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The Wolf Den #748 - The SEC Goes All In Against Binance
Sh*t just got real.
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In This Issue:
The SEC Goes All In Against Binance
Bitcoin Thoughts And Analysis
Volcano Mining Returns
Apple Was Overshadowed
WTF Is The SEC Doing?
Will The Fed Raise Rates Again? War On Inflation Continues | Macro Monday
The SEC Goes All In Against Binance
In yesterday’s newsletter, I wrote that crypto investing is a test of one’s capacity to tolerate pain, and that crypto is a market in which only the resilient survive. I wrote about this topic in regard to price action, but it equally applies to narratives and fundamentals - arguably harder tests for investors to endure. If you plan to stick around in this market, I suggest you take a deep breath.
Things just got more serious.
Yesterday, news broke that the SEC is suing Binance and its founder CZ. As expected, Twitter immediately blew up and deep speculation ran rampant. I will spare you the awful takes.
I would be lying if I said this wasn't a serious matter. Inside the Goliath 136-page SEC complaint are a number of serious accusations against Binance. It will take weeks to properly analyze the document and years to settle. As I present the SEC’s argument, please bear in mind that this complaint is the SEC coming in with all guns blazing. They have thrown everything AND the kitchen sink at Binance. Binance will mount a serious defense in the coming years, and the court will likely push back significantly on many points, as seen with the Ripple case. My guess is that the they will settle somewhere in the middle, with a hefty fine and some restrictions, but it is far too early to tell.
Let’s go over some of the key details.
Plaintiff - The SEC
Defendants - Binance, BAM Trading Services Inc. (“BAM Trading”), BAM Management US Holdings Inc. (“BAM Management”) and Changpeng Zhao
The opener - “This case arises from Defendants’ blatant disregard of the federal securities laws and the investor and market protections these laws provide. In so doing, Defendants have enriched themselves by billions of U.S. dollars while placing investors’ assets at significant risk.”
As you can imagine, there are a lot of accusations being lobbed at Binance, so my plan is to condense the case and share the overarching claims. This is a fluid process that we are parsing by the hour. I am not a lawyer, so please bear with me on this journey. Also, I am not an expert. My goal here is to concisely share with all of you the details that we know so far.
Here are the major allegations against the defendants:
unlawfully solicited U.S. investors to buy, sell, and trade crypto asset securities through unregistered trading platforms
unlawfully offered three essential securities market functions—exchange, broker-dealer, and clearing agency—on the Binance Platforms without registering with the SEC.
unlawfully engaged in unregistered offers and sales of crypto asset securities
designed and implemented a multi-step plan to surreptitiously evade U.S. laws
Zhao and Binance were intimately involved in directing BAM Trading’s U.S. business operations and providing and maintaining the crypto asset services of the Binance.US Platform.
put the safety of billions of dollars of U.S. investor capital at risk and at Binance’s and Zhao’s mercy
Below is another allegation that I separated because of its severity:
billions of U.S. dollars of customer funds from both Binance Platforms were commingled in an account held by a Zhao- controlled entity (called Merit Peak Limited), which funds were subsequently transferred to a third party apparently in connection with the purchase and sale of crypto assets.
In short, the SEC is alleging that Binance (including Binance.US) has done (and is doing?) everything wrong as a crypto exchange. The SEC is claiming that Binance evaded regulation, offered trading of securities, put customer funds at risk, and traded against customers with customer funds. The last bullet point I separated because it not only opens the door to a criminal lawsuit, but also allows people to draw comparisons (likely unfounded) to the FTX fraud.
I told you this wasn't going to be easy.
We have some context here - crypto is not the only place the funds have been commingled in the past. Here are a few other examples, with penalties displayed.
Before I continue down this rabbit hole, let me state clearly that I do not wish to cause fear or panic. My goal is to raise awareness and present the information that we have. That way you can make rational decisions that best suit you.
To say that Binance is another FTX is a scary thought. It is worth noting that Binance has survived a number of “bank runs” and massive withdrawal events in the past year, with zero indication that their solvency is in question. FTX could not do the same.
That said, we simply don't know the truth behind Binance’s finances. Industry ‘experts’ will tell you that Binance has an infinite war chest of cash while others tell you that Binance’s funds aren’t even backed 1:1. Most seem to believe that Binance is fully solvent at this point in time, even if they played fast and loose with funds in the past. Remember, most of the allegations are based on supposed wrong doings from years ago.
As expected, Binance quickly announced that “All user assets on Binance and Binance affiliate platforms, including Binance.US, are safe and secure.” I am inclined to believe that this is true, but I am not staking my reputation on this. I also believed in SBF, and look where that got me.
