Crypto's Eternal Winter

Ed Zitron 8 min read

We have now entered the age of consequence, where the results of foolish decisions have compounded upon themselves so viciously that entire institutions are crumbling in front of us.

As I predicted a year ago, Binance and Changpeng “CZ” Zhao have faced a massive reckoning as a result of failing to hold together the crumbling fraud of the cryptocurrency industry. Binance has settled with the Department of Justice to the tune of over $4 billion (just over $2.5 billion in forfeitures and $1.8 billion in criminal fines), along with both a guilty plea from CZ and his immediate abdication as CEO of Binance as a result of both criminal and civil charges against the company and CZ himself. The charges include directly breaking anti-money laundering laws (including aiding in nearly $900 million in transactions between US accounts and persons located in Iran), unlicensed money transmission, and violating the Bank Secrecy Act.

CZ himself will have to wait until February for his sentencing, and won’t be allowed to return to his home in the United Arab Emirates until it takes place, likely because the UAE has no extradition treaty with the US. $1.8 billion of the above fines will also be credited toward agreements with the CFTC, FinCEN and OFAC. CZ must also personally pay $50m in fines as part of Binance’s plea deal with the US Department of Justice, and has relinquished his voting rights in Binance.US to a (purportedly) independent third party.

Per the deal, Binance will have to appoint an independent compliance monitor for three years to “remediate and enhance [its] anti-money laundering and sanctions compliance programs,” and CZ will be barred from touching anything Binance-related for 3 years — yet he still remains the largest stockholder in the company, owning 70% in mid-2022, according to a Forbes analysis.

This is the end of a long road that began in 2018, only a year into Binance’s existence, with a sprawling investigation that involved interdepartmental bickering over whether the DOJ had enough evidence to prosecute, and should, theoretically, be a stark lesson to the rest of the cryptocurrency industry about not breaking the fucking law.

Since the announcement of the charges, over a billion dollars has flowed out of Binance, and unbelievably there are still some that think it’ll survive:

“The sum of $4 billion is clearly very large and will create real pain for Binance’s balance sheet,” Yesha Yadav, Milton R. Underwood professor of law and associate dean at Vanderbilt University, told CNBC via email.

“However, this fine does not appear aimed at dealing a fatal blow to the exchange. Based on Binance’s dominant position within the crypto-ecosystem over a number of years, CZ’s personal wealth ... and continuing trading volumes despite declines in overall crypto trading volume as well as in Binance’s market share relative to other venues, I doubt that Binance will face risks to its solvency in paying this fine.”

While Binance might not be identical to FTX, there is a reasonable likelihood it’s just as crooked, and I’d argue equally as vulnerable. Back in February, Forbes published a remarkable exposé into Binance’s finances, revealing it they had transferred $1.8 billion in stablecoin collateral — the same collateral that was meant to be backing customers’ funds — to crypto hedge funds like Cumberland and, of course, Sam Bankman-Fried’s Alameda Research.

We still have no clear understanding of how Binance operates, other than the fact it lacks rigorous Know Your Customer (KYC) or Anti-Money Laundering (AML) policies. The company is officially registered in the Cayman Islands, a jurisdiction known for its generous corporate secrecy laws, and has no real headquarters — though it does operate several offices that serve as regional headquarters, including one in Paris that was raided by law enforcement earlier this year (which CZ described as a “surprise … on-site inspection,” one that’s a routine part of operating a regulated business in France). By design, the company is a black box, intended to obfuscate and deflect any real scrutiny.

Binance has spent a year trumpeting its “proof of reserves,” yet has never been professionally audited (in fact, its auditor quit!), only accounts for 31 of the 350 different digital assets it lists on said proof of reserves, and doesn’t share anything about any debts or other obligations. This is particularly concerning considering the fact that CZ loaned BAM — the holding company for Binance’s US arm — $250 million that he has “not taken back,” despite claiming in December 2022 that Binance “has no outstanding loans,” and that liabilities (which are, somehow, not loans) are “harder” to quantify. Additionally, Binance has been winding down its BUSD stablecoin after the SEC marked it as an unregistered security back in June.

It’s really important to remember that despite the Department of Justice being done with Binance, the SEC is still investigating Binance and Binance.US and remains suspicious that CZ may have a back door to the US entity’s funds. Binance US’ attorneys have claimed the SEC’s case has seriously damaged the company — assets on the exchange are down nearly 90%, and the site has lost half its users.

That’s exactly what awaits newly-crowned Binance CEO Richard Teng, who claimed in a blog post that Binance would “effectively contribute to the development of a globally harmonized regulatory framework that will foster innovation while providing critical consumer protections.” When run through a bullshit-to-English translator, this effectively means the end of what made Binance rich — to quote Attorney General Merrick Garland, “[turning] a blind eye to its legal obligations in the pursuit of profit.”

Binance’s entire growth strategy was predicated on breaking the law, working with high-value clients to obfuscate their connections to the US and continue illegally serving them on the platform (versus their US affiliate, which Binance also controlled). Despite allegedly agreeing to stop US customers from using the exchange back in 2019,’s US customers generated trillions of dollars of transactions and over $1.6 billion in profit for the company between 2017 and 2022.

And the biggest problem? Running a cryptocurrency exchange legally just isn’t that profitable.

