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Hi Fintech Family!

This week’s newsletter kicks off with a scoop from Frankfurt bureau chief Martin Arnold on how Binance is cracking down on sanctions evasion on its exchange. We also have a Q&A session with one of the new fintech unicorns help Wall Street reduce its exposure to Russia. Additionally, the summary section highlights two stories that show investors dropping scrutiny of the fast-growing digital asset sector as regulatory scrutiny heats up.

What fintech angles in the Russian invasion are we missing? Let us know at Imani.Moise@ft.com Where Sid.V@ft.com.

Is crypto a risk for sanctions enforcement?

Since the West imposed sanctions on Russia for invading Ukraine, Binance, the world’s largest cryptocurrency exchange by trading volume, said it closed about 80 accounts per week due to client links with those targeted by the sanctions.

The figure was provided exclusively to FintechFT as the cryptocurrency industry steps up its defense of its decision to continue providing services to customers in Russia, despite many Western companies – including banks – breaking their ties to the country.

Authorities in the United States and Europe have called for greater scrutiny of cryptocurrency exchanges so that they are not used to evade Western sanctions. Ruble-denominated trading on cryptocurrency exchanges rose sharply to peak at more than $70 million a day following Russia’s invasion, though it has since fallen back below $10 million, according to the Chainalysis blockchain data platform.

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 across the world against Russia”. The ECB unsuccessfully lobbied for the EU to ban cryptocurrency exchanges from dealing with customers in Russia.

In the United States, Mark Warner, Chairman of the Senate Intelligence Committee, has law Project to crack down on cryptocurrency exchanges. “For the sanctions imposed by the United States and our allies to have the maximum impact on Vladimir Putin and his oligarch friends, we must close the avenues they might use to evade these sanctions,” he said.

Warner’s bill has yet to pass, but so far the United States has taken a tougher stance than Europe. Warner’s proposed legislation would allow the government to sanction any “foreign digital asset player who facilitates the evasion of sanctions against Russia.” It would also allow the United States to ban platforms under its jurisdiction from transacting with cryptocurrency addresses in Russia.

In contrast, the EU only said crypto-assets are “securities” which could be used to provide loans and credits, specifying that they are covered by its sanctions.

More than 400 groups offer ruble-based cryptocurrency exchanges to Russian clients, most of which are unregulated and allow anonymous access, according to Elliptic, a London-based blockchain analytics firm. The firm has identified “several hundred thousand crypto addresses linked to Russia-based sanctioned actors” as well as the linking of 15 million crypto addresses to broader criminal activity “with a link in Russia.”

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

Tigran Gambaryan, Binance’s VP of Investigations and Global Intelligence, told the FT that its 500-person compliance team is “better equipped” than most banks to stop sanctions violations. “We can see transactions go back several steps to look further down the chain,” he said. “We have better visibility into where someone’s funds are coming from than the banks.”

Additionally, Coinbase, the US-based cryptocurrency exchange, said it had “not seen an increase in sanctions-busting activity in the post-invasion context.” But the risk still exists. The company, which has no operations in Russia but still handles Russian client transactions, has blocked a total of “more than 25,000 addresses linked to Russian individuals or entities that we believe are engaging in illicit activities” – most before Russia invaded Ukraine.

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

Quick Questions and Answers

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

Last week, FT’s US banking editor Joshua Franklin spoke with the CEO of one of fintech’s newest unicorns, Capitolis, which has raised $110m from companies like Canapi Ventures and George’s 9Yards. Osborne at a valuation of $1.6 billion. Co-founder Gil Mandelzis quit his job running one of the largest fixed income trading platforms, BrokerTec, to launch Capitolis in 2017. In an effort to modernize capital markets, Capitolis has since secured support from Wall Street heavyweights like JPMorgan and Citigroup.

How did you start? It has become very clear that there is going to be a shortage of commercial banking services or banking capabilities in financial markets around the world, from a service perspective. You won’t have enough prime brokers to handle the growing number of assets under management. So it became very clear to me that the business model of the big banks will have to change and they will have to become small capitalization institutions and then become platforms themselves. There are two ways to achieve this. First, let’s find all the unnecessary dead weights in terms of the unnecessary positions they have on their balance sheets and help them get rid of them. And after we’ve eliminated everything, if they still need to use capital, let’s find a way for them to partner with capital rather than having their own capital. There are compression products to help them eliminate unnecessary positions. And with a market product that allows them, when they need capital, to obtain it.

How do you earn money? The income model is tied to consumption. So basically, as we allow banks to eliminate or raise capital, we do a small part of it. . . We are not profitable yet. It’s a choice. But look, we see a huge opportunity. We and our investors are therefore very happy to invest.

Why can’t holders do what you do? It depends on what part of the business. On the compression side, we need a group of competitors to share their fundamental positions and find optimization opportunities. So you have to have an intermediary to do it. . . But also, if you’re looking at democratizing access to all of these opportunities for virtually any institutional investor, these are very meaningful investments in technology. These are very long-term projects that can take three or four years. Banks aren’t made for that. They could approach a few credit funds, a few large sovereign wealth funds to find targets or other banks. But if you’re talking about real networks and real democratization through potentially hundreds or thousands of potential investors, that’s just not realistic. Banks are not made for this.

What solutions did you propose to banks to manage exposure during the war in Ukraine? Without changing the risk, we can significantly reduce the amount to be paid. This is a huge victory for the banks, because some of the settlements cannot be completed because they were supposed to go through a Russian bank, a local bank, or there is simply uncertainty about the possibility of settlement. So the amount of risk that we have eliminated in exposure for these banks, we are talking about several billion dollars that have been eliminated. . . The banks came to us, asked us to do it. The technology is there, the people are there, they know us, they trust us. So it’s something we’re able to do in a very short period of time.

Fintech Fascination

Apple sinks into financial services Silicon Valley giant Apple last week acquired British start-up Credit Kudos in its latest push into consumer credit. After launching its Apple Card with Goldman Sachs in 2019, The deal could be a step in the iPhone maker’s plan to launch its own “Buy now, pay later” service, consultants have told the FT.

More controls, fewer seats According to data from PitchBook, cryptocurrency startups are raising billions of dollars from investors without giving up the board seats typically associated with early-stage investments. More venture capitalists are giving way to boards of companies with digital assets as founders seek to limit the influence of outside backers

Regulators seek center of decentralized finance Global regulators are sounding the alarm about conflicts and hidden risks in the growing decentralized finance market and questioning how “decentralized” the sector really is. Most DeFi protocols rely on centralization, and some have hidden centralized authority, Iosco’s board wrote in a report.

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