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It’s Binance’s turn in the barrel

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The world’s largest crypto exchange would like Washington to know that it knows it’s in trouble.

Market regulators across the globe have been circling Binance and its billionaire founder Changpeng “CZ” Zhao for years. The Justice Department is reportedly investigating possible violations of sanctions and money laundering rules. As federal agencies move to crack down on lightly regulated crypto markets, Binance — which is roughly five times larger than its nearest competitor by volume — is under pressure.

“Is there any crypto company that you have heard wasn’t the target of a DOJ or SEC investigation right now?” Patrick Hillmann, Binance’s chief strategy officer, told MM without referring to a specific probe. “It’s a matter of taking our turn and going through the barrel.”

That barrel ride won’t be particularly pleasant.

One of the company’s banking partners has already moved to limit its ties. Last week, the New York Department of Financial Services shut down a token issued by another crypto company, Paxos, that was produced in partnership with Binance, citing the exchange’s involvement as a concern.

“There were certain issues with respect to Paxos’s oversight of Binance that were unresolved,” NYDFS Superintendent Adrienne Harrissaid in a Q&A with MM. “Ordering them to stop minting new Paxos-issued BUSD was the next step.”

Even some of the crypto industry’s biggest allies on the Hill are alarmed.

“I have deep concerns about Binance,” Sen. Bill Hagerty (R-Tenn.) told POLITICO’s Eleanor Mueller last week. “They’re moving aggressively all over the world right now and they are very opaque.”

The barrage of damaging headlines and regulatory threats — along with lawmakers’ palpable anxiety over Binance’s market power, which was amplified by Zhao’s role in FTX’s collapse — has finally forced the company to elevate its lobbying presence in Washington.

Binance recently inked its first external lobbying contracts with Hogan Lovells and Ice Miller Strategies — both previously represented Binance.US, a separate exchange owned by Zhao that serves U.S. traders — and also joined the Chamber of Digital Commerce, a crypto trade association that counts Fidelity Investments, State Street and Visa as members.

In an interview and follow-up text messages, Hillmann said the firm’s new strategy was an acknowledgement that it could no longer avoid direct engagement in crypto policy battles in Washington. He also conceded that doing so would require owning up to some major mistakes; including that it failed to fully verify the identity of its customers — a basic requirement for any financial company — during its first two years of operation. Hillmann and company spokespeople said those problems have been addressed.

“These inquiries are obviously very serious, but the investigators have been very forward and collaborative. We’re willing to do what is necessary to build back trust in our platform and the industry more broadly,” he said.

Even so, Binance’s attempt to generate goodwill is likely to be met with skepticism from both policymakers and crypto lobbyists who’ve long been wary of the company.

“We have seen the extreme harm some offshore crypto companies can cause to investors and the entire industry,” said Brian Quintenz, a former CFTC commissioner who now leads the crypto policy team at Andreessen Horowitz — a major investor in digital asset startups. “We urge regulators and Congress to work with responsible U.S.-based crypto and web3 companies to keep firms in the country under our jurisdiction and regulations and create rules to legally and successfully operate in the U.S.”

IT’S TUESDAY — And your MM hosts hope you had a wonderful holiday weekend.

Deputy Treasury Secretary Wally Adeyemo will give a speech on Russian sanctions strategy at 10 a.m. at the Council on Foreign Relations … Existing home sales data will be released at 10 a.m. … WEDNESDAY … The FOMC minutes will be released at 2 p.m. … Treasury Secretary Janet Yellen will hold a press conference in India at 7 p.m. … THURSDAY … Revised GDP will be released at 8:30 a.m. … Atlanta Fed President Raphael Bostic speaks at 10:50 a.m. … The SEC has a closed meeting at 2 p.m. … FRIDAY … The Personal Consumption Expenditures (PCE) Price Index will be released at 8:30 a.m. … New home sales and consumer sentiment data will be released at 10 a.m. … Fed Gov. Philip Jefferson speaks on disinflation at the U.S. Monetary Policy Forum at 10:15 a.m.

BONFIRE OF THE Q&As — In light of the Acela set’s sudden fascination with etiquette, your MM host feels compelled to report on the tempest-in-a-teapot brewing at Washington’s Exchequer Club. Three members of the 63-year-old institution said that Assistant Treasury Secretary Graham Steele’s remarks at its Feb. 15 luncheon caused quite the stir — and not because of the content. The storied club’s protocol requires speakers to take questions from its policy wonk audience at the conclusion of their remarks. That wasn’t the case for Steele, who was provided a list of pre-submitted questions ahead of time after agreeing to sub for the scheduled speaker – Treasury Undersecretary for Domestic Finance Nellie Liang.

“In recognition of the limited time Steele had to prepare, we determined that a modified format was appropriate,” the club’s chancellor, Margaret Liu, senior vice president and deputy general counsel at the Conference of State Bank Supervisors, told MM.

The reaction was swift. Several club members raised objections with Exchequer leadership, while others stirred the pot with (unverified) claims that the Biden administration was shielding its appointees. “I’m irritated by how they handled this,” one member told MM, requesting anonymity to discuss internal matters at the club. “It pissed off a lot of people.”

The uproar from Exchequer’s buttoned-up membership was a surprise to both Liu and Treasury officials, who said in a statement that they did not ask to see pre-cleared questions — or set any other parameters — as a condition for Steele’s appearance. Moving forward: “Our policy remains that our speakers take questions from the audience,” Liu said.

