There won't be a Blackrock bitcoin ETF, at least not until Binance bites the dust

Back in 2018 I wrote about the controversy over the constant stream of bitcoin ETF denials emanating from the Securities and Exchange Commission (SEC). And my conclusion then was: "further rejections likely." My conclusion in 2023 is the same. Even with Wall Street-giant Blackrock entering the scene with a proposed Nasdaq-listed iShares Bitcoin ETF, nothing has changed: a bitcoin ETF probably probably won't get approved.

The FT says that the big difference this time around is that Blackrock will enter into a "surveillance-sharing agreement with an operator of a United States-based spot trading platform for bitcoin." It's pretty clear that this agreement will be with Coinbase, the U.S.'s largest crypto market.

This may sound convincing, but the idea that Blackrock is the first potential bitcoin ETF issuer to enter into surveillance-sharing agreement with a U.S. exchange is wrong. It's an old tactic, one that hasn't worked to-date.

When the Winklevoss twins famously tried to launch their bitcoin ETF on the Bats BZX exchange many years ago, part of their (modified) proposal involved BZX entering into a surveillance-sharing agreement with the Gemini Exchange, a U.S. crypto exchange. But the SEC didn't see this as adequate in 2018, so it's not apparent to me why that approach would be adequate now.

Let's back up. Why surveillance sharing agreements?

I got into this in more detail five years ago, but here's a quick explanation. When an exchange lists an ETF, particularly a commodity-based one, that ETF is typically underpinned by some sort of commodity, say lumber or copper, that gets traded on another exchange (or set of exchanges). The SEC believes that a mutual agreement to share information between the relevant exchanges is key to preventing fraudulent and manipulative acts. For example, if one exchange serves as a venue for trading bananas, and another exchange wants to list a banana ETF, the SEC will only approve said ETF if the listing exchange shows that it can monitor the underlying spot banana exchange to catch manipulators, the end goal being to protect investors.

The Winklevoss's earlier attempt to prevent manipulation through surveillance sharing with Gemini wasn't deemed sufficient by the SEC, for two reasons. Gemini was neither significant (i.e. "big relative to the overall market"), nor was it regulated as a national exchange.

Fast forward to 2023. In its proposal, Blackrock is essentially swapping out Gemini with Coinbase, by having Nasdaq, the exchange that will list the iShares Bitcoin ETF, share surveillance with Coinbase. But unfortunately for Blackrock, nothing has changed. First, much like Gemini, Coinbase isn't a regulated exchange. Secondly, Coinbase isn't all that big in the global scheme of things, especially compared to global titan Binance, an offshore exchange. So I doubt that a surveillance sharing agreement with Coinbase will get Blackrock's proposal over the line. 

A second tactic that Blackrock is using to get SEC approval is to establish another surveillance sharing agreement with a regulated futures exchange, one that offers bitcoin contracts. As I explained in my 2018 article, this is how the massive SPDR Gold ETF got approved a few decades ago. When trading in a commodity occurs informally, say via over-the-counter markets (as it does with gold), and it's not possible for an exchange that lists an ETF to ink surveillance sharing agreements, then the SEC may accept an agreement with a futures exchange as a substitute, in SPDR's case the NYMEX exchange.

In Blackrock's case, it has chosen to have Nasdaq, the exchange on which it will list, mutully share information with CME futures exchange, which lists bitcoin futures.

At first blush, Blackrock seems on the right track. The CME ticks the "regulated" column, unlike Coinbase. What about the "significant" column? The CME's open interest of around $1.5-2.0 billion is about half of Binance's $3-4 billion in futures open interest (and just a small fraction of the $10 billion combined total of Binance and all other unregulated offshore exchanges), so I'm not sure how the CME will qualify as big enough. (I get this data from The Block.) Put differently, if you wanted to manipulate the price of bitcoin using futures, you'd probably be able to do a fine job of it via Binance's futures market, and so Blackrock's surveillance sharing agreement with the CME just won't be all that effective.

