Binance reveals plans to elude U.S. authorities amid fear of prosecution: Report

Yahoo Finance’s David Hollerith joins the Live show to discuss the details around Binance’s reported plans to elude U.S. authorities and the expectations for Silvergate Capital.

Video transcript

- Crypto exchange giant Binance in focus this morning following a report from the Wall Street Journal that, amid the fear of prosecution, Binance had set out on a plan to neutralize US authorities. Yahoo Finance's David Hollerith has more on this story. He joins us now. David, what are some of the details here?

DAVID HOLLERITH: Yeah, so Jared, just to take a step back, so Binance International is the world's largest crypto exchange. And Binance US is much smaller US regulated crypto exchange. There's been a long running discussion about the relationship between these two firms, and that's become notably a bigger deal as critics have pointed out. And since FTX has collapsed, there are a lot of similarities in terms of structure between the two firms.

Things reached a new boiling point on Friday, actually, in bankruptcy court. Voyager Digital is trying to sell its assets to Binance US, and notably, the SEC, the FTC, and several state securities regulators have actively been objecting. And sort of the bankruptcy court is trying to go through all this. So Binance US licenses the Binance brand and technologies, but is technically a separate legal entity, though, it's nonetheless majority owned by Binance's founder and CEO CZ.

As far back as 2020, there's actually been reports about sort of a connection to this, and even documents that have shown that Binance, at least, at one point in time, was thinking about trying to find a way to reach US investors without having to deal with US regulators. So the Wall Street Journal story from the weekend drew from chat logs from Binance employees, and this provided further evidence that Binance for some time has been potentially trying to find ways to use Binance US to reach US investors without having to deal with regulators. Reuters has also reported about this extensively, and they've also drawn-- as was in the Journal story, they've drawn a connection to Merit Peak, which was once a market maker for Binance US and is also owned by CZ, Binance's CEO.

But notably from this story, I think, what was pointed out was the fact that the SEC Chair Gary Gensler was actually being recruited by Binance before he was chair of the agency when he was an MIT professor, and that's notable. If we are to believe the chat logs from Binance employees, it indicated that he was generous in offering licensing strategies to the companies. Obviously, this licensing agreement situation is the legal connection between the two firms. It's also notable as, on Friday, CZ, the founder, actually did a Twitter Space's AMA, and he sort of brought some of this to the public's attention, too, saying that he had met and previously known Gary Gensler, and that they had a good rapport. And he lectured for his MIT course. So this all just makes the connection between what's going on right now with Binance US and the SEC that much more interesting.

- It does, and speaking of connections, I mean, as we talk about the interconnectedness of this crypto world, as we know, one of the potential casualties that you've been watching is Silvergate. What can we expect to happen next with that sort of crypto focused bank?

DAVID HOLLERITH: Yeah, Julie, you know, so for Q4, Silvergate fell into a situation, which is they were less than well capitalized or sort of on the brink of being less than well capitalized. There's a leverage ratio that is watched closely by banking regulators, and Silvergate was about 5.3%. Anything below 5% is a concern for regulators, and since then, Silvergate's come out saying they're going to be late on their annual report. Losses look worse, and obviously, last week, we saw the stock collapse by half between Thursday and Friday.

So in this scenario, Silvergate is a bank. It's a state chartered bank, so it could go into something, which is receivership, which for banks, it's kind of like bankruptcy, not quite the same thing. And this would be decided by either the California State regulator or the FDIC, and in either situation, it would likely be the FDIC that would sort of take the mantle there.

So we'll be watching that, but again, that's a worst case scenario. And Silvergate has fallen. It's lost so many deposits in the last couple of days. We are definitely expecting something like this to happen.

- Yeah, most definitely, and we'll count on you to keep watching it. Thanks so much, David. Appreciate it.