- The Money Minute
- "I HAZ NO CONFIDENCE!"
"I HAZ NO CONFIDENCE!"
Says the Binance Compliance Officer Who Definitely Should Haz Confidence
I don’t know if it's the interest rate hikes or something in the finance stars but right now is a wild time in financial news. We’ve got a lot to cover with today’s weekly news update. But before we get to our main stories about crypto bros and juicy Wall Street gossip, let’s check in on the situation over at Silicon Valley bank.
On Sunday regulators arranged for First Citizens Bank out of - checks notes - North Carolina to buy Silicon Valley Bank. That means SVB is back to being a normal bank. For a while, the FDIC was fully protecting all deposits at the bank. But now that SVB has been purchased, the FDIC isn’t doing that anymore and are only insuring deposits up to $250,000. For a couple of weeks, it was the un-safest, and then the safest, bank in America. Now it’s just a normal bank. It remains to be seen if the folks over at First Citizens can continue SVB’s reputation of being the start-up investment bank of choice. Or if they even want to. However, this purchase has been great for First Citizens' stock price which shot up after the news of the purchase.
Moving onto the big gossip on Wall Street: on March 22nd, Hindenburg Research dropped a hint that had my group chats blowing up. Now, I’ve talked about Hindenburg Research before on my podcast, Money Rehab. Hindenburg Research is a short-selling group. The way they make money is by identify companies that are deeply flawed or criminally corrupt, borrow shares of their stock to sell, release their information on what is wrong with the company, buy back their borrowed shares at a lower price, pocket the difference, and return those borrowed shares.
Now, you may not agree with that business model, but that is how Hindenburg Research operates. This business model only works if your research is on point. You have to have receipts for your receipts for this to work. And Hindenburg? They have receipts for days. And this time, the target of their investigation is the company Block, formally known as Square, and its CEO Jack Dorsey. Yes, the OG Twitter guy.
There are many different allegations. Hindenburg is saying that Block has misled investors, uses predatory practices that profit off of poor people, and knowingly allows their app to be used for crime. The fraud aspect of this story is central. Block claims to have 51 million active users each month. But the Hindenburg reports say that up to 75% of these accounts are fraudulent accounts. Hindenburg learned this by studying all the available records and talking to former and current employees. But during their research, they also discover just how easy it was to get a fake Cash App account and credit card. To prove this, they got accounts in the name of Elon Musk and Donald Trump, sent money between the accounts, and managed to get Cash App to send them a Donald Trump credit card. Even Jack Dorsey, the CEO of the company, isn't safe from fraud. Hindenburg found five different fake accounts for him. They also looked at the issues with the way Block is being valued. In digging into this, they argue that the profits the company is making are often the result of pretty sus decisions. For example, there are caps on how much large banks can charge in “interchange fees” or merchant fees. Despite essentially being a large bank, Block avoids the limits on those fees by routing a lot of its transactions through smaller banks so that they can charge merchants far more in fees than would be otherwise allowed.
Block also purchased Afterpay, which is one of those buy now, pay later companies. They technically don’t charge interest in the same way a credit card does but by Hindenburg calculations they are charging some of the most vulnerable users— those who can not access traditional credit or afford to pay for things in full with cash— upwards of 289% in interest when you calculate what all the late fees mean for users. And all those fake ghost accounts on Cash App? A large number of them are being used for nefarious means. In particular, a lot of them are for receiving payment for drug and sex trafficking.
This tees us up depressingly well to talk about our next big story: the US Commodity Futures Trading Commission's, or the CFTC’s, lawsuit against Binance. There are two main points of this complicated lawsuit. The first is this: it is illegal in America to allow people to trade unregistered derivatives and no one in America has ever been given permission to sell registered crypto derivatives. Crypto derivatives essentially allow traders to profit off the price change of crypto without owning the actual asset. It’s risky stuff. The allegation here is that Binance was subtly telling customers how to use a VPN (software that obscures their location), to get around American laws and trade crypto derivatives on Binance’s global crypto exchange. This is a no-no, you can’t tell your customers how to break local laws.
Here’s the second prong of the suit: Binance has a lot of criminals exploiting the platform. Or as Binance’s Money Laundering Compliance Officer said in an internal chat “I HAZ NO CONFIDENCE.” And that line is directly from the federal case. A few lines down it has the Chief of Strategy discussing how HAMAS limits its deposits to avoid money laundering suspicions, and when discussing Russian users says: “Like come on. They are here for crime.” To which the cheeseburger Compliance Officer replied, “We see the bad, but we close 2 eyes.” Which is yeah, that’s not what a Compliance Officer is supposed to do. They are supposed to have both eyes on preventing crime.
Absent in these charges is any allegation that Binance is mishandling anyone’s money. But “I haz no confidence” in anything about this situation.
Our final story is another crime, but this time a “who-done-it?”
It fits in nicely because it’s about derivatives as well. This one is about buying futures. Basically, these are the rights to buy a commodity at a set price. Let’s say you buy a $5 coupon that will let you buy Mac lipstick for $10 and it expires at the end of April. Which is a good deal since Mac lipstick typically costs about $20. Using the coupon, you will pay $15 for a $20 lipstick. And you could totally use that coupon! Or, you could sell your coupon for its face value and make a $5 profit. If the price of the lipstick goes down $5, you may decide to not buy the lipstick at all, and just eat the $5.
This is (generally) how commodity futures work except the underlying asset is 100 drums of oil or tons of corn, or as is the case in this story, $2 million worth of nickel. So, less practical assets to the average person than a new tube of Velvet Teddy lipstick, but far more valuable. Now, these commodity futures get traded around, sometimes companies use them as a hedge to get better prices on raw materials, and other times they’re just traded as an investment asset.
This was the case with tons of nickel in a JP Morgan warehouse in Rotterdam. But something was rotten in Rotterdam and these bags of nickel turned out to be… rocks.
That’s right. For some amount of time, JP Morgan had been involved in a Schrodinger's cat commodity trade— since they were mostly just trading the paper with no intention that anyone would ever claim that particular pile of nickel. As long as no one went to the warehouse and kicked open the bag, they were fine and trading a valuable asset, but as soon as someone did kick the bag open and discover that they were filled with plain ol’ rocks, JP Morgan's futures were worthless. This also meant that now there’s a massive scramble to kick bags at warehouses around the world to make sure that the nickel is all where it should be, and I do mean literally kick bags. Steel-toed boots are recommended and apparently, you’ll know you’ve kicked nickel because it hurts more. This is real life.
At this time, the suspicion is that persons unknown stole the nickel from the warehouse, as the records show that it was checked and found to be correct when it came in initially. No word yet on who will be selling the futures on the movie rights.