In any case, this particular gambit has been tried before, and it hasn't worked. A parade of ETFs have tried to use a CME surveillance sharing agreement as their ticket to SEC approval, many using in-depth statistical analysis showing why the CME qualifies as "significant," and none have convinced the SEC, so it's not evident why Blackrock is special.

If Blackrock's iShares Bitcoin ETF isn't going to get approved, what needs to happen to get a bitcoin ETF over the line?

In my opinion, the unregulated offshore market needs to die. Much of crypto price discovery (and thus potential manipulation) occurs in offshore markets, both on the spot and futures side. Given the logic that the SEC has used up till now, Binance needs to go bust, and kosher venues need to take its place, before a U.S. bitcoin ETF get approved, because it's only then that a majority of bitcoin trading will migrate to venues that tick both the SEC's "regulated" and "significant" requirements.

For the first time ever, euro paper money in circulation is shrinking

Why is the paper euro shrinking? Are we at peak cash? 

To begin with, here is the data, charted: 

As the orange line shows, Europe is experiencing its first year-over-year drop in paper money in circulation. 

While it's tempting to attribute this to paper money's declining role in payments, what I suspect is happening is that as the European Central Bank hikes interest rates, Europeans are redepositing spare cash into the banking system so that they can earn yield. And the net result is less cash in circulation.

Just twelve months ago, the ECB's key interest rate was still in negative territory, sitting at -0.5%. At the time, holding a bit of extra cash under a mattress didn't hurt anyone, since there was no interest to be earned by returning it to one's bank. Then, in four swift moves beginning in mid-2022 (July 27, September 14, November 2, and December 21), the ECB jacked up rates to 2%. As of today its deposit rate is at 3.5%.

Suddenly, owning large chunks of cash under one's mattress had an opportunity cost. Queue a mass reverse bank run, one which involved bringing 0% paper money back to banks, and then to the ECB, in order to convert it into interest-earning assets.

One the best examples of this is from European banks themselves. To satisfy customer withdrawal requests, banks typically keep a reserve of banknotes on hand in their vaults. Historically they've always tried to minimize this stock, since they couldn't earn any interest on notes. But this urge to minimize holdings evaporated with negative interest rates, as the chart below shows. Banks let their vault cash double in size from 2014 to 2020.

When interest rates finally jumped from negative territory back to 0% in late July 2022, the opposite happened. As the chart shows, banks rapidly emptied their vaults and brought their banknotes back to the ECB in order to convert them into central bank deposits, even though those deposits only yielded 0%. Paper money incurs storage costs, so banks will generally prefer a 0% deposit, which doesn't incur storage costs, to a 0% banknote. And now that deposits at the ECB are yielding 3.5%, there's just no contest. Paper money is out, digital money is in.

We can get a broader picture of the rush to redeposit notes by looking at the European Central Bank's banknote flow data, illustrated below. Every month, banks withdraw notes from the ECB (orange line) and return notes to the ECB (blue line), in order to satisfy the public's demand for cash. Banks generally withdraw more notes than they redeposit, the net result being the steadily rising stock of paper currency that we see in the top-most chart. 

On the heels of the ECB's July 27, 2022 rate hike, the ECB experienced its highest rate of note redeposits in almost ten years, coming in at €106 billion in August. Much of that would have been the aforementioned banks returning some €40 billion in vault cash to the ECB. But banks wouldn't have been the only large actors to empty their mattresses.

European retailers probably let themselves get sloppy after 2014, holding a lot of extra cash in their store tills and safety deposit boxes rather than depositing it only to earn a negative return. With rates now positive, these retailers are probably being much more vigilant in sweeping up all spare company cash and redepositing it to the banking system. Other likely culprits include investment companies who, rather rather than holding negative yielding bonds, opted to store as many banknotes as possible, and are now changing their investment strategies.

In sum, the paper euro is shrinking, but it's probably due to higher interest rates, not fewer cash payments. Nor is this peak cash. After an interest rate-induced pause, the upwards rise in paper euros in circulation will probably continue.

