Aurelia Butler

ORLANDO, Fla. (Reuters) – The Fed is nowhere near taking a victory lap on inflation, but some signals from the bond market suggest that day may not be quite as distant as policymakers had anticipated.As recession fears yank commodity prices down from their recent peaks – last week, oil and copper had fallen 20% in less than a month – market-based inflation expectations have rapidly declined also. Breakeven inflation rates embedded in five- and 10-year inflation-linked bonds, and ‘five-year/five-year forward’ inflation swaps, have retreated by as much as a full percentage point from highs in March and April, and as much as 50 basis points since the Fed’s June 15-16 policy meeting.Inflation expectations reflected by these financial market instruments are typically comprised of three components: term premium, liquidity premium, and outright expected inflation.There is no prescribed formula for slicing and dicing them, so findings can vary wildly.According to some models monitored by Roberto Perli and Benson Durham at Sandler Piper, both former Fed economists, the steep headline decline in recent weeks has been driven mainly by the inflation expectations component, which has offset moves in liquidity and term premiums.Call it the ‘core’ measure of inflation expectations.Durham’s estimates suggest that since June 14, the eve of the Fed’s two-day meeting, the expected inflation component of the 5-year Treasury Inflation Protected Securities (TIPS) yield has fallen around 60 basis points, and the equivalent measure in 10-year TIPS has fallen nearly 50 bps.Durham reckons the expected inflation component embedded in five-year/five-year forwards has declined 37 bps, helping to reverse rise earlier this year. The year-to-date increase of around 50 bps is still around the 90th percentile of all six-month changes.”The worst part has unequivocally gotten better. That is good news,” Durham said. “The decline is meaningful, but the model can be volatile. It’s encouraging though.” Such steep and rapid declines are rare. Benson notes that the fall in five-year forwards is around the 99th percentile of all three-week changes in absolute terms since TIPS started trading in 1999. The last time there was a sustained decline like this was in the aftermath of the Great Financial Crisis. Similarly, the last time the broader measure of five-year breakeven inflation rates fell by a percentage point in a few months was in 2011. GRAPHIC: Stripped out expected inflation – Piper Sandler https://fingfx.thomsonreuters.com/gfx/mkt/gdvzylrxapw/InflExpect4.jpg GRAPHIC: US bond yields & inflation expectations https://fingfx.thomsonreuters.com/gfx/mkt/movanameypa/InflExpect1.jpg ALL UNDER CONTROL?This suggests investors think long-run inflation is under control, either by an economic ‘soft landing’ doing part of the Fed’s work, or by the Fed deliberately making policy highly restrictive to kill inflation (and growth).Right now, the first scenario looks more likely. Inflation expectations have come down but so has the Fed’s so-called ‘terminal rate’, the market’s estimate of where the fed funds rate will peak. At the time of the Fed’s June policy meeting, rates markets were betting the Fed would raise rates above 4% in the first half of next year. That is now around 3.50%, and was even lower earlier this month.Right now, traders think the Fed won’t go too far above its long-run estimate of the ‘neutral’ rate of interest around 2.5% for long, and are betting on long-term inflation of around 2.5%, not much above the Fed’s goal of 2%.It goes without saying that too much faith must not be put in one model. Economists, traders, and not least policymakers, will be scrutinizing a range of indicators for signs that inflation expectations have peaked and continue to decline. GRAPHIC: UMich consumer inflation expectations https://fingfx.thomsonreuters.com/gfx/mkt/zdvxobymkpx/InfExpect2.jpg One of those is the University of Michigan’s consumer survey of inflation expectations. The preliminary five-year June survey rose to 3.3%, enough to prompt the Fed to suddenly shift towards a 75 bps rate hike a few days later rather than the 50 bps move officials had widely flagged.The final reading was revised back to 3.1%, calling the Fed’s communications strategy and wider credibility into question. Still, with gas prices falling – dipping below $4 a gallon in some parts of the country – July’s number could be lower still.Many analysts point out that market-based inflation expectations measures like breakevens and forwards are distorted by the risk premiums embedded in them and their relatively low levels of liquidity. “Breakevens don’t have a particularly long history. In some instances, they react faster and earlier (to economic data), but ultimately it is consumers’ inflation expectations that matter most to the Fed,” said Francis Yared, global head of rates research at Deutsche Bank (ETR:DBKGn). GRAPHIC: US inflation expectations and oil https://fingfx.thomsonreuters.com/gfx/mkt/znpneadwqvl/InfExpect3.jpg (The opinions expressed here are those of the author, a columnist for Reuters.) (By Jamie McGeever; editing by Diane Craft) More

