Thu. May 19th, 2022

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Hey Fintech Fam!

This week’s newsletter kicks off with a scoop from Frankfurt bureau chief Martin Arnold about how Binance is cracking down on sanctions evasion on its exchange. We also have a Q&A with one of the newest fintech unicorns helping Wall Street wind down its Russian exposure. Plus, the round-up section highlights two stories that show investors giving up overview of the fast-growing digital asset sector as regulatory scrutiny heats up.

What fintech angles into the Russian invasion are we missing? Let us know at or

Is crypto a risk to sanction enforcement?

Since the west has heaped sanctions on Russia for invading Ukraine, Binance, the world’s largest cryptocurrency exchange by trading volume, says it has closed about 80 accounts per week due to customer links to those targeted by the penalties.

The figure was provided exclusively to FintechFT as the cryptocurrency industry steps up the defense of its decision to continue providing services to clients in Russiadespite many western companies – including banks – severing ties with the country.

US and European authorities have called for extra scrutiny of cryptocurrency exchanges so they are not used to evade western sanctions. Ruble-denominated trading on cryptocurrency exchanges rose sharply to peak at more than $ 70mn per day after Russia’s invasion, though it has since fallen back below $ 10mn, according to the blockchain data platform Chainalysis.

Christine Lagarde, president of the European Central Bank, said last week that crypto assets “are certainly being used, as we speak, as a way to try to circumvent the sanctions that have been decided by many countries around the world against Russia ”. The ECB unsuccessfully pushed for the EU to ban cryptocurrency exchanges from dealing with any clients in Russia.

In the US, Mark Warner, chair of the Senate intelligence committee, has proposed legislation to clamp down on cryptocurrency exchanges. “In order for the sanctions levied by the US and our allies to have the maximum impact on Vladimir Putin and his oligarch friends, we must close off avenues they might use to evade those sanctions,” he said.

Warner’s bill has not yet passed, but so far the US has taken a tougher stance than Europe. Warner’s proposed law would allow the government to sanction any “foreign digital asset actors that are facilitating evasion of sanctions against Russia”. It would also allow the US to prohibit platforms under its jurisdiction from transacting with any cryptocurrency addresses in Russia.

By contrast, the EU has only said crypto assets are “transferable securities” that could be used to provide loans and credit, making it clear they are covered by its sanctions.

More than 400 groups are providing ruble-based trading in cryptocurrencies to Russian customers, most of which are unregulated and allow anonymous access, according to Elliptic, a London-based blockchain analytics company. The firm has identified “Several hundred thousand crypto addresses linked to Russia-based sanctioned actors” as well as linking 15mn crypto addresses to broader criminal activity “with a nexus in Russia”.

Crypto platforms and exchanges say their systems actually make it harder to evade sanctions or launder money compared to the traditional banking system, pointing out the blockchain is an indelible record that allows transactions to be traced to individual wallet addresses.

Tigran Gambaryan, Binance’s vice-president of global investigations and intelligence, told the FT that its 500-strong compliance team was “better equipped” than most banks to stop sanction breaches. “We can see transactions back several stages to look further down the chain,” he said. “We have better visibility on where someone’s funds are coming from than banks do.”

Moreover, Coinbase, the US-based cryptocurrency exchange, said it had “not seen a surge in sanctions evasion activity in the post-invasion context”. But the risk still exists. The company, which has no operations in Russia but still handles transactions from Russian clients, has blocked a total of “over 25,000 addresses related to Russian individuals or entities we believe to be engaging in illicit activity ”- most before Russia invaded Ukraine.

Others say the idea that crypto would help individuals skirt sanctions is more nuanced still. Michael Chobanian, founder of Ukraine’s Kuna cryptocurrency exchange told the FT the biggest risk was that some exchanges provided Russians with the ability to transfer money into foreign currencies abroad. “It is not about crypto; it is about fiat currency gateways, ”he said. “It is possible to transfer fiat currency from Russia into any other currency without even using crypto.” (Martin Arnold)

Quick Fire Q&A

Every week we ask the founders of fast-growing fintechs to introduce themselves and explain what makes them stand out in a crowded industry. Our conversation, lightly edited, appears below.

Last week, FT’s US banking editor Joshua Franklin chatted with the CEO of one of the latest fintech unicorns, Capitolis which raised $ 110mn from firms like Canapi Ventures and, George Osborne’s 9Yards at a $ 1.6bn valuation. Co-founder Gil Mandelzis left his job running one of the largest fixed income trading platforms, BrokerTec, to launch Capitolis in 2017. With the goal of modernizing capital markets, Capitolis has since gotten backing from Wall Street heavyweights like JPMorgan and Citigroup.

How did you get started? It became very clear that there’s going to be a shortage in commercial banking, or capital markets banking capacity in the world, from a services perspective. You’re not going to have enough prime brokers to service the growing number of assets under management. So it became very clear to me that the business model of the large banks will have to change and that they will have to become capital-light institutions and then become platforms themselves. There are two ways of achieving that. One is, let’s find all unnecessary deadweight in terms of unnecessary positions that they have on their balance sheets and help them eliminate that. And after they eliminate everything, if they do need to still use capital, let’s find a way for them to partner with capital rather than have their own capital. There’s compression products to help them eliminate unnecessary positions. And with a marketplace product that allows them when they need capital to source it.

How do you make money? The revenue model is related to consumption. So basically, as we’re allowing banks to eliminate capital or raise capital, we’re making a small piece of it. . . We’re not yet profitable. It’s a choice. But look, we’re seeing a huge opportunity. So we and our investors are very happy to invest.

Why can’t incumbents do what you do? It depends on which part of the business. On the compression side, we need a bunch of competitors to share with one another their fundamental positions and find opportunities to optimize. So you have to have an intermediary to do that. . . But also, if you look at democratizing access to all of these opportunities to basically any institutional investor that is out there, those are very meaningful investments in technology. Those are very long-dated projects that can take three or four years. The banks are not set up for that. They could go out to a few credit funds, or to a few large sovereign wealth funds to find targets or to other banks. But if you talk about true networks and true democratization out there through potentially hundreds or thousands of prospective investors, it’s just not realistic. The banks are not set up to do that.

What solutions have you offered banks to manage exposure during the war in Ukraine? Without changing the risk, we can dramatically reduce the amount that needs to be settled. That’s a huge win for the banks, because some of the settlements either cannot be done because it was supposed to happen through a Russian bank, a local bank, or there’s just uncertainty whether you’ll be able to settle. So the amount of risk that we’ve eliminated in exposure for these banks, we’m talking about many billions of dollars that were eliminated. . . The banks came to us, asked for us to do that. The technology is there, the people are there, they know us, they trust us. So it was something that we’re able to do over a very short period.

Fintech fascination

Apple wades deeper into financial services Silicon Valley giant Apple last week acquired UK-based alternative credit scoring start-up Credit Kudos in its latest push into consumer finance. After launching its Apple Card with Goldman Sachs in 2019, the deal could be a step in the iPhone-maker’s plan to reportedly launch its own “Buy Now Pay Later” service, consultants told the FT.

More checks, fewer seats Cryptocurrency start-ups are raising billions of dollars from investors without conceding the board seats usually associated with early-stage investments, according to PitchBook data. More venture capitalists are passing on board seats in companies with digital assets as founders seek to limit the influence of outside backers

Regulators search for decentralized finance’s center Global regulators are ringing alarms bells about the hidden conflicts and risks in the fast-growing decentralized finance market and questioning how “decentralized” the sector actually is. Most DeFi protocols rely on centralization, and some have a hidden centralized authority, the board of Iosco wrote in a report.

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