How is the foreign expansion of Canadian banks going?

With the high profile nixing of TD Bank's purchase of First Horizon Bank last month, I thought I'd take a step back and try to visualize the last few decades of Canadian bank expansion outside of the country.

What I've done is go through the annual reports of the big-5 banks at five-year intervals in order to make a few charts out of each bank's total loan data. More specifically, I measure the big bank's foreign presence by comparing their domestic lending to lending made outside of Canada. For those who don't know, the big-5 are made up of Royal Bank, Toronto Dominion, CIBC, Scotiabank, and Bank of Montreal.

My first chart is the total amount of bank loans issued by the big-5, separated into Canadian loans and non-Canadian loans. (This category that also includes bankers' acceptances.)

Unsurprisingly, both domestic and international lending in 2022 were far higher than in 1995, with international loans rising above $1 trillion in 2022. What pops out is that while lending within Canada has advanced over all periods, there was a decline in big-5 international lending between 2000 to 2005.

In the chart below I've used a logarithmic scale instead of an arithmetic scale in order to better visualize the 2005 blip.

What happened during that period? Canadian banks were damaged by loans they had made in the late 1990s tech craze that soured in 2001 and 2002, particularly in the U.S. As a result of these setbacks, the big banks dialed back their willingness to engage in risk and that's probably why we see a pullback in their foreign lending portfolios.

The next chart shows international lending as a percentage of all big-5 lending. 

This chart further delineates the severity of the 2000-2005 episode. In 2000, international loans constituted more than 25% of the big banks' portfolios of loans. After getting stung in the early 2000s, this proportion plummeted to 18%. It would took twenty years for Canadian banks to rebuild the international side of their loan portfolios back to 25%. By 2022, international loans constituted over 30% of all Canadian bank loans, providing an answer to the title of my blog post: the foreign expansion of Canadian banks is still advancing, and is at its highest peak going back to 1995.

One thing I find interesting is that the big-5 did not contract their foreign loans after the 2008 credit crisis. I suspect this is due to the fact that most Canadian banks that operate internationally tend to focus on loans to foreign businesses and governments, not foreign individuals or consumers, and since much of the fallout in 2008 was on the U.S. residential side of things, Canadian banks escaped mostly unscathed.

In the next chart, I've broken up foreign lending by bank. 

As you can see, TD Bank was the biggest foreign lender in both 2015 and 2022, followed by Scotiabank, which had historically held the crown over the entire 1995-2022 period. Apart from the recent nixing of TD's attempted purchase of First Horizon Bank, TD has executed a very successful push into the U.S. over the last two decades starting with its acquisition of Banknorth in 2005, and now sits as the U.S.'s tenth largest bank.

As for Royal Bank, while it may be Canada's most valuable company by market capitalization, in 2022 it was only a middling foreign lender, hitting the same level of foreign loans as the much smaller Bank of Montreal. The laggard in the group is CIBC. But CIBC was also one of the fastest growers between 2015 and 2022, albeit from a very low base, no doubt helped by its 2016 acquisition of US-based PrivateBank.

As before, here's the same chart as above, but using a logarithmic scale.

A logarithmic scale gives move insight into how leadership in foreign lending has changed since 1995. Of the big five banks, TD was the smallest foreign lender in 1995. Now it leads the pack. As for CIBC, it was one of Canada's leading foreign lenders in 1995, but between 2000-2005 it went cold turkey. Long-time Canadian bank watchers will recall that of all Canadian banks, CIBC was the most aggressive in pushing into the U.S. in the late 1990s, particularly on the investment banking side with CIBC World Markets. But it got caught up in notable failures like Enron and, chastened, retrenched back to the low-risk world of Canadian retail banking.

For my last chart, here is a bank-by-bank breakdown of international lending as a total of all bank lending. 