Got any other weird tips or gossip? Preferably about something that doesn’t involve etiquette? (Though we’ll take those too). Send those to Sam at [email protected] and Zachary at [email protected].

Treasury previews next wave of Russia sanctions — Treasury Deputy Secretary Wally Adeyemo told reporters Monday night that the Biden administration will intensify its work to derail Russian sanctions evasion.

It followed a similar announcement from President Joe Biden during Monday’s Kyiv trip, when he said he planned to announce later this week additional sanctions “against elites and companies that are trying to evade or backfill Russia’s war machine.”

In a preview of a speech he’ll give later this morning at the Council on Foreign Relations (read his full remarks here), Adeyemo stayed mum on the specifics of the sanctions but gave a sense of the administration’s direction of travel:

— Targeting Russia’s access to so-called dual-use technologies, like semiconductors from refrigerators, that help support its war effort in Ukraine.

— Increasing the cost that Russia pays to get around sanctions, such as the money it spends on setting up its own oil trading ecosystem to sidestep the G-7 price cap on Russian crude and refined petroleum.

— Continuing close coordination with U.S. allies, including intelligence sharing and travel by senior officials, as well as calling on companies in coalition countries to help prevent support from flowing to Russia.

— The tactics, such as the crackdown on dual-use tech, also apply to China, and Adeyemo said the U.S. would try to shine a light on instances where Chinese companies are providing materials to Russia.

— But Adeyemo said “China can’t give Russia what it doesn’t have,” meaning China isn’t producing the kinds of semiconductors that Russia needs for its war effort.— Zachary Warmbrodt 

MALPASS FALLOUT — World Bank President David Malpass’s abrupt decision to step down from his post has created an opening for Biden to tap a new leader to supervise an overhaul of the bank’s work to focus more on climate. As our Adam Behsudi, Zack Colman and Victoria Guida report, “the path ahead is littered with obstacles for the U.S.”

“‘The world wants to move quickly, but we have to move in a way that builds consensus and recognizes that not all 189 members see the tradeoffs and the balance between global challenges and country-focused development in the same way,’ said Masood Ahmed, president of the Center for Global Development, a think tank. ‘That’s what the job is going to be for the next president, how do you build a way forward?’”

TECHNICALLY/PRACTICALLY —  CBO Director Phillip Swagel said on Friday that it’s “theoretically” possible for the Treasury Department to prioritize its payments if the U.S. hits its debt limit, writes Eleanor Mueller. “‘Our projections are based on the expectation, the assumption, that the U.S. government continues to pay its bills, that the debt ceiling is raised,’ Swagel said at a Bipartisan Policy Center discussion. But ‘in principle, it’s feasible.’”

CREDIT SUISSE — Reuters’s Oliver Hirt: “Swiss financial regulator Finma is reviewing remarks made by Credit Suisse Group Chairman Axel Lehmann about outflows from the lender having stabilized in early December.”

CORPORATE MINIMUM — Our Brian Faler: “The Treasury Department on Friday rolled out new, piecemeal instructions on how Democrats’ new minimum tax on big corporations will work. The 21-page explanation is designed to fill in the gaps of the levy for the insurance industry.”

DALIO’S PARACHUTE — Bridgewater Associates Founder Ray Dalio “agreed to surrender his control over all key decisions at Bridgewater only if the firm gave him what could amount to billions of dollars in regular payouts over the coming years through a special class of stock,” write NYT’s Rob Copeland and Maureen Farrell.

TIME FOR ANOTHER EDITION OF “GOOD NEWS IS BAD” — The WSJ’s Akane Otani: The recent “run of strong economic data should be good news for markets as well. Yet investors have been viewing almost everything the past year through the lens of how it might affect the Fed’s interest-rate policy. Their growing fear is that if the U.S. economy remains too hot, it will force the Fed to raise interest rates higher and hold them there for longer than they anticipate.”

HOWEVER — The WSJ’s Ben Eisen and Gina Heeb: “A rising number of Americans are falling behind on their car payments. Some 9.3% of auto loans extended to people with low credit scores were 30 or more days behind on payments at the end of last year, the highest share since 2010.”

TOO HOT — Bloomberg’s Farah Elbahrawy: “Stock investors that have turned too optimistic about the economic outlook are setting up for disappointment, according to JPMorgan Chase & Co. strategists.”

CUSTODIA — From Sam: “One of Wyoming’s top crypto banks is ratcheting up its legal fight with the Federal Reserve after the central bank’s Kansas City branch rejected its application to access the central bank’s payment rails.”

CELTIC PRIDE — Our Declan Harty: “Former Boston Celtic star Paul Pierce will pay more than $1.4 million to settle charges alleging that the NBA Hall of Famer touted a cryptocurrency token without disclosing that he had been compensated in return.”

FIRST IN MM — The Proof-of-Stake Alliance gave MM a preview of a pair of white papers that aim to lay groundwork for an eventual regulatory regime for proof-of-stake blockchains and service providers. SEC Chair Gary Gensler has taken aim at staking services, claiming those products are unregistered securities. “Following the SEC’s staking-as-a-service providers, we believe that revisiting and updating our industry principles to reflect new innovations like liquid staking will help unite those who participate in staking ecosystems and strengthen all of our advocacy efforts,” POSA’s Executive Director Alison Mangiero said in a statement.