There is a segment at the end of the complaint on page 133 titled, “Prayer For Relief” in which the SEC is asking the court to freeze Binance’s assets. If granted, this would effectively freeze everything, including retail funds on the platform. From what I understand, the SEC is pushing for this immediately, but the bar for this request to be granted is high. I cannot image the court granting this request, as Binance customers around the world would be locked out of their accounts, doing significant harm to users. It is an absurd request
There’s still a ton left to discuss, but I am only one man and it has only been one day.
But the case boils down to a few key questions. Are there insolvency issues? Is this a criminal issue and will the DOJ get involved? If this remains civil, can the case be settled by massive fines and penalties? Is this a regulatory hiccups and will Binance be let off the hook? The truth probably lies somewhere in between and it may take years to find out.
After the events of last year in crypto and this year in banking, investors are wasting no time in assuming the worst, but I am not there yet. The SEC has gradually worked its way up the food chain, taking on larger and larger prey, but it hasn't always won. Coinbase remains the final boss, but this case should not be interpreted as a foreshadowing for Coinbase. From day one, Binance and Coinbase have operated in markedly distinct ways on fundamentally different paths; this should be obvious.
On the subject of Coinbase, I am inclined to believe that the SEC is coming for them guns blazing as well. As expected, Coinbase stock dumped on the news - even more than BNB coin! While this may seem surprising, the market is clearly pricing in a wholesale attack on the crypto industry by the United States government. It makes sense through that lens for Coinbase stock to suffer, because there’s no bigger play onshore.
As for rumors, there is speculation that CZ might soon step down from his CEO position. I don’t have any personal knowledge on this matter; I am just presenting what I have seen and heard.
Interestingly, the media learned about Binance being sued before Binance did. Was the SEC complaint prematurely leaked, or are underhanded games being played that we're unaware of? We already know the SEC isn't above playing dirty, so I wouldn't be surprised if that’s the case.
The final point to address in the complaint is the mention of 12 assets the SEC wants to cunningly label as securities, bringing the grand total of coins that the SEC has deemed securities in similar suits to 61. See below.
While Ethereum isn't mentioned in the list, that doesn't necessarily call for celebration. There's nothing celebratory about this lawsuit; instead, it calls for unity. If crypto is to triumph, we need to set aside our differences and stand united with regulators willing to join us. Cryptocurrency will face challenges if we convince ourselves that this is a mere 'us versus them' situation - we need all the support we can garner, even from the most unlikely allies.
Lastly, if Binance is found to be a malicious player and needs to be excised, then we'll learn from it. However, at present, the SEC is public enemy number one, and that should be everyone’s primary concern.
Even with that in mind, I'm not hesitant to advise that it's imprudent to casually leave funds on Binance or any other exchange. There's never been a more suitable time to contemplate cold storage. You owe your loyalty not to any platform, but to yourself.
Thus far, the market has remained robust, but there's still a lot to learn. The FTX collapse marked the nadir of the bear market, so it wouldn't surprise me if the Binance lawsuit turns out to be the low point of this pullback. Of course, the entire landscape changes if solvency becomes an issue, but let's hope we don't reach that stage. This is a significant new scenario to navigate, so I'll strive to cover it as it develops.
Lastly, make sure to tune into Crypto Town Hall for the most current coverage of everything. I intend to leave no stone unturned.
In case you missed it, the news broke during yesterday’s Crypto Town Hall, which continued on for 3 hours before spaces crashed. We had 240,000 people listen in live!
I will also be discussing it with crypto Lawyer David Silver on YouTube at 9 AM EST.
Bitcoin Thoughts And Analysis
You know what number I am about to say, right? $25,212. Price front ran this level so far about a couple of hundred dollars, but it’s an area that I have been watching for 3 months.
At this point, we have majorly oversold RSI on lower time frames, while the daily is not there yet. I would look for another push down to for bullish divergence and then, game on in my mind. No guarantees, but good risk reward on that play.
Bitcoin also dumped about $1000 when the news broke of the CFTC complaint against Binance… then the market rose again. Not saying it will happen again, but we do have some context for quick overreactions to news.
Yes, I keep sharing the same chart. Why? Because when ETH outperforms Bitcoin, altcoins tend to perform well. And even with the Binance and news and correction across the market, ETH is trying for a weekly breakout through resistance. Need to wait until SUNDAY for confirmation. ETH/USD is down, but ETH/BTC is up.
If Ethereum can show relative strength in this situation, then I would watch closely for a bigger move soon.