You can see that Canada's smallest domestic lender, the Bank of Montreal, has spent much of the last thirty or so years as Canada's most international bank, measured in terms of international lending as a proportion of all lending. This is most likely due Bank of Montreal's long and successful presence in the U.S midwest, going back the early 1980s when it bought Harris Bank. Scotiabank has also been a leader in international lending, focusing mostly on Mexico and Latin America.

Royal Bank's lack of focus on international lending can probably be partly blamed on its lacklustre experience with Centura Bank, a franchise it bought back in 2001 and expanded over the next few years with additional acquisitions, renaming it RBC Bank. But Royal's RBC effort never worked out and Royal sold it in 2012.

What to expect in the future? 

Having locked up most of the Canadian banking market, it's all but inevitable that Canada's big banks will continue to push into foreign markets, especially the highly-fragmented U.S. banking market. There will be failures such as the rotten loans made during the late 90s bubble, but as before Canadian banks will learn from these. While TD's acquisition of First Horizon was cancelled, Bank of Montreal's purchase of Bank of the West last year went through, which moves it from 23rd to 13th on the list of biggest U.S banks. 

And there is a giant waiting on the sidelines. Having relaunched its push into the U.S. with its acquisition of City National Bank in 2015, Royal Bank is probably due for another big U.S. takeover.

To conclude, by 2025 Canada's big-5 banks will likely be even more reliant on international loans, with perhaps as much as as 34-35% of all their lending being to non-Canadian sources.

The lower limit to silver's usefulness in coinage

A detectorist in Suffolk, England recently found a beautiful halfpenny minted some time between 1625-1649, during the reign of King Charles I. This coin, captured in the video below, illustrates an important feature of coinage: the lower limit to silver's usefulness as a monetary metal.

As you can see, the halfpenny is tiny compared to the fingers holding it, which would have made it difficult to count, handle, and transfer. Storing it away in a pocket or purse would have been a nuissance, since it might have gotten lost in the folds.

Just chilling this afternoon and pottering about.
So here's a lovely little Charles I halfpenny, simple yet elegent ☺️

Found 2020https://t.co/PiKJjooe7D pic.twitter.com/87BRG2s69u

— Suffolk Detectorist (@SDetectorist) June 11, 2023

The root of the problem is that silver has always had a relatively high value-to-weight ratio, (i.e. it is good at "condensing value," as I once described here) and so attempts to embody lower denomination coins with silver don't function very well, since what is required for low denominations is a material that dissipates rather than condenses. Silver change is just too damn small.

According to the Portable Antiquities Scheme, this particular halfpenny – which is in great shape – weighs 0.27 grams and has a diameter of 10 mm. Compare that to a U.S. dime, already annoyingly small, which weighs 2.3 grams and has a diameter of 18 mm. Doing the calculation for you, a modern dime weighs almost ten times (!) as much as a Charles I halfpenny.

How much was a halfpenny worth in 1625? In short, I'd describe it as the dollar bill of its day.

In England, one penny could buy a penny loaf of bread, the weight of which was regulated by law. In Sheppard and Newton's The Story of Bread (1957), a loaf weighing 4 pounds would have cost 5 pennies in London in 1625. These days, a loaf sold in a grocery aisle usually weighs around 1 pound, so putting things into a modern context, a single 1625 penny was capable of buying one modern-day loaf of bread, and so a halfpenny was worth half a modern-day loaf. Given that a loaf currently retails at Walmart for around US$2 to US$2.50, that means a halfpenny was equivalent to a dollar bill, give or take.

As the dollar bill of its day, a halfpenny would have served a crucial role in England's day-to-day commerce. But being so delicate, it must have done a poor job of it. Even worse would have been the silver farthing, England's smallest coin, worth a quarter-penny, or half a halfpenny. "A still more egregious case [of too small coins] was that of the silver farthings the Royal Mint issued in 1464. Weighing only three troy grains each, these were 'lost almost as fast as they were coined,'" writes George Selgin in Good Money.

