Yes, SVB (Is Processing ACH for Binance.US)
CFPB Drops Suit Against Unlicensed P2P Payday Lender, Republicans Seek to Reverse Overdraft Rule
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Exclusive: Yes, SVB (Is Processing ACH for Binance.US)
With some referring to Trump as the first crypto president, as he advances a regulatory agenda broadly favorable to the industry, the sentiment is “crypto is so back.”
One key item on the crypto industry’s agenda is improving its ability to access the traditional financial system, which has manifested in part in the so-called debanking debate.
Traditional financial institutions have become a lynchpin in the crypto ecosystem by providing on and off ramps for US dollars, as well as serving as potential distribution partners for crypto products and holding dollars or USD-denominated assets backing stablecoins.
The “crypto winter” of 2022 saw the disorderly collapse of firms like FTX, Celsius, and BlockFi, which is generally understood to have contributed to the failure of crypto-focused Silvergate Bank in March 2023.
What started with Silvergate became a “regional” banking crisis with the subsequent failure of Silicon Valley Bank, commonly known as SVB, followed by Signature Bank and First Republic.
The total cost to the FDIC’s deposit insurance fund from the episode was approximately $31.5 billion.
In the wake of this turmoil, heightened regulatory scrutiny, and with crypto markets in the doldrums, banks — justifiably — pulled back from serving many crypto firms.
Binance.US had worked with both Silvergate and Signature prior to their failure.
The company ceased US dollar deposits and withdrawals, including via ACH, in June 2023, amid a lawsuit from the SEC alleging Binance and its founder and CEO, Changpeng Zhao, diverted customer funds, inflated trading volumes, and misled investors.
In late 2023, Binance and Zhao also pleaded guilty to violating the Bank Secrecy Act, failing to register as a money transmitter, and failing to maintain an effective anti-money laundering program; Binance paid a total financial penalty of over $4.3 billion as part of a settlement in the matter.
Binance.US is purportedly an independent and separate company from Binance, which operates the larger Binance.com platform.
Binance.US remained unable to process US dollar deposits or withdrawals, including via ACH transfer, until last week.
On Wednesday, the company announced it would begin rolling out USD services to all eligible customers, saying in part:
“Our team has been working hard to secure reputable and compliant payment and banking partners in order to deliver the best experience possible, without compromise. This means all qualifying customers will be eligible to deposit or withdraw USD with zero processing fees. Moreover, most deposits process in a few minutes or less, which means funds are available instantly for trading.”
The announcement continued to explain that “[a]s a licensed and regulated U.S. crypto exchange, we needed to find 1) a secure and compliant payment and banking partner, and 2) one that would help us deliver a quality on-ramp and off-ramp experience.”
Binance.US did not, however, specify what partner it is working with to provide USD capabilities.
The Information’s Yueqi Yang reported that the company is working with “a U.S.-based fintech provider that has a network of banking partners, a broker-dealer license, and enables retail and crypto trading platforms to accept ACH bank transfers.”
The ACH debit authorization page linked in Binance.US’s deposit flow loaded a blank screen when conducting a test transaction; after an inquiry from Fintech Business Weekly, including about the missing ACH authorization terms, the terms do now appear in the flow, but do not name the payment processor the company is using. Linked terms of use also do not name the payment processor.
However, the test transaction reveals Binance.US is working with brokerage-as-a-service provider Atomic (a different firm than the payroll switching company by the same name.) Atomic was founded in 2020, and its most recently announced funding was a $25 million Series A led by QED and Anthemis in 2021.
Atomic is a registered investment advisor and broker dealer. And while Atomic’s site doesn’t specify what bank(s) it works with, a representative for JPMorgan Chase, the bank from which the test transaction was debited, confirmed that the Originating Depository Financial Institution (ODFI) was Silicon Valley Bank, which is now part of First Citizens.
SVB and Atomic did not respond to questions and requests for comment, including about their due diligence and third-party risk management practices. Binance.US declined to provide any comment for publication.
While this provides greater clarity into how Binance.US is moving money, the company’s terms of use don’t make clear how it is holding US dollars:
The terms describe a “fiat wallet,” with funds held by Binance.US in omnibus accounts at “one or more intermediaries.”
The terms go on to clarify that “fiat” (US dollars) are held in “one or more of: United States Treasury bills, a cash sweep program of a custodial brokerage account, demand deposit account(s) at one or more insured depository institution(s), or other permissible investments as defined under applicable state law,” and specify that the fiat wallet is “not a form of deposit[]” and is “not insured by the FDIC.”
Based on the terms, there are multiple possibilities of where and how Binance.US is holding users’ US dollar deposits:
Binance.US does hold state money transmitter licenses (MTLs), which enable it to hold customer funds in permissible investments; what qualifies as “permissible” varies state to state, but typically includes bank deposits and safe, highly liquid assets such as US Treasuries.
The mention of a “cash sweep program of a custodial brokerage account” may refer to Atomic’s ability to provide brokerage accounts as a service, though Binance.US’s terms do not make it clear if the company is opening brokerage accounts on users’ behalf. Atomic operates a cash sweep program, placing users’ funds at banks that include Webster, SSB Bank, Eagle Bank, and others.
The lack of clarity around how Binance.US is holding and keeping track of users’ US dollar deposits is particularly concerning, given the similarities to the so-called “modular banking” model used by banking as a service provider Synapse, which collapsed last year, leaving as much as $96 million still unaccounted for.