US futures and European stocks fluctuated in early Tuesday trading, with the Australian dollar rising after an unexpected interest rate hike by the Reserve Bank of Australia. US market indicators were muted, following Monday's decline of the S&P 500, and Apple Inc. dropped 0.4% in premarket trading. In Europe, German bonds advanced as consumer expectations for euro-area inflation significantly decreased in April.
The Reserve Bank of Australia, citing high inflation, suggested tighter monetary policy might be needed, resulting in a 1% increase in the Australian dollar. John Bromhead, a strategist at ANZ Banking Group Ltd, echoed the global challenge of combating high inflation levels.
In commodities, wheat prices rose up to 3% following news of Russian forces damaging a dam in Ukraine, posing a potential threat to Black Sea grain supplies. The US dollar remained steady, while Asian stocks hit a three-month high, propelled by a rally in Chinese developers. Beijing seems to be taking measures to boost the economy, with some of the largest banks being asked to reduce their deposit rates.
Key events this week:
Rate decision in Poland, Tuesday
China forex reserves, trade, Wednesday
US trade, consumer credit, Wednesday
Canada rate decision, Wednesday
EIA crude oil inventory data, Wednesday
Eurozone GDP, Thursday
Rate decisions in India, Peru, Thursday
Japan GDP, Thursday
US wholesale inventories, initial jobless claims, Thursday
China PPI, CPI, Friday
Some of the main moves in markets:
The Stoxx Europe 600 was little changed as of 10:05 a.m. London time
S&P 500 futures were little changed
Nasdaq 100 futures were little changed
Futures on the Dow Jones Industrial Average fell 0.1%
The MSCI Asia Pacific Index rose 0.3%
The MSCI Emerging Markets Index was little changed
The Bloomberg Dollar Spot Index was little changed
The euro fell 0.1% to $1.0699
The Japanese yen rose 0.2% to 139.24 per dollar
The offshore yuan fell 0.2% to 7.1329 per dollar
The British pound fell 0.2% to $1.2419
Bitcoin rose 0.3% to $25,720.39
Ether rose 0.6% to $1,816.53
The yield on 10-year Treasuries declined two basis points to 3.66%
Germany’s 10-year yield declined five basis points to 2.33%
Britain’s 10-year yield declined two basis points to 4.19%
Brent crude fell 2.2% to $75.03 a barrel
Spot gold was little changed
Volcano Mining Returns
While Binance's saga has dominated recent news, there's another compelling story making waves if you scratch beneath the surface. Tether has injected a whopping $250m into El Salvador’s ambitious $1b volcano project. This contribution marks the completion of the fundraising efforts, greenlighting the start of Bitcoin mining in the northern city of Metapán.
To be christened "Volcano Energy," the park intends to harness the power of both wind and solar energy, with the anticipation of generating over 1.3 exahash/second (EH/s) of computing power. If you're puzzled because the initial proposal involved leveraging energy from a volcano, you're certainly not alone. Yet, the official press release clarified that "the site is intended as a pathway to our geothermal future."
It's undoubtedly encouraging to observe projects continuously securing funds, suggesting a vibrant future for the crypto sphere. However, the ongoing Binance developments deliver a substantial blow, which, for now, eclipses all other narratives in the space.
Apple Was Overshadowed
Was it only my Twitter feed, or was Apple's major VR announcement entirely overshadowed by the Binance news? Regardless, the headset appears bulky and will set you back $3,499 if you want to own one. It's certainly not designed for everyday consumers, but it will undeniably be intriguing to see what sort of commercial applications stem from this product. There's considerable potential for the product to intersect with crypto if it achieves success in gaming... hint, hint, metaverse. Every new innovative product seems odd at first; VR glasses will require a period of adjustment before they can truly go mainstream.ream.
WTF Is The SEC Doing?
Is the SEC attempting to appear hip? Their effort to incite amusement and attract attention on social media is lamentable at best. I anticipate more from a government agency, but then again, we're talking about the SEC, an organization often criticized. Crypto Twitter already frequently targets the SEC, and posts such as the following will not improve the SEC's reputation in this arena.
Dave Weisberger, Co-Founder and CEO of CoinRoutes, and Mike McGlone, Senior Macro Strategist at Bloomberg, discuss the upcoming Fed's decision on the interest rate hike and the inflation problem.
The views and opinions expressed here are solely my own and should in no way be interpreted as financial advice. Every investment and trading move involves risk. You should conduct your own research when making a decision. I am not a financial advisor. Nothing contained in this e-mail constitutes or shall be construed as an offering of financial instruments or as investment advice or recommendations of an investment strategy or whether or not to "Buy," "Sell," or "Hold" an investment.
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