How to solve silver's inability to serve as a good medium for lower-denomination coinage? Here's one of the attempts made by the minting authorities:

Halfpenny of King James II, 1687. Source: Yale University Art Gallery

This James II halfpenny is what is called token coinage. Minted out of tin, which had a very low value, a token coin such as this one was worth far more than the amount of tin residing in it. What gave it its value isn't the metal within, but James II's promise to repurchase the coin at its stipulated rate of a half-penny's worth of silver.

Unlike Charles I's feather-light 0.3 gram halfpenny, James II's halfpenny had some heft to it. Weighing in at 10.11 g, which is equal to two modern American quarters, there was no losing track of this beast. The tin halfpenny would certainly have served as a more durable dollar bill of its day than a Charles I silver halfpenny.

Alas, while tokens such as James II's tin halfpennies solve the too-small problem, they introduce a new problem: counterfeiting. Because the amount of metal in a halfpenny was so cheap relative to the face value of the halfpenny, it would have been very profitable for fraudsters to manufacture fakes. Which is indeed what happened. By the middle of the 18th century, close to half of all the farthings and halfpennies, all of which were token coins by then, were counterfeits, according to Selgin (pg 20).

To counter the counterfeiters, James II's 1687 halfpennies have a strange feature on them: a small copper plug. In the image above this plug has fallen out, but this link illustrates what a complete coin would have looked like. By adding a plug to the coin, mint officials were trying to increase the complexity and thus the cost of manufacturing fakes, thus reducing their attractiveness to fraudsters. In concept, we can think of these plugged halfpennies as a clumsy predecessor to Canada's toonie, which has a nickel outer rim and an aluminum-bronze central plug.

Alas, James II's tin halfpennies never worked out. The tin was quick to erode and the copper plug was prone to falling out. If the solution to silver's lower limit was to make token coinage, better to manufacture those tokens out of a tougher substrate like copper. By the 1690s, England's tin halfpenny experiment had ended.

When is a stablecoin a security? The strange case of Binance and BUSD

The SEC has been hinting for several years that stablecoins may be securities. I've always found the idea of regulating stablecoins as securities to be a bit odd. No one who buys a stablecoin expects to make a profit. That's because none of the big stablecoins (Tether, BUSD, or USD Coin) have ever paid interest. With no expectation of profit, stablecoins aren't like bonds or stocks or other investment contracts, and thus they shouldn't fall under SEC purview.

Never mind that PayPal, Wise, Payoneer and Cash App all create dollars in the same way as a stablecoin issuers do, and like stablecoins only pay 0% interest. Yet the SEC has never deemed a PayPal balance to be a security.

Anyways, over time we've been getting more clarity on the regulatory status of stablecoins. In February, the SEC issued a warning notice to stablecoin issuer Paxos that, in its view, one of Paxos's stablecoins, Binance USD, was an unregistered security. Notably, Paxos's other stablecoin, USDP, was not mentioned in the notice. Some types of stablecoins seem to be securities, others not.

A new lawsuit against Binance provides even more insight into what sorts of stablecoin activity the SEC deems to fall under securities law. Earlier this week, the SEC accused Binance of (among many other things) offering and selling Binance USD, or BUSD, as a security without bothering to register the offering. Paxos's USDP was not mentioned in the suit, nor was any other stablecoin. 

To clear up any confusion, BUSD is issued by Paxos but Binance puts its name on the label and markets the coin. It's a partnership.

One reading of the SEC's suit against Binance is that a stablecoin itself isn't a security. Rather, it is the particular way that BUSD's income is shared between Paxos and Binance, combined with the way that Binance offers BUSD to retail customers, that transforms this particular instance of a stablecoin into a security offering.

Here's a short explanation of how the whole BUSD sausage works. The main entry-way for the public into BUSD is via Binance's website. When retail customers buy BUSD on Binance, they submit fiat dollars. Next, the customers' funds are wired to Paxos, a New York-chartered limited trust, where they are pooled and invested in assets that yield interest. Paxos in turn sends BUSD back to Binance to be deposited into Binance-controlled addresses. These underlying BUSD tokens serve as stand-ins for customer U.S. dollar balances on Binance.