A representative for Binance.US declined to answer questions about how the company approaches reconciliation between its own books and records, those of service providers like Atomic, and the banks or other custodians actually holding user funds.
CFPB Dismisses Suit Against Unlicensed P2P Payday Lender SoLo Funds
Last May, the Consumer Financial Protection Bureau filed a 33-page complaint against unlicensed peer-to-peer payday lender and repeat scofflaw SoLo Funds.
SoLo Funds has previously settled regulatory actions in Minnesota, Pennsylvania, Connecticut, California, and Washington, DC; the company has also faced civil litigation from consumers, including a putative class action.
The CFPB’s suit accused SoLo Funds of using “deceptive dark patterns” to illegally extract fees from users:
While SoLo claims fees paid to lenders and the company are voluntary, the CFPB alleges that is not the case. When consumers reach the part of the application that asks them to pay a fee to SoLo, consumers only see options for what percentage to give—none of the options is zero. SoLo also informs prospective lenders of the fee they will receive from a consumer to fund a loan. The result is that consumers who do not pay a fee to lenders are unlikely to get their loans funded. In fact, as of December 31, 2022, only 0.5% of funded loans did not include a fee paid to the lender by the borrower.
From approximately March 2018 through December 2022, borrowers took out more than 540,000 loans on SoLo’s platform in nearly all fifty states. In that time, SoLo received more than $8 million in “donations” and lenders received almost $13 million in “tips” through the SoLo platform.
The Bureau alleged SoLo Funds misrepresented the cost of loans, made false threats and collected money borrowers did not owe, and acted as a credit reporting company, without implementing proper safeguards.
SoLo Funds’ actions violated the CFPA’s prohibition on unfair, deceptive, and abusive practices and the Fair Credit Reporting Act, the CFPB alleged.
But on February 3rd, following Treasury Secretary Bessent’s short-lived appointment as acting Director of the CFPB, the Bureau filed an emergency notice in the SoLo Funds case, informing the court it would appear at a scheduled hearing “but [would] not present argument other than to respectfully request a pause in proceedings.”
Subsequently, on February 13th, SoLo Funds filed a motion asking the court to compel the CFPB to produce a variety of documents.
When the Bureau did not respond to the motion by the deadline, the judge in the case ordered the CFPB to file a status report advising the court whether or not it intended to oppose SoLo Funds’ motion.
The same day, rather than filing the requested status report, the CFPB moved to dismiss the case with prejudice — meaning the Bureau cannot refile the case at a later date.
Congressional Republicans Seek Overdraft Rule Rollback
Late last year, the CFPB finalized its overdraft rule, which would cap banks’ and credit unions’ fees at $5 or at an amount that covers their actual costs and losses.
For financial institutions that wanted to charge fees above their actual costs, the rule would require them to comply with relevant consumer credit regulations, including by “giving consumers a choice on whether to open the line of overdraft credit, providing account-opening disclosures that would allow comparison shopping, sending periodic statements, and giving consumers a choice of whether to pay automatically or manually.”
The CFPB calculated that the final rule would save consumers approximately $5 billion per year, or about $225 per household that incurs overdraft fees.
Critics of the measure argue the rule exceeds the Bureau’s authority, would harm consumers who need access to “short term liquidity,” may cause banks and credit unions to reduce or eliminate “free” checking products (which some bucket under the “debanking” label), and increase financial institutions’ compliance costs.
Industry trade groups filed suit last December seeking to block the rule from taking effect. American Bankers Association President and CEO Rob Nichols said of the overdraft rule:
“The CFPB’s final overdraft rule exceeds the Bureau’s statutory authority, ignores thoughtful industry and stakeholder feedback, and will harm the very consumers the CFPB claims to protect. Surveys consistently show that Americans understand and appreciate overdraft protection, and if this rule is allowed to move forward, many Americans will lose this service.”
Earlier this month, Senate Banking Committee Chair Tim Scott (R-SC) and House Financial Services Committee Chair French Hill (R-AK) introduced Congressional Review Act resolutions in their respective chambers, seeking to invalidate the CFPB’s final overdraft rule.
The Congressional Review Act enables Congress, through a joint resolution of disapproval, to overturn agency rules within 60 legislative days with a simple majority in each chamber, followed by the President’s signature. The resolutions cannot be filibustered in the Senate.
Congressman Hill said of the effort to block the overdraft rule, “The CFPB’s actions on overdraft is another form of government price controls that hurt consumers who deserve financial protections and greater choice,” with Senator Scott adding in part, “[M]any consumers rely on overdraft services to make ends meet and limiting this practice will push Americans to riskier financial products. I’m proud to lead the effort to overturn this misguided rule and protect Americans’ access to important financial services.”
If the effort is successful, which seems likely, the Congressional Review Act prohibits the introduction of a substantially similar rule, unless explicitly called for in legislation passed by Congress.
Other Good Reads & Listens
Brief Remarks on the Economy and Accountability in Supervision, Applications, and Regulation (Speech by Fed Governor Michelle Bowman)
Reflections on a Maturing Stablecoin Market (Speech by Fed Governor Christopher Waller)
No, The CFPB’s Not Dead. It’s Not Even Close to Dead. (Adam Levitin)
Hackers steal $1.5 billion from exchange Bybit in biggest-ever crypto heist (CNBC)
Listen: Banking as a Service Discussion with Ballard Spahr (Consumer Finance Monitor)
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