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Crypto bulletin

March 29th, 2023

Crypto Bulletin – Week 276

Rare are the weeks without a story in the cryptocurrency industry. The one that ends today for the crypto strategy is certainly not one of them! The U.S. Commodity Futures Trading Commission (CFTC) on Monday filed suit against Binance and its CEO, Changpeng “CZ” Zhao, for trading violations. The largest cryptocurrency exchange in terms of trading volume is allegedly in violation of trading and derivatives rules. According to the CFTC, Binance failed to meet its regulatory obligations by not properly registering with the derivatives regulator.

The CFTC has been investigating the company since 2021. In February, the company admitted that it was likely to face regulatory action in the U.S. and was already working with regulators. As part of its legal action, the CFTC is seeking to force Binance to repay allegedly ill-gotten gains that resulted from the misconduct it is accused of. It is also asking Binance to pay civil penalties and accept a ban on trading as well as registration in the United States.

“Binance has taken a calculated and incremental approach to increasing its presence in the United States, despite having publicly stated its intention to block or restrict access to its platform by its U.S.-based customers.” Explains the lawsuit. “Binance has never been registered with the CFTC in any capacity and has ignored federal laws essential to the integrity and vitality of the U.S. financial markets,” the lawsuit states. “Unless this Court imposes restrictions and injunctions on them, defendants will likely continue to engage in the acts and practices alleged in this complaint.”

Changpeng Zhao responded to the news by calling it unexpected and disappointing. The company expressed its view that the optimal strategy would be to continue to safeguard the interests of its users while working closely with regulators to define an explicit regulatory framework. “The complaint filed by the CFTC is unexpected and disappointing, as we have been working with the CFTC for over two years,” a Binance spokesperson told the website Decrypt.co. “Nevertheless, we intend to continue to work with regulators in the U.S. and around the world.”

In addition to its U.S. presence, technically speaking, Binance allegedly offered its customers leverage when trading in the cash market and designated two product categories as futures and perpetuals for its swaps. Binance is also alleged to have used approximately 300 “house accounts,” all of which were directly or indirectly owned by Zhao, as well as accounts owned or controlled by entities owned by Zhao, to trade on its own platform. Binance reportedly did not disclose this practice to its customers. While this practice is certainly illegal under CFTC rules, it is important to mention that it is a far cry from the fraudulent activities revealed in the FTX saga for example. This type of “market maker” approach is normally used to generate maximum liquidity.

Nonetheless, Binance appears to have been caught red-handed. According to legal analysts, the lawsuit would appear to be substantial enough to deal a fatal blow to the company… at least on U.S. soil. After another lawsuit was filed against Coinbase and Gemini earlier this year, one can really wonder if there is a political angle to this action, wanting to attack the US crypto industry as such rather than targeting specific players for specific wrongdoings.

This lawsuit certainly created downward pressure on Monday. However, as of this writing, the price of bitcoin has regained all of the lost ground, and then some. In short, while the future of Binance is uncertain, the perceived value of cryptocurrencies to investors is not. The past year has been nothing more than an abrupt – but possibly necessary – reminder that “Not your keys, not your coins” and the risks of unregulated centralized firms in the custody of crypto assets.

U.S. prosecutors unveiled a new indictment against Sam Bankman-Fried on Tuesday, accusing the FTX founder of paying a $40 million bribe to Chinese officials to unfreeze his hedge fund accounts. The latest bribery conspiracy charge adds to the pressure already on the 31-year-old former billionaire, who is currently facing 13 counts related to the collapse of FTX in November. Previous charges against the disgraced FTX founder include wire fraud, securities fraud, conspiracy to commit bank fraud and FEC fraud. There is not a week that goes by without SBF’s future inevitably looking like it will be behind bars. With all the damage FTX has done, no one will shed a tear.

Speaking of crooks in the cryptocurrency world, let’s point out that Terra’s Do Kwon was reportedly arrested in Montenegro last week. “Montenegrin police have arrested a person suspected of being one of the most wanted fugitives, South Korean Do Kwon, co-founder and CEO of Singapore-based Terraform Labs.” Published Filip Adzic, the country’s interior minister. Montenegrin authorities are still trying to confirm that the arrested person is Kwon, as he was in possession of forged documents at the time of his arrest. Last month, Kwon was charged with securities law violations by the Securities and Exchange Commission. The agency accused him of organizing a multibillion-dollar fraud involving an algorithmic stablecoin and other crypto asset securities.

Some things, however, don’t change. MicroStrategy, the software company that is also the largest holder of bitcoin, has paid off the outstanding balance of its $205 million loan from Silvergate Bank in full, amounting to $161 million. As a result, the company terminated its credit agreement with Silvergate and recovered the 34,619 BTC that were held as collateral for the loan. In the same SEC filing, MicroStrategy also disclosed that between February 16 and March 23, it spent $150 million to acquire an additional 6,455 BTC. MicroStrategy and its subsidiaries now own a total of 138,955 BTC. The company says it paid an aggregate price of $4.14 billion to acquire its BTC holdings. At the current price, its holdings are worth $3.8 billion.

The Ethereum Foundation has finally placed a tangible date on the Shapella update that will allow the withdrawal staked ETH in proof-of-stake contracts on the new network. The Shapella network update will be activated on the Ethereum network at epoch 194048, scheduled for 22:27:35 UTC on April 12, 2023. It will be interesting to follow how this update will affect the market price. Will the withdrawal capability lead to a large initial selling pressure? Or will the ability to integrate and withdraw from staking contracts increase the attractiveness of the network to investors?

Bitcoin’s liquidity is at a 10-month low due to the banking crisis in the United States. While low liquidity may facilitate higher prices as long as buyers are there, it is more likely to manifest itself in increased volatility. Low liquidity around an asset leads to inefficiencies in the market due to events such as thin order books, slippage and wider bid/ask spreads.

Was it this low liquidity that pushed bitcoin to touch $28,600 overnight? One thing is certain, this move has closed out many short positions taken since Monday. According to coinglass data, total liquidations of $136M have been recorded in the past 24 hours. The volume of sellers between $28,000 and $30,000 remains high at the moment. However, we know that the order book can be a mirage when volatility sets in.

Certainly, it is particularly encouraging that the price of bitcoin is only slightly down from seven days ago considering the news surrounding Binance. Many – including us – are watching the crucial 200-week moving average at $25,500. Most speculators were still expecting it to be tested yesterday before thinking about a possible rebound. Will the surge of the past few hours be enough to change sentiment and allow us to look up instead? One thing is certain, the technical picture remains bullish at this time. A new weekly close above this moving average would confirm the recovery. A close above $30,000 would put us squarely in a confirmed bull market.

 

 

All indications are that the first quarter of 2023 has been the opposite of the 2022 picture for bitcoin. Indeed, it appears all but confirmed that it will record its best quarter in two years. The chances that November 2022 prices will be the real bottom of the cycle are consequently looking increasingly strong.

Rivemont Investments, manager of the Rivemont Crypto Fund.

The presented information is as of March 29th, 2023, unless otherwise indicated and is provided for information purposes only. The information comes from sources that we believe are reliable, but not guaranteed. This statement does not provide financial, legal or tax advice. Rivemont Investments are not responsible for any errors or omissions in the information or for any loss or damage suffered. 

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