According to the SEC, some 90% of all BUSD was controlled by Binance. In a key bit of data, we also learnt that Paxos and Binance split the interest income 50/50.

Any investment of money in a common enterprise constitutes the first key steps towards an investment contract, and an investment contract falls under SEC jurisdiction. In its suit, the SEC is suggesting that when Binance customers bought BUSD, and their funds were pooled and invested by Paxos, the initial triggers for investment contract-status had been met.

However, for an asset to be an investment contract there also needs to be an expectation of profit. Recall that BUSD doesn't pay any interest to customers. A BUSD token is about as unfruitful as a U.S. dollar balance at PayPal or Wise, neither of which are securities.

Here's where the hook appears to have caught flesh. While BUSD tokens are themselves barren, BUSD tokens held on Binance do yield a profit. According to the SEC, Binance offered something called a BUSD Reward Program that "promised interest payments to BUSD investors merely for holding BUSD on the Ethereum blockchain."

The SEC then proceeds to connect Binance's ability to imbue BUSD with "profit potential" to the interest earned on the underlying pooled assets that it splits with Paxos.

And that's why this particular instance of a stablecoin may be a security. If Paxos were to directly pay interest to the public, then BUSD would obviously be a security, since that establishes an expectation of profit. What has happened instead is that streams of interest income are channeled through to the public by Paxos paying Binance and Binance rewarding end users. The SEC seems to be saying that this isn't an accepted workaround: two separate entities cannot cooperate and fabricate an interest return on stablecoins, and avoid having this entire contraption be deemed a security.  

Now, that's just my interpretation. I could be wrong. But assuming that I'm right, what does that mean if you are a stablecoin issuer and don't want to run afoul of securities law?

First, never pay direct interest to retail customers. That's why old-school money transmitters like PayPal, Wise, and Cash App don't directly offer interest on balances; and when their customers do get interest, it's either a bank or a money market fund that carries this business out on behalf of the money transmitter.

The particular lesson to be gleaned from the SEC's case against Binance seems to be that in addition to not paying interest to customers, stablecoin issuers should probably be wary of sharing interest income with partners. These partners may sluice the interest back to their own retail customer base, the whole amalgam thus synthesizing into an SEC-regulated security. That may explain why Paxos's BUSD is being targeted by the SEC as a security, whereas Paxos's USDP – which never had a Binance yield-generating nexus – isn't being targeted as a security... at least for now.

Another Indian payments idea: a lightweight portable payments system for catastrophes

India is so far ahead of most of the world when it comes to payments technology that when a new Indian payments idea emerges, we should probably pay attention.

In its recent annual report, the Reserve Bank of India, the country's central bank, put forward the idea of a super-resilient back-up payments rail, which it calls the Lightweight Payment and Settlement System (LPSS). If a war or natural disaster cripples core payments infrastructure such as India's real-time gross settlement system, then the LPSS would kick in to process essential payments. The LPSS would be "independent of conventional technologies," portable, and capable of being operated "anywhere by a bare minimum staff."

Here is the full description:

Source: RBI

In my admittedly not-very-technical head, what I'm imagining is some sort of truck filled with computers and other apparatus for processing payments, sort of like a mobile police command vehicle. I could imagine a fleet of them. And there would be multiple way for these mobile payments bunkers to communicate with commercial banks, some of which wouldn't rely on the internet, like... ham radio? Transactions recorded on DVD and delivered by hand? (Yes, apparently that's a real thing). Dunno. I'm sure others will have a better idea how the LPSS works.

Central banks already plan for disasters by creating layers of payments redundancy, specifically back-up data centres in fixed locations.

In the U.S., for instance, the key Fedwire system is hosted at the Fed's East Rutherford Operations Center in New Jersey. Should disaster strike at the East Rutherford hub, a secondary back up data center at the Federal Reserve Bank of Richmond is designed to resume Fedwire operationality 60-90 minutes later. A third backup center exists at the Federal Reserve Bank of Dallas. (The source for this is here.)