Richard Barwell is head of macro research at BNP Paribas Asset ManagementA decade and a half of quantitative easing has led to a massive expansion in central bank balance sheets. However, it is not obvious that the balance sheet had to get so big in the first place, or stay so big, given the range of views within central banks about how QE works and the reasons why QE took place.Some policymakers believe that QE works by disturbing the balance between demand and supply in the bond market. For those individuals, the accumulated stock of purchases is a crude proxy of the current stimulus from QE so the balance sheet expansion was appropriate. However, many — and perhaps most — central bankers do not attach much significance to this quantities mechanism. They believe that asset purchases only really influence asset prices when markets are dysfunctional and illiquid. In normal market conditions these policymakers believe QE influences asset prices primarily via a signalling mechanism and it is then less obvious why the balance sheet had to get so big.If a QE announcement can shift investor beliefs and asset prices then it must contain new information, over and above what is already in the public domain, given current communications and past actions. But are any bond purchases strictly necessary in these circumstances? If central banks hold valuable private information about the state of the economy or the future conduct of policy then they could publish that information in a more effective and controlled fashion at a fraction of the cost and without any expansion in the balance sheet. Rather than hinting that rates may stay lower for longer via QE the central bank could publish a path for the policy rate that clarified and quantified how and why rates would stay lower for longer. Alternatively, if central banks don’t hold back relevant information then there is nothing left for QE to signal.Some academic economists counter that the balance sheet is the signal. They argue that the accumulation of a large bond portfolio fundamentally changes the internal policy debate and the future path of policy. Central bankers now supposedly have an incentive to keep rates low for longer: to avoid losses on those bonds. However, most policymakers would probably protest that they ignore such considerations and investors may query whether keeping rates low for far too long is necessarily the best way to avoid capital losses on long-term bonds.Even if it was necessary for the balance sheet to get so big, central bankers could have prioritised reversing that process — quantitative tightening — in the past, present and near future.Policymakers who believe in the signalling mechanism presumably accept that the value of the signal gradually decays over time. Once the market has deciphered the message in a QE announcement it is unclear what purpose the associated bond purchases serve. The issue is whether QT would also send an unintended and likely unwelcome signal to the market. It is not obvious that it would, if central banks had made clear from the start that QT would automatically follow QE. All purchases could have been automatically and gradually unwound once the market got the message. Instead, central banks adopted a full reinvestment policy, keeping the balance sheet big until at least the first hike. Once that norm was established, deviating from it would have sent a signal.Decisions around QT are more complicated for those policymakers who believe in the quantities mechanism. For them, any reduction in the size of the bond portfolio would imply a de facto monetary tightening. But central banks could have chosen to tighten policy through QT — shrinking the balance sheet — before they raised the policy rate. Instead, they chose to tighten primarily through rate hikes.The standard justification for the current approach is that the impact of changes in the balance sheet on the economy is more uncertain than the impact of rate hikes so it makes sense to tighten via the more reliable instrument. However, you can perhaps flip that argument on its head. If the impact of asset purchases is so uncertain then it might make sense to remove that major source of macro uncertainty first.All this discussion presupposes that QE was entirely a monetary policy operation. It was not. Irrespective of how you classify the operations that took place in March 2020 — market maker of last resort or risk taker of last resort — central banks were buying assets to first and foremost achieve financial stability objectives.Different objectives behind bond purchases suggest that different rules of the game could apply. The default monetary policy assumption of full reinvestment until at least the first hike did not have to be adopted. Policymakers could have argued that they would buy and hold bonds for as long as markets remained dysfunctional but would gradually sell them back into the market as soon as market conditions permitted. Instead, the full reinvestment policy was adopted and the financial stability purchases effectively morphed into monetary policy operations after the fact.Setting monetary policy without 20:20 hindsight is a hard thing to do. But the way central bankers think about how QE works and the reasons why they do QE suggest they might have been able to achieve broadly similar objectives with a significantly different path for the balance sheet. That is worth thinking about before the next time central banks buy assets for monetary or financial stability purposes. More

