CZ's Marlo Stanfield Exit
CZ's Marlo Stanfield Exit
CZ fought the law. The law and CZ won -- and BNB lost.
As a longtime champion of CZ and Binance, I found the terms of CZ’s surrender to US authorities extremely bearish for BNB.
First, my TLDR of the surrender terms:
CZ personally pays $50 million
Binance Inc. pays $4.3 billion to various US agencies
CZ surrenders all standard operational control of Binance
CZ faces up to 18 months in prison, which the DOJ will waive assuming CZ totally cooperates w/ DOJ
CZ retains his 50-75% (?) ownership of BNB, worth $15-35bn at current prices, thus full operational control to make sure the DOJ alters Binance’s operations as it pleases
Binance remains on the hook for the $2bn of FTX deposits stolen by SBF to buy FTT back from Binance via Alameda
Immediate implications of these terms:
The vast majority of Binance’s ~$6.5bn of excess reserves ($3.5bn of stablecoins, $700m of BNB, $400m of ETH, and $900m of BTC, plus other coins over customer deposits) gets cleaned out over the next 18 months
BNB’s burns, which I believe equate to CZ engaging in insider selling, will end or be sharply curtailed, since Binance will operationally need to rebuild excess reserves.
Binance will implement an extremely onerous (probably more onerous than what Coinbase has today, given that COIN is at war with the DOJ) compliance/AML regime which structurally raises BNB’s customer acquisition cost as well as opex
Binance loses its “tax evasion alpha” to OKX, Kucoin and other offshore exchanges. Depositing money at Binance is now shacking up with the DOJ, and people in crypto do not trust the DOJ, for a wide spectrum of legitimate to illegitimate reasons.
Binance’s business model becomes much more similar to Coinbase’s.
Coinbase today is a $25.5bn market cap company with around $155bn of customer deposits (very roughly, $117bn of COIN 9/30 restricted cash * BTC’s 33% appreciation since 9/30). COIN has extremely high fees and, as a result, wide spreads and low velocity. In the industry it’s considered to be a poor product relative to offshore offerings, albeit for reasons beyond its control.
Binance’s main exogenous (excluding BNB) customer deposits are appx. $50 billion, or 1/3 of Coinbase’s, or a bit under $60bn including customers’ BNB balances.
BNB’s ability to attract deposits will be hurt, because they will have to engage in the compliance theater of rejecting a significant % of deposit attempts.
Their opex as a % of revenue will likely surpass COIN’s since BNB has a much smaller deposit base.
This will force BNB to raise fees, which will reduce trading velocity, increase spreads, and thus increase deadweight loss. For that reason alone, they’ll lose share.
The spiral of higher txn fees → lower velocity → lower share → higher txn fees will be especially toxic for BNB, which has far more customers and far less assets/customer than COIN does (thus much higher fee sensitivity per customer).
Finally, because BNB’s breakeven assets per customer will be so much higher, their return on marketing expenses will plunge. Normally, in this situation you’d probably reset global marketing efforts to go after non-US high net worth (HNW) customers.
However, non-US HNW’s have extreme distrust of the US government. At any point in the customer-asset curve, Binance’s return on marketing expense will be far lower. Thus, Binance will probably cut marketing costs.
Long COIN, long OKX, short BNB.
But there’s a bigger-picture driver for BNB’s share losses.
Over the last 10 years, there were 2 ways to deal with the schizophrenia-addled caprice with which the US DOJ ‘regulated’ the crypto industry. COIN exemplified “comply now because the rules will eventually be reasonable.” CZ/Binance exemplified “comply later, because the rules are nonexistent, the regulators are unreasonable, and as an industry, we can actually fight back.”
Binance’s bet — “noncompliance pays” — won. Which was extremely embarrassing for US regulators.
Despite failing to break into the massive US crypto market, Binance still became the industry hegemon by revenue, profits, mindshare, and legitimate (non-wash trading) trading volume.
Binance not only prospered while warring with the DOJ (as opposed to Coinbase, Kraken and others, who ended up being equally hostile to US regulators but lacked the same leeway to fight back), it also proved that the “investment return on US compliance” was extremely negative.
Choking BNB with a terminal level of regulatory costs won’t be in the long-term US regulatory or enforcement interest, but it will disprove the embarrassment that “in crypto, DOJ non-compliance pays.”
Road not taken: BNB as the DOJ’s overseas honeypot
The superficially better outcome for BNB would’ve been to serve as a quiet honeypot for US overseas surveillance, significantly breaching its customers’ privacy vis-a-vis the DOJ in exchange for a much more equal peace (in public) with the US. But the level of publicity around this event rules out that possibility, and probably carried unquantifiable tail risks for CZ and other Binance leadership.
Why did CZ capitulate now?
I have long argued that Binance can’t be destroyed unless a) Tether was very rapidly destroyed, b) the UAE refused to give CZ its sovereign protection, or c) US regulators inadvertently crippled the eurodollar system, which is the underpinning of USDT and any other offshore stablecoin. (C) seemed possible contemporaneous with the SVB and Silvergate shutdowns, but faded out of the picture thereafter.
CZ/BNB were able to fight the DOJ hand-to-hand longer than any dollar-based financial services player because unlike Coinbase and the US exchanges, they were integrated with the eurodollar system, not the dollar system.
Tether, having settled with various US regulators not so long ago, doesn’t seem like it’s in much trouble. Furthermore, Binance has had plenty of time to hedge its USDT exposure by launching new stablecoins; however, it only launched one, FDUSD, supposedly a 50-50 JV between Binance CMO & “Mrs. CZ” He Yi, and Justin Sun. But BNB didn’t promote it (or any other USDT rival) with any particular urgency, despite a very strong commercial reason to do so. (USDT, in addition to being the industry’s largest central point of failure, doesn’t share any of its $4bn annual yield with the centralized exchanges that drive 95% of its user demand.)
Given the relative quiet on the stablecoin front, Binance’s moderate successes in the binance.us case, and time increasingly favoring the industry with the Biden Administration’s falling political standing and industry courtroom victories, I can only surmise that the Hamas/Israel situation jeopardized CZ’s UAE protection and forced his early surrender.
Which would be an incredible irony, given the proven falsehood of the WSJ-Hamas story, and the fact that Hamas’s biggest financier, by far, has been the US government.