As for Canada, our new Lynx high-value payments system is hosted at a primary site (I don't know where) with a secondary site ready to turn on as a back-up, as explained in this document. If both sites go down, then the system moves to good ol' fashioned manual processing.

I assume that India currently uses the same fixed primary/secondary site strategy as Canada and the U.S.

Ultimately, every single digital payment gets settled via transfers of central bank deposits over core payments infrastructure. So ensuring that these systems are available is crucial. No central bank wants to fall victim to something like the infamous 2014 breakdown of CHAPS, the UK's wholesale payments system, which prevented people from making crucial payments for ten hours.

Ages ago, some of us suggested that blockchain-based systems might provide a suitable layer of redundancy. If key centralized infrastructure like India's RTGS, U.S.'s Fedwire, or Canada's Lynx were to stop working thanks to a disaster, a central bank could temporarily fail-over to a decentralized option until the primary system is restored. This model has never been tried out. Perhaps in a world with ever-increasing natural disasters and renewed geo-political tensions, an LPSS, some sort of truck-full-of-payments-processing-machinery, is the best solution for central banks.

Why is Binance leaving Canada?

Binance, the world's largest crypto exchange, announced last month that it would be exiting Canada. At the time, it blamed "new guidance" issued by Canada's securities regulators. We now have an even more detailed explanation from Binance about the nature of this "new guidance."

First, Binance says that Canadian securities regulators refused to approve its BUSD stablecoin.

If you explore this claim more closely, it just doesn't hold water. Canadians use Canadian dollars for almost everything, but BUSD is a U.S. dollar stablecoin. There's no way that any exchange's strategy for attracting Canadian customers would depend to any significant degree on providing us with U.S. dollars. (And if this was a major part of Binance's Canadian strategy, what on earth were its executives thinking?)

The other reason this excuse is a flimsy one is that the BUSD stablecoin was already due to be retired by February 2024, on orders emanating from the New York Department of Financial Services. Surely Binance's entire Canadian strategy didn't rely on a stablecoin that was destined to become defunct anyway.

The second excuse Binance gave for its departure was new guidance that its token BNB (if approved) would be subject to "investment limits." What Binance is presumably referring to is the regulatory line that most Canadian securities regulators drawn between restricted crypto assets and specified crypto assets. If a crypto asset is a specified asset, exchanges can let their customers buy it without limit. But restricted crypto faces a $30,000 ceiling, waived only if you are an eligible or accredited crypto investor.

So long story short, Binance says it was blindsided by BNB being deemed a restricted crypto asset.

But surely this couldn't have come as a sudden surprise to Binance. Twenty-three crypto exchanges have sought Canadian regulatory approval over the last three years, and in each case the list of approved specified assets (i.e. those not subject to buying limits) has been consistently confined to bitcoin, ether, bitcoin cash, and litecoin. It seems very unlikely that Binance's entire strategy for entering Canada depended on trying to add BNB to what has always been a set-in-stone list.

If Binance didn't leave because of a prohibition on BUSD or limits on BNB, then why did it leave?

One possibility is that Binance may have got wind of a recently unveiled Ontario Securities Commission's investigation into Binance's practices, and decided to cut its losses.

Alternatively, Binance may have belatedly realized that it simply didn't have the institutional chops to comply with Canada's regulatory framework. For instance, in order to protect customers from malfeasance, exchanges that want to deal with Canadians must keep 80% of all crypto at a third-party custodian. Binance doesn't currently use a third-party custodian, so it would have had to build a new platform for Canadians.

Realizing only after it had launched itself on a path to regulated status that it couldn't comply, Binance needed a face-saving reason to cut & run. When Canadian regulators provided Binance with the first round of feedback this spring, the exchange seized on this "new guidance" as its pretext for leaving, thus allowing it to blame regulators rather than blaming itself.