Operation Choke Point 2.0

Binance and its CEO Changpeng Zhao has been sued by the CFTC over regulatory violations

Binance CEO CZ responds to CFTC charges: “I eat our own dog food.” (Source: Binance)

• Operation Choke Point was a 2013 DOJ initiative to cut off undesirable business sectors deemed at high risk of money laundering (such as firearms dealing, online gambling, etc) from the banking system
• Operation Choke Point 2.0 is arguably a coordinated attempt across the U.S. government and financial regulators to suffocate the crypto industry and cut it off from the banking system (article on Choke Point 2.0 by Nic Carter, Partner at Castle Island Ventures)
• Thus far, we have seen the collapse of the two major US crypto-friendly banks, Silvergate and Signature Bank (voluntary and otherwise), as well as the rejection of Custodia Bank’s two-year application to become a member of the Federal Reserve system, citing linkages with the crypto industry
• In addition to the challenges of gaining and maintaining access to banking rails for fiat on/off ramp, crypto participants have also been under intensifying pressure from the U.S. regulators

Source: Reuters and CoinDesk

• Overnight, the Commodity Futures Trading Commission (CFTC) charged Binance and CEO Changpeng Zhao on allegations that the company knowingly offered derivatives in the U.S. illegally and did not implement KYC/AML processes (CZ’s response)
• The case document makes for extraordinarily entertaining /disturbing reading. We have provided a few screen shots below for your reading pleasure:

Did Binance trade against their own clients?

A bit of micro-management?

Dubious compliance advice?

“We see the bad, but we close 2 eyes”….

So BTC, ETH & LTC are commodities according to the CFTC?

• Bitcoin’s price reaction to the Binance news has been relatively muted, merely a 1-standard deviation move to the downside
• However, it is likely to weigh on sentiment in the short-term and given the magnitude of the recent rally and risks of further enforcement action against other crypto platforms, we may see a further pullback. We see the next level of support at $26,200 and then $25,200, where prices may potentially consolidate
• We are by no means financial litigation experts but we expect the lawsuit between CFTC and Binance to be drawn out, eventually culminating in a settlement and a sizable fine
• It does not alter our medium-to-longer term bullish outlook on Bitcoin and we would continue to look to accumulate on dips, especially if they are precipitated by risk-off corrections from traditional markets (thereby providing further catalyst to bring forward the Fed pivot and subsequent monetary easing)
• Downside skew on BTC is the flattest we have seen for some time and good levels for clients looking for short-term downside protection

BTC June 80%-ATM Skew (Source: TDX Strategies)

• Conversely, upside convexity is still well-bid, making the payoff of long call spreads attractive. We continue to like the idea of accumulating year-end call spreads
• Contact the desk for more ideas