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US banking laws exist, at least on a basic level, to protect consumers and stop those that the US doesn’t like from accessing US funds and the US banking system. The nature of cryptocurrency runs completely contrary to this ideal — it’s decentralized, (theoretically, but not actually) anonymous and eternally inscribed to the blockchain’s ledgers.

Crypto exchanges make money in the greasiest way, charging both fees on transactions and making money on the spread between when a user sells their crypto and what it actually sells for. Their business model is reliant on screwing users over by charging higher fees, which also makes them entirely beholden to the markets, meaning that cryptocurrency exchanges effectively only make a profit when times are good.

As exchanges get desperate, they come up with new ways to make money. Coinbase shuttered its consumer lending product Coinbase Borrow earlier this year, then launched a lending platform for institutions in September that allows institutional lenders to lend Coinbase their crypto in exchange for real money, “overcollateralizing” (giving Coinbase more crypto than the dollars they’re borrowing) the loan in the process.

The problem with any kind of cryptocurrency loan is that these assets can be traded at all times of the day, and it’s pretty likely that their prices are manipulated, making these extremely dangerous, even with overcollateralization. If (when) a massive crypto crash happens, depositors may happily sacrifice their crypto if it’s worth significantly less than the money they borrowed (much like Adam Neumann and his WeWork stock loan from SoftBank).

And on top of all that, it just isn’t that profitable. Coinbase hasn’t had a profitable quarter since Q4 2021, when it did $547 billion in trading volume, compared to $76 billion in Q3 2023, with the majority of said volume made up of institutional trading, which has declined 17% quarter-over-quarter. In some ways, Q3 2023 was a great quarter for Coinbase, in that it only had a net loss of $2m, versus a loss of $97.4 million in Q2. Amy Castor notes that Coinbase closed the gap with an $82 million debt repurchase and $50m gain in “strategic investments,” two things that the company cannot rely on in the future. What’s even more incredible is that Coinbase still can’t find profitability while making $172 million in interest from the real dollars that people exchanged for stablecoin USDC, which it runs with Circle (and which handles all of the actual costs and infrastructure).

To make things worse, the SEC has made it clear, as Matt Levine put it, that it believes all US cryptocurrency exchanges are illegal, something they’ve punctuated by suing both Coinbase (the 2nd largest crypto exchange by volume) and Kraken (the 3rd largest), both for being unregistered brokers, clearing agencies and dealers, and in Kraken’s case for mixing (“commingling”) upwards of $33 billion in customer assets with its own funds, hot off the tails of doing the same to Binance. Coinbase and Binance were both sued for offering “staking” programs where users could put their cryptocurrency assets in the hands of the platform in return for funds, which the SEC previously fined Kraken $30m for offering.

I realize all of this is complex, and annoying, and frustrating, but to explain it very simply: there is no legal and profitable way to operate a cryptocurrency exchange, and without cryptocurrency exchanges, there’s no real way for the average person to enter the blockchain. Speculative investment in cryptocurrency may stick around, but the fundamental business models of these companies are rickety and highly dependent on cryptocurrency doing well. Even the allure of a Bitcoin ETF, which would allow regular investors to speculate on Bitcoin through their regular brokerage accounts, only stands to turn it into a boring (yet volatile) asset class.

And on a very simple level, where does cryptocurrency go from here? It isn’t a reliable investment or store of value. The underlying technology is yet to prove its usefulness in a non-crypto context. And the other reason — illicit transactions — is becoming less viable as the cryptocurrency ecosystem finds itself under greater scrutiny and forced to comply with the same rules as conventional financial services companies.

Crypto’s big lie was that it could create wealth for anyone — even those who had been sidelined by the inequalities of the everyday economy. Celebrities helped bolster this image by lending their names and reputations to a dog’s breakfast of companies and get-rich schemes, but after the implosion of FTX and the NFT market, and the subsequent legal backlash from stiffed consumers, they are now likely terrified of getting involved.

Eleven public figures — including Larry David, Giselle Bundchen, Tom Brady and Naomi Osaka — face a civil class action lawsuit over their promotion of FTX. Should the plaintiffs succeed, the defendants may find themselves collectively liable for all trading losses, with the cost potentially reaching $8bn Superstar soccer player Cristiano Ronaldo is being sued for over a billion dollars over his promotion of Binance, as well as his Ronaldo NFTs (which went from as high as $77 to just $1). The NFT-based “Stoner Cats” show backed by Mila Kunis and Chris Rock is being sued by the SEC for conducting an unregistered securities offering, and investors are suing multiple auction houses (including the prestigious Sotheby’s) and celebrities like Justin Bieber for their endorsement of NFTs. The last three years of cryptocurrency have been arguably the most damaging hype-cycle I’ve ever seen in tech, with millions of people convinced that they were investing in the future of money, only to see the rich get richer and their holdings turned to dust.

Worse still, when you peel away the financial “value” of these assets, all you’re left with is awkward versions of already-existent technology. Over a decade into its existence, cryptocurrency has produced no killer app or life-changing innovation. In fact, there’s very little usable product to speak of, let alone something that might be fun or interesting outside of deeply niche tech enthusiasts and the cult-like followers still pretending that this industry is developing anything.

We will likely see one more bull run — one for the ages — as whatever smart money left in the ecosystem seeks to escape with their profits. Every cryptocurrency exchange is approaching its heat death, and it is only a question of what will break first — their business models or their spirit.

The loser, as ever, will be the retail investor, who will be conned by a compliant media into believing that this next bull run is the best one yet.

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