvergate have warned of potential conflicts of interest between Binance.US and its customers due to Merit Peak's undisclosed activities and ownership on the platform. Furthermore, the SEC referred to the market-making firm as a Binance entity in its December 2020 subpoena to Binance.US, seeking information on the firm.

Binance.US denied any wrongdoing

When asked about the transactions described in the bank records, Binance.US representative Kimberly Soward declined to comment on the matter. Instead, in a statement, she mentioned that the information used in the Reuters report was outdated. To highlight that the recent developments are inaccurate, the exchange clarified that only its employees have access to its bank accounts and that Merit Peak is a former market-making firm that ceased all activity on the platform in 2021. Top of it all, Binance.US said it always maintained a 1:1 reserve and asserted its commitment to transparency and maintaining the highest standards of security and regulatory compliance.

SEC goes after BKCoin and its principals for alleged fraud

The US Securities and Exchange Commission last month filed a complaint against Miami-based hedge fund BKCoin for running a scheme using funds raised from investors. The commission alleged as per a recent Mar 6 statement crypto fraud involving approx. $100 million raised by the investment adviser firm’s co-founder Kevin Kang from more than 50 investors. The emergency action divulged that Kang “misappropriated [the funds], created false documents, and even engaged in Ponzi-like conduct. Kang used as much $12 million for his individual needs.

In related news, New York Attorney General Letitia James recently sued crypto exchange CoinEx for operating in the jurisdiction without regulatory approval. A Feb 22 press release said CoinEx allowed the services available via its website and mobile apps to be accessed in  New York, violating the state’s Martin Act.

False representation as a crypto exchange

The Attorney General’s office insisted that since the Hong Kong-based crypto exchange is unregistered with either the Securities and Exchange Commission or the Commodities Futures Trading Commission (CTFC) as required by law, it is not a crypto exchange. Moreover, it failed to comply with a subpoena recently sent by Letitia James’ office requiring it to detail its activities in the state. Owing to these violations, the Attorney General wants a court order preventing CoinEx from branding itself as a crypto exchange. Letitia also wants CoinEx to implement geo-blocking such that residents of New York cannot access its website and mobile apps. Responding to the statement, CoinEx said it is actively working to address the allegations raised by the New York attorney general,  insisting that it remains committed to regulatory compliance towards its goal to offer a safe and reliable user experience.