The dollar surged against other major currencies on Monday as traders weighed the prospect of aggressive interest rate rises in the US and intensifying recession risk in Europe.The dollar index, which tracks the US currency against six others and has a large euro weighting, rose 0.7 per cent to around its highest point since 2002. That ascent helped to push the euro closer to parity with the greenback, with Europe’s common currency dropping as much as 0.9 per cent to $1.0094 — closing in on a level not seen for nearly two decades. The dollar also hit a fresh 24-year high against the Japanese yen, buying ¥137.27. Market sentiment in recent weeks has swung between a recognition that central banks need to raise interest rates aggressively to combat soaring inflation and a more forward-looking view that excessive monetary tightening may cause a global economic slowdown. Both narratives have firmed investors’ bullishness towards the dollar, particularly because recession risks are seen as higher in Europe. The European Central Bank has followed the US Federal Reserve into tightening monetary policy, but is expected to remain as dovish as possible to counter economic shocks from Russia’s invasion of Ukraine.“We’re expecting a recession earlier in Europe” said Sonja Laud, chief investment officer at Legal & General Investment Management. “The US is an energy exporter, Europe is an importer and in the current energy price environment that makes all the difference.”As Russia shut its Nord Stream 1 gas pipeline for 10 days of scheduled maintenance on Monday, ING strategists noted that “many fear Russia may take the chance to halt or considerably trim its exports” in “a severe blow to the region’s economic outlook”. Futures linked to TTF, Europe’s wholesale gas contract, edged 0.1 per cent higher to €170 per megawatt hour on Monday, remaining more than double their level in early June. Following unexpectedly strong jobs data for June, analysts expect the Fed to raise rates by as much as 0.75 percentage points at its July meeting to tame inflation, following a similar move last month. Futures markets tip the US funds rate to peak at 3.54 per cent next March, while the ECB is expected to nudge borrowing costs gradually higher, from minus 0.5 per cent currently to just over 1 per cent by February.

The Bank of Japan, meanwhile, has defied the global trend towards tighter monetary policy. On Monday, BoJ governor Haruhiko Kuroda warned of “very high uncertainty” for the domestic economy in a strong signal that the central bank will retain its easing stance.In stock markets, the Stoxx Europe 600 index lost 0.3 per cent and Germany’s Xetra Dax dropped 0.8 per cent, following sharp falls in China driven by new Covid-19 restrictions. Futures markets indicated that Wall Street’s S&P 500 share index, which rose last week following its worst first half of the year for more than five decades, would lose 0.5 per cent at the New York opening bell. Hong Kong’s Hang Seng share index shed 2.8 per cent and mainland China’s CSI 300 dropped 1.7 per cent after cities across China reimposed coronavirus restrictions to battle the highly contagious BA.5 Omicron subvariant. The yield on the 10-year German Bund, which falls as the price of the benchmark eurozone debt instrument rises, fell 0.05 percentage points to 1.29 per cent.The yield on the 10-year US Treasury bond, which underpins debt pricing worldwide, traded 0.04 percentage points lower at 3.06 per cent. More

I swore to myself — I swore — that I wasn’t going to get drawn into following UK trade policy and instead would keep my mind on higher and more substantive things. But the spectacular implosion of the worst prime minister in British history can’t pass without comment. I was tempted to headline today’s newsletter “The head clown leaves but the trade circus rolls on”, except that first, someone else did similar, and second, if you ask professional clowns about Johnson you get a fierce denial that he’s one of them. But I digress. Today’s main piece muses on the direction in which policy is likely to go under a new British leader and looks at the competing strains of thought, if we can dignify them with that term, in the UK’s Conservative party. Charted waters looks at the causes of the UK’s petrol price increases. Thoughts on this or anything else? I’m at [email protected], or reply to this email.The Conservatives’ destructive streak runs deepThe last time I wrote about this I opined that the UK’s policy with regard to the EU and the Northern Ireland Protocol was obviously nuts but the modestly important sideshow of non-EU trade policy was actually pretty well run thanks to the competence of the civil servants and the liberalising instinct of certain ministers.Seems I was a bit optimistic. Two weeks ago the UK not only decided to fiddle its own trade defence regime to continue imposing steel safeguard tariffs, but the government went out of its way to emphasise that it was probably breaking WTO law to do so. Governments have pretty