🔪 Knives out

Crypto is under fresh scrutiny

View in Browser Tonight: The worst-kept secret in crypto is the subject of a lawsuit against Binance. Plus: The banking crisis autopsy is under way. Let's get into it.  By Allison Morrow Dow 32,432.08 0.60% S&P 500 3,977.53 0.16% NASDAQ 11,768.84 0.47% Last updated March 27 at 7:44 PM ET 👀 CZ UNDER SCRUTINY If you live in America, you're not allowed to trade crypto derivatives. And if you're a big international platform for trading crypto derivatives, you can't let Americans trade those products if you haven't registered with the boring-sounding but not-to-be-trifled-with federal regulator known as the Commodity Futures Trading Commission, or CFTC.   Today, that regulator sued Binance, the world's largest cryptocurrency exchange, for allegedly doing just that. (And if that name sounds familiar, it may because back in November, Binance briefly flirted with the idea of bailing out its smaller rival, FTX. Obviously, Binance took one look under the hood at FTX, now at the center of a massive federal fraud investigation, and promptly bailed.)   Here's the deal: The CFTC alleges that Binance and its CEO violated US trading laws by, among other things, secretly coaching "VIP" customers within the United States on how to evade compliance controls.   The commission, which regulates US derivatives trading, said the company and its CEO, Changpeng Zhao, "instructed its employees and customers to circumvent compliance controls in order to maximize corporate profits."   Which, you know, isn't something you want to be caught doing. The CFTC can't bring criminal charges, but it can seek heavy fines and potentially ban Binance from registering in the US in the future.   Binance said the lawsuit was "unexpected and disappointing," adding that it has made "significant investments" in the past two years to ensure that US-based investors are not active on the platform.   As news of the lawsuit broke Monday, Zhao, known as "CZ," tweeted the number 4, pointing to a part of a previous statement: "Ignore FUD, fake news, attacks, etc." (FUD is a commonly used acronym among crypto folks that stands for "fear, uncertainty, doubt." Let it be known that crypto devotees never met an acronym they didn't like.)   Binance has long argued that it isn't subject to US laws because it doesn't have a physical headquarters in America. Or anywhere, really — CZ claims that the company's headquarters are wherever he is at any point in time, "reflecting a deliberate approach to attempt to avoid regulation," according to the CFTC's lawsuit.   Big picture The CFTC's lawsuit is certainly not great news for Binance, or for crypto more broadly. But it's not quite the seismic event that was FTX's collapse, or even the Terra/Luna meltdown. (You can read more about those here and here but, tl;dr: Those 2022 events were, to use a technical term, holy-crap-sell-everything-call-your-dad-and-cry moments for crypto investors.)   Prices of bitcoin and ethereum, the two most popular cryptocurrencies, fell more than 3% Monday. Which is to say, it was just another day trading virtual currencies.   Perhaps the most significant part of the lawsuit is the way the CFTC loudly calls out one of the worst-kept secrets in all of crypto: That not only are US customers gaining access to risky offshore crypto derivatives they shouldn't be allowed to access, but it's also pretty darn easy to do so. All anyone needs is a VPN and an iron stomach, because crypto derivatives are leveraged bets on wildly unstable assets. (And like everything in this newsletter, that shouldn't be taken as any kind of advice.)   The likely outcome, said Timothy Cradle, a crypto compliance and regulation expert at Blockchain Intelligence Group, will be that Binance ends up paying "hundreds of millions of dollars" in fines and will be prevented from registering a derivatives exchange in the future. That's "a terminal blow for users of their service located in the US and a significant hit to Binance's revenue" as the suit alleges US users make up 16% of the revenue for Binance's derivatives product.   Monday's news adds yet another layer of regulatory scrutiny on crypto's biggest players. The Internal Revenue Service and Securities and Exchange Commission are also reportedly also investigating Binance, per Bloomberg. Meanwhile, Coinbase, the largest US-listed crypto exchange, received a so-called Wells notice (typically a precursor to enforcement action) last week from the SEC for possible securities law violations.   And just to pile on: The crypto industry earlier this month lost two of its biggest connections to the mainstream finance world — Silvergate and Signature Bank.   All in all, not a great month for the industry that is perpetually straining credibility even when it's hot. And right now, it is decidedly not. #️⃣ NUMBER OF THE DAY 7,000 Disney CEO Bob Iger on Monday said his company will begin the first of three rounds of layoffs that will ultimately cut 7,000 jobs. The cuts to Disney's global workforce are part of a multibillion-dollar cost-cutting initiative aimed at streamlining the company's operations in a period of media industry turmoil.   