Dec 5, 2023 - Business

How regulators tamed crypto and helped drive a bitcoin rally

Data: CoinGecko; Chart: Axios Visuals
Data: CoinGecko; Chart: Axios Visuals

Bitcoin on Monday touched $42,000, a level not seen since May 2022 before the collapse of a stablecoin called TerraUSD heralded the start of the industry's meltdown.

Why it matters: The price surge comes thanks to optimism about the possibility of a Bitcoin ETF, as well expectations for Fed rate cuts buoying riskier assets — but this isn't just a market forces thing.

  • A less-appreciated aspect of bitcoin's current run is what happened last month with Binance, the world's largest crypto exchange.

Catch up fast: The company and its CEO pleaded guilty to money laundering and fraud charges, agreeing to pay more than $4 billion — the largest penalty in U.S. Treasury history.

  • Among the charges, Binance laundered money for terrorist groups including Hamas.
  • Despite the current anti-crypto atmosphere among some U.S. regulators, the settlement agreement allowed Binance to continue operating.

Zoom in: But there's a catch. Under the settlement, Binance is required to create an effective anti-money laundering system — under the watchful eye of an independent outside party who reports to federal regulators.

  • "It's the first such arrangement in crypto," explain Henry Farrell and Abraham Newman in a must-read piece for the WSJ. And, they argue it's more significant than the monetary penalty.
  • The new system will transform Binance "from a scofflaw into a watcher and enforcer on behalf of the U.S. government," they write.

Zoom out: The arrangement will change the larger crypto market.

  • Anti-money laundering rules "spread like a virus," the WSJ piece argues. That's because anyone who wants to do business with Binance needs to get their house in order, too. And the people doing business with those Binance users will need to adjust.
  • The U.S. did something similar about 10 years ago with a crackdown on big banks — levying big fines and imposing monitoring arrangements. That terrified "other financial institutions into rapid and widespread compliance," they write.

The big picture: While the crypto market lives on, the vision of what cryptocurrency could be is very different from its early days.

  • Given the Binance deal, it's hard to argue that crypto traders are operating in a decentralized Wild West market outside of U.S. dollar hegemony.
  • Instead, the market has drifted toward centralization where big exchanges — Coinbase, too — operate under the watchful eye of the U.S. government. (Lawbreakers could move to smaller less centralized trading to try to avoid detection.)

Yes, but: Regulators aren't done with Binance. A lawsuit filed by the SEC is ongoing.

The bottom line: A year ago, in the wake of Sam Bankman-Fried's downfall, the future of crypto looked uncertain — but it has survived and even mounted a bit of a resurgence.

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