blatantly flouted WTO rules before. A similar occasion was George W Bush’s steel tariffs of 2002, obviously aimed at winning the midterm elections of that year. But at least his administration went through the motions of pretending they were legal before losing the inevitable WTO case and lifting them in 2003.Accordingly, I’m changing my standard analysis of British trade policy as follows. Its EU policy is bonkers. Anything non-EU is pretty well done if run by civil servants, but a roll of the dice once ministers start having ideas.Sadly, it’s a long shot that any of the likely successors to Johnson are going to end the confrontations over the Northern Ireland Protocol. (This is another rule of thumb of mine that I might have to revise — that the UK always capitulates to the EU when asked to choose between confrontation and chaos.) Certainly, EU officials don’t think so. Even the relatively moderate former Remainer leadership candidates (Tom Tugendhat, Jeremy Hunt) feel the need to support the Northern Ireland Protocol Bill. The best we can hope for is that this is brinkmanship negotiation, not an actual trade war, but even that’s a really bad idea.For the non-EU bit of UK trade policy (“and apart from that, Mrs Lincoln …”) the randomness in ministerial decisions obviously owes something to competing strands of thought, or perhaps of instinct, in the Conservative party. One is the standard attachment to free trade, usually rooted in some 19th-century Ricardian analysis, sometimes but not always combined with a quasi-imperial attachment to anglophone countries such as the US. The second, which is driving the Northern Ireland issue and the steel safeguards, is a British (and often specifically English) nationalism all about self-reliance and telling foreigners where to get off. Intriguingly, Margaret Thatcher managed to combine the two in one person, first being instrumental in expanding free enterprise in the EU by creating the single market but then turning against Brussels over its ambitions for social and political union. But I digress.Two leading candidates to have done time in the Department for International Trade, Liz Truss and Penny Mordaunt, would place themselves ideologically in the first camp. Truss, courageously for an MP with a rural constituency, gave the Australians the big agricultural tariff cuts they wanted in the bilateral deal. Mordaunt’s free-trade Atlanticist views on trade are laid out in a speech she gave to the Carter Center in the US last December. It started with an ever so slightly exaggerated view of the UK’s standing. Brexit apparently means the UK “has made itself a player on the global chessboard, and the US needs to understand and recognise the UK’s new position”. Currently, those galaxy brain grandmasters in London are sending an undefended pawn marching recklessly towards the EU’s queen despite the US trying to warn them against. But I digress.The problem with the free-trade view in advanced economies is that, with exceptions such as some parts of agriculture, regulations rather than tariffs are the big deal. You can’t have unilateral mutual recognition of regulations. Mordaunt’s speech at least recognised this, but was way too optimistic that the common values that apparently exist between the UK and the US will somehow get these things done. She wanted “outcomes-based regulation consistent with our common law” based on accepting equivalence with trading partners’ rules rather than the EU’s prescriptive rule book.If Mordaunt wants some trenchant views on regulation and equivalence, she should talk to American parents trying to buy imported infant formula, London insurance companies going state-by-state to try to set up in the US, or Scottish haggis makers who’ve been banned from the US market since 1971 on esoteric food-safety grounds. The agreements the UK claimed recently with a bunch of US states aren’t much more than aspirational.It’s a bit of a grim outlook for the UK and trade, and I’m going to do my best to going back to ignoring it. For a supposedly market-orientated party, the Conservatives have frequently shown serious hostility to open trade down the centuries. Thanks to their obsession with endlessly fighting battles with the EU whether from inside or out, they’re here again. The liberalising instincts of some ministers will ameliorate this a bit, but we shouldn’t expect the regime under the new prime minister to be much different from the old one.As well as this newsletter, I write a Trade Secrets column for FT.com every Wednesday. Click here to read the latest, and visit ft.com/trade-secrets to see all my columns and previous newsletters too.Charted watersApologies to those who might see this as a UK-obsessed newsletter, but there was an interesting local analysis of a global concern at the moment — escalating vehicle fuel prices at the service station pumps. Upset among British motorists, including a go-slow by drivers that brought some motorways to a standstill, has fuelled resentment against the retailers providing their petrol, prompting an investigation by the Competition and Markets Authority. The initial findings — that there was little evidence of fuel station operators inflating prices — show the uncomfortable