Disney had about 220,000 workers as of October 1, of which approximately 166,000 were employed in the United States. A cut of 7,000 jobs represents about 3% of its global workforce. 🚩 RED FLAGS It's been just over two weeks since Silicon Valley Bank went under, felled by a sudden depositor run that left it with a $1 billion negative cash balance.   The panic that emanated from SVB's Bay Area clientele made its way around the globe, heaping extra scrutiny on lenders of all sizes. The long-struggling behemoth Credit Suisse buckled under the stress. Investors soon pegged First Republic, another Bay Area lender with outsize levels of uninsured deposits, as the next domino to fall, until an industry-led lifeline stabilized it.    It's been an unsteady couple of weeks, with the ghosts of 2007-2008 ambling around Wall Street like something out of a Dickens novel.   But on Sunday night, it felt like a turning point — a capstone on a crisis that threatened at various points to spin out of control.    See here: First Citizens Bank is purchasing the bulk of what's left of Silicon Valley Bank, the US lender that no one outside of the tech world had heard of until its sudden collapse began threatening the global banking system.    As of Monday, 17 branches of SVB began operating as "Silicon Valley Bank, a division of First Citizens Bank." More on that here.    The SVB autopsy continues... Tomorrow and Wednesday, lawmakers in Congress will hold back-to-back hearings on the collapse of SVB. One question we expect them to home in on: Why on Earth did no one see this coming?    SVB's vulnerabilities were, surprisingly, not super complicated. This wasn't 2008, when obscure products at the center of a labyrinthine Wall Street derivatives market turned out to be worthless and wound up ravaging the US housing market.    The unsatisfying answer, for now, is that no one knows — or at least no one who's willing to say it out loud. But what's clear is that SVB's failings are not the fault of any one person or system or asset, but rather a cacophony of missed warning bells and basic corporate mismanagement that collided with an old-fashioned depositor panic.  Over the weekend, I wrote about some of the biggest red flags that should have been caught in the run-up to SVB's collapse. Chief among them: The bank displayed a shocking disregard for risk-management standards.    A casual observer of Silicon Valley Bank's financial position even a month ago would have had little reason to be alarmed. "The bank would've appeared to have been healthy, if you look at their capital position, their liquidity ratios...they would've been fine," said John Sedunov, professor of finance at Villanova University.  "Those traditional big-picture things, the front page items...They should have been fine."  The ticking time bombs lurked one layer deeper, in the the construction of the bank's portfolio and the construction of the liabilities.   Silicon Valley Bank held an unusually large proportion (55%) of its customers' deposits in long-dated Treasuries. Those are typically super safe assets, and SVB was hardly alone in loading up on bonds in the era of near-zero interest rates. But those bonds' market value decreases when interest rates go up.  Typically, a bank hedges its interest rate risk using financial instruments called swaps, effectively exchanging a fixed interest rate for a floating rate for a period of time to minimize its exposure to rising rates. SVB appears to have had zero hedges in place on its bond portfolio.  "Frankly, managing your interest rate risk exposure — that's one of the first things that I teach an undergraduate banking class," Sedunov said. "It's textbook stuff."   For more on all the missed red flags, check out my full story here.  WHAT ELSE IS GOING ON? 🚘 Lyft announced a new CEO will take over next month, while its co-founders step down from their management positions.   🌯 Chipotle agreed to pay former employees after the company shut down a store that tried to unionize   🎶 Taylor Swift fans took Ticketmaster to court Monday after the company fumbled online sales to the Tay's latest tour.   🐦 Twitter said parts of its proprietary code were leaked last week.   📱 Asian Americans are anxious about hate crimes. TikTok ban rhetoric isn't helping. POST OF THE DAY Today's movers FCNCA 895.61 53.74% First Citizens BancShares, Inc. Class A GRRR 11.80 41.15% Gorilla Technology Group, Inc. BANL 6.13 39.00% CBL International Limited NIR 4.98 59.08% Near Intelligence, Inc. UBX 1.95 53.01% Unity Biotechnology, Inc. ZURA 16.84 42.76% Zura Bio Limited Class A Last updated March 27 at 4:00 PM ET   What did you think of today's newsletter? Click here to send us feedback CNN BUSINESS NIGHTCAP You are receiving this newsletter because you're subscribed to CNN Business Nightcap.   No longer want to receive this newsletter? Unsubscribe. Interested in more? See all of our newsletters.   Was this email forwarded to you? Sign up here.   Create CNN Account | Listen to CNN Audio | Download the CNN App    ® © 2023 Cable News Network, Inc. A Warner Bros. Discovery Company. All Rights Reserved. One CNN Center Atlanta, GA 30303