truth, that in oil as in other vital commodities the problems are international in nature and in this case mostly owing to the breakdown in trade caused by a big supplier (Russia) being given pariah status by western trading partners and a loss of capacity owing to Covid-19. (Jonathan Moules)Trade linksThe FT reports that even US administration officials who support lifting tariffs on imports from China admit it won’t do much to reduce inflation.Relatedly, the Economist says that Joe Biden is looking at other options than tariffs to take on China.The WSJ reports on how one company tried to re-engineer its supply chains to remove China.Commodity prices have fallen sharply in recent months, probably because of fears of recession hitting global demand.Trade Secrets is edited by Jonathan Moules More

ORLANDO, Fla. (Reuters) -Hedge funds had a torrid second quarter, but their faith in the dollar paid off spectacularly.Industry data provider HFR’s Currency Index, part of the broader Macro (Total) Index, rose 1.76% in June, the biggest monthly rise since March 2020, which brought the April-June increase up to 5.70%.That was the best quarter since a 5.72% surge in the same period in 2017.Or put another way, currency strategies tracked by HFR essentially just had their joint-best quarter since the index was launched in 2008. Central to that was funds’ consistent and sizeable long dollar position.According to Commodity Futures Trading Commission data, hedge funds have been long of dollars against a basket of G10 currencies every week for 51 weeks. The average net long dollar position in the second quarter was worth around $15 billion.Thanks to a widespread belief that the Federal Reserve will raise U.S. interest rates to combat inflation more than other central banks, the dollar went on a tear in Q2.It is now at its strongest level in 20 years against the euro and a basket of major currencies, and its 6.5% rise on an index basis in April-June was its best quarter since 2016.The latest CFTC data showed that funds increased their net long dollar position against G10 currencies by $2 billion to $16 billion in the week through July 4, simply reversing the $2 billion reduction from the week before.This suggests that despite the dollar’s strong gains, lofty position, and a general softening of investors’ expectations for the Fed’s tightening cycle, funds are confident the greenback can climb even higher. MUFG’s Lee Hardman notes that the stronger-than-expected U.S. employment report for June on Friday and the latest public comments from Fed officials point to another 75 basis point rate hike later this month.”The dollar strongly regained upward momentum over the past week and we expect this to extend further in the near term,” Hardman wrote in a note on Friday.The relative weakness of the dollar’s major counterparts, particularly the euro, cannot be ignored though.CFTC funds increased their net short euro position to 16,852 contracts from 10,596 a week earlier. That is the biggest net short this year and marks the fourth week in a row funds have been net short the euro.A short position is essentially a bet that an asset will fall in value, and a long position is a bet that it will rise. Funds are now holding a $2.16 billion bet on the euro weakening. A month ago, they had a $6.8 billion bet on it strengthening.The flip is paying off.The euro slumped to a 20-year low of $1.0070 last week, close to parity, on fears that the energy crisis will tip the euro zone economy into recession, and that the European Central Bank will struggle to support growth while trying to tame record inflation and rein in widening sovereign bond yield spreads.Hardman recommends selling the euro at $1.0160, targeting a break through parity down to $0.9760 soon. It looks like a growing number of hedge funds would be on board with that.(The opinions expressed here are those of the author, a columnist for Reuters.)(By Jamie McGeeverGraphics by Jamie McGeever, Saikat Chatterjee, Marc Jones; Editing by Sam Holmes) More

LONDON (Reuters) – The world’s largest crypto exchange, Binance, continued to process trades by clients in Iran despite U.S. sanctions and a company ban on doing business there, a Reuters investigation has found.In 2018, the United States reimposed sanctions that had been suspended three years earlier as part of Iran’s nuclear deal with major world powers. That November, Binance informed traders in Iran it would no longer serve them, telling them to liquidate their accounts.But in interviews with Reuters, seven traders said they skirted the ban. The traders said they continued to use their Binance accounts until as recently as September last year, only losing access after the exchange tightened its anti-money laundering checks a month earlier. Until that point, customers could trade by registering with just an email address.”There were some alternatives, but none of them were as good as Binance,” said Asal Alizade, a trader in Tehran who said she used the exchange for two years until September 2021. “It didn’t need identity verification, so we all used it.”Eleven other people in Iran beyond those interviewed by Reuters said on their LinkedIn profiles that they too traded crypto at Binance after the 2018 ban. None of them responded to questions.The exchange’s popularity in Iran was known inside the company. Senior employees knew of, and joked about, the exchange’s growing ranks of Iranian users, according to 10 messages they sent to one another in 2019 and 2020 that are reported here for the first time. “IRAN BOYS,” one of them wrote in response to data showing the popularity of Binance on Instagram in Iran.Binance did not respond to Reuters’ questions about Iran. In a March blog post, published in response to Western sanctions on Russia, Binance said it “follows international sanction rules strictly” and had assembled a “global compliance task force, including world-renowned sanctions and law enforcement experts.” Binance said it used “banking grade tools” to prevent sanctioned people or entities from using its platform.Iran’s mission to the United Nations in New York did not respond to a request for comment.The Iranian trading on the exchange could draw interest from U.S. regulators, seven lawyers and sanctions experts told Reuters.Binance, whose holding company is based in the Cayman Islands, says it does not have a single headquarters. It does not give details about the entity behind its main Binance.com exchange which does not accept customers in the United States. Instead, U.S. clients are directed to a separate exchange called Binance.US, which – according to a 2020 regulatory filing – is ultimately controlled by Binance founder and CEO Changpeng Zhao.Lawyers say this structure means Binance is protected from direct U.S. sanctions that ban U.S. firms from doing business in Iran. This is because the traders in Iran used Binance’s main exchange, which is not a U.S. company. But Binance does run a risk of so-called secondary sanctions, which aim to prevent foreign firms from doing business with sanctioned entities or helping Iranians evade the U.S. trade embargo. As well as causing reputational damage, secondary sanctions can also choke off a company’s access to the U.S. financial system.Binance’s exposure would depend on whether sanctioned parties traded on the platform and whether Iranian clients dodged the U.S. trade embargo as a result of their transactions, four lawyers said. Non-U.S. exchanges “can face consequences for facilitating sanctionable conduct, whereby they have exposure for allowing the processing of transactions for sanctioned parties, or if they’re on-boarding those types of users,” said Erich Ferrari (NYSE:RACE), principal attorney at Ferrari & Associates law firm in Washington.Reuters did not find evidence that sanctioned individuals used Binance.Asked about traders in Iran using Binance, a spokesperson for the U.S. Treasury declined to comment.Binance kept weak compliance checks on its users until last year, despite concerns raised by some senior company figures, Reuters reported in January, drawing on interviews with former senior employees, internal messages and correspondence with national regulators. The exchange said in response it was pushing industry standards higher. Reuters’ new reporting shows for the first time how the gaps in Binance’s compliance programme allowed traders in Iran to do business on the exchange.Binance dominates the $950 billion crypto industry, offering its 120 million users a panoply of digital coins, derivatives and non-fungible tokens, processing trades worth hundreds of billions of dollars a month. The exchange is increasingly going mainstream. Its billionaire founder Zhao – known as CZ – this year extended his reach into traditional business by pledging $500 million to Tesla (NASDAQ:TSLA) boss Elon Musk’s planned takeover of Twitter (NYSE:TWTR). Musk has since said he is pulling out of the deal. Last month Binance hired Portuguese soccer star Cristiano Ronaldo to promote its NFT business.”BINANCE PERSIAN”Since the Islamic Revolution of 1979, the West and the United Nations have imposed sanctions on Iran in response to its nuclear programme, along with alleged human rights violations and support for terrorism. Iran has long maintained the nuclear programme is for peaceful purposes.Under the 2015 deal between Iran and six world powers, Tehran curbed its nuclear programme in return for an easing of some of the sanctions. In May 2018, President Donald Trump ditched the accord and ordered the reimposition of the U.S. sanctions that were relaxed under the deal. The curbs came back into effect in August and November that year.After Trump’s move, Binance added Iran to a list of what it called “sanctioned countries” on its terms of use agreement, saying it could “restrict or deny” services in such areas. In November 2018, it warned its customers in Iran by email to withdraw their crypto from their accounts “as soon as possible.”Publicly, some Binance executives lauded its compliance programme. Its then chief financial officer said in a December 2018 blog it had invested heavily in countering dirty money, saying it took a “proactive approach to detecting and squashing money laundering.” In March the following year, it hired a U.S. compliance platform to help it screen for sanctions risks.By August 2019, Binance deemed Iran – along with Cuba, Syria, North Korea and Crimea – a “HARD 5 SANCTIONED” jurisdiction, where the exchange would not do business, according to an internal document seen by Reuters. The May 2020 document included Iran on a list of countries headed “strictly no,” citing Chief Compliance Officer Samuel Lim.Even as Binance’s stance on Iran hardened, its profile among the country’s legions of crypto users was growing, traders said, citing their knowledge of the local industry.Cryptocurrencies grew attractive there as sanctions took a heavy toll on the economy. Since the birth of bitcoin in 2008, users have been drawn to crypto’s promise of economic freedom beyond the reach of governments. Cut off from global financial services, many Iranians relied on bitcoin to do business on the internet, users said.”Cryptocurrency is a good way to circumvent sanctions and make good money,” said Ali, a trader who spoke on condition he was identified by only his first name. Ali said he used Binance for around a year. He shared with Reuters messages with Binance customer service representatives that showed the exchange closed his account last year. They said Binance was not able to serve users from Iran, citing recommendations from United Nations Security Council sanctions lists.Other traders at the exchange cited its weak background checks on clients, as well as its easy-to-use trading platform, deep liquidity and a large number of cryptocurrencies that could be traded as reasons for its growth in Iran.Pooria Fotoohi, who lives in Tehran and says he runs a crypto hedge fund, said he used Binance from 2017 until September last year. Binance won over Iranians because of its “simple” know-your-customer controls, he said, noting how traders could open accounts simply by providing an email address.”They succeeded in gaining a huge trading volume, with many pairs of currencies, within a short period of time,” said Fotoohi.Binance’s Angels – volunteers who share information on the exchange across the globe – also helped spread the word.In December 2017, Angels announced the launch of a group called “Binance Persian” on the Telegram messaging app. The group is no longer active. Reuters couldn’t determine how long it operated, but identified at least one Iranian who was an active Angel after Washington reimposed sanctions.Mohsen Parhizkar was an Angel from November 2017 to September 2020, managing the Persian group and helping its users, according to his LinkedIn profile. A person who worked with Parhizkar confirmed his role and shared messages they exchanged. Contacted by Reuters, Parhizkar said Binance had cancelled programmes in Iran because of sanctions. He didn’t elaborate.After its 2018 ban, at least three senior Binance employees were aware that the exchange remained popular in Iran and was used by clients there, 10 Telegram and company chat messages between the employees that were seen by Reuters show.By September 2019, Tehran was among the top cities for followers of Binance’s Instagram page, topping New York and Istanbul, one message from the same month shows. The employees then made light of this. One jokingly suggested advertising Binance’s popularity in Iran, saying, “Push that on Binance U.S. Twitter.”In a separate exchange from April 2020, a senior employee also noted that Iranian traders were using Binance, without saying how he knew this. A Binance compliance document from the same year, reviewed by Reuters, gave Iran the highest risk rating of all countries for illegal finance.”BEGINNERS’ GUIDE TO VPNS”Further underpinning Binance’s growth in Iran, traders said, was the ease with which users could skirt curbs via virtual private networks (VPNs) and tools to conceal internet protocol (IP) addresses that can link internet use to a location. North Korean hackers used VPNs to obscure their locations while setting up accounts on Binance to launder stolen crypto in 2020, Reuters reported in June.Mehdi Qaderi, a business development worker, said he used a VPN to trade around $4,000 worth of crypto on Binance in the year to August 2021. “All of the Iranians were using it,” Qaderi said of Binance.In a 2021 guide to how sanctions applied to crypto firms, the U.S. Treasury said sophisticated analytic tools existed that could detect IP address obfuscation. Crypto companies could also gather information to alert them to users in a sanctioned country, it said, such as from email addresses.”Crypto exchanges would be expected to have these types of measures in place in order to comply with sanctions,” said Syedur Rahman, legal director at Rahman Ravelli law firm in London.Binance itself had supported the use of VPNs.Zhao, Binance’s CEO, tweeted in June 2019 that VPNs were “a necessity, not optional.” He deleted the remark by the end of 2020. Asked about the tweet, Binance didn’t comment. In July the following year, Binance published on its website a “Beginners’ Guide to VPNs.” One of its tips: “You might want to use a VPN to access sites that are blocked in your country.”Zhao was aware of crypto users circumventing Binance’s controls in general. He told interviewers in November 2020 that “users do find intelligent ways to get around our block sometimes and we just have to be smarter about the way we block.”((reporting by Tom Wilson and Angus Berwick; editing by Janet McBride)) More