Regulatory trouble is nothing new for Binance, and on many occasions, in the past, it has managed to overcome or bypass such roadblocks and eventually work with regulators.
However, when it comes to the United States, the exchange has found itself in the cross-hairs of multiple agencies.
A number of United States financial regulators have ongoing investigations against the crypto exchange. Some of these investigations date back to 2018, and now, one of the primary derivatives market regulators in the U.S. has filed a lawsuit in conjunction with its investigation that started in early 2021.
The U.S. Commodities Futures Trading Commission filed a lawsuit against Binance along with its CEO, Changpeng Zhao, and former chief compliance officer Samuel Lim on March 28.
The lawsuit alleges that Binance violated U.S. derivatives laws by offering its derivative trading services to U.S. customers without registering with appropriate market regulators. The CFTC accused Binance of prioritizing commercial success over regulatory compliance.
The lawsuit also made headlines because the CFTC has not only levied charges against the exchange but also against Zhao and Lim. The U.S. regulator has also accused Binance and its CEO of seven violations of the Commodities Exchange Act and controlled foreign company rules.
David Waugh, managing editor of the Daily Economy at the American Institute for Economic Research, told Cointelegraph that the CFTC lawsuit isn’t surprising considering the U.S. government’s overarching approach toward cryptocurrency enterprises — regulators seem to be employing every conceivable measure to curb the industry’s expansion.
“Significant regulatory action could prompt Binance to increasingly shift its business operations beyond the United States. Moreover, considering Binance.US’s sizable share of U.S. Bitcoin trading volume, the potential closure of the exchange’s American operations could lead to a decline in domestic trading volume unless traders transition to alternative platforms.”
The CFTC has actively gone after large companies, having previously opened regulatory enforcement actions against Tether and Bitfinex, which resulted in major shifts in the crypto landscape. The lawsuit against Binance looks to be no different.
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The CFTC has demanded a ban on Binance, Zhao, Lim and all affiliates from trading on registered entities, holding any commodity interest, registering or exempting with CFTC or acting as a principal, officer or employee of a registered entity. It has also demanded that Binance pay back the trading profits, revenues, commissions and fees derived from U.S. customers, as well as pay civil penalties assessed by the court and stand a jury trial on this matter.
Binance’s fate in the U.S. looks uncertain at present
The CFTC lawsuit has amassed evidence, including internal chat records of Zhao with Binance’s executives. Some market pundits believe it could very well seal the fate of the global crypto exchange in the United States.
Mark Fidelman, the founder of SmartBlocks, told Cointelegraph that the lawsuit has the potential to undo years of progress made by Binance’s sister firm in the U.S., Binance.US, which the global exchange has claimed functions as an independent entity. Fidelman said, “Charges against Binance are stiff, and the penalties could be business-ending.”
In addition to the regulatory infractions, the lawsuit specifically mentions Binance.US trading subsidiaries Merit Peak as well. The CFTC alleged that Zhao directly controls Binance and all of its connected companies.
The lawsuit also specifically ties in Trust Wallet, Binance Labs (due to U.S. exposure) and many Binance employees with U.S. exposure, including exchange-employed community builders called “Binance Angels” as grounds for a U.S. filing.
The most daunting accusation could be that Binance had nearly 300 accounts directly or indirectly linked to Zhao that traded against customers.
CFTC’s lawsuits against crypto companies have been settled with hefty fines and orders to cease operations in the past. Terrence Yang, a Harvard Law JD and the managing director of Bitcoin-focused firm Swan Bitcoin, told Cointelegraph that it seems unlikely that Binance.US will continue to operate much longer, depending on what the CFTC proves in court.
“On the one hand, Binance.US offered fewer products than Binance and has customers who identify as U.S. and Binance.US recognizes as U.S. customers. On the other hand, if the CFTC can prove to a judge that Binance.US helped Binance siphon U.S. customers who wanted to do more exotic products and use VPNs to hide their U.S. identity, then Binance.US may not be viable going forward.”
Binance did not directly respond to Cointelegraph’s request for comment.
The firm did release a public response to the lawsuit, in which Zhao said that the complaint appears to contain an incomplete recitation of the facts, and they “do not agree with the characterization of many of the issues alleged in the complaint.”
Many see the lawsuit as critical for Binance’s future in the U.S., with some further classifying it as a political move among regulators.
NEW: According to sources familiar, the @CFTC lawsuit was dropped on @binance without warning, similar to @coinbase's Wells notice. Some industry professionals believe this was a political move by the CFTC to show the SEC that this is a commodities issue rather— Eleanor Terrett (@EleanorTerrett) March 27, 2023
Adam Cochran, a decentralized finance developer and angel investor, in a Twitter thread explained the end scenario of the lawsuit. He said that if Binance and other mentioned executives fail to engage with U.S. courts or don’t appear to defend themselves in a trial, then the CFTC would win. However, if they engage, “then the discovery process will be opening all their books internationally to U.S. regulators from all entities including those personally owned by Zhao to churn up other issues.”
18/23— Adam Cochran (adamscochran.eth) (@adamscochran) March 27, 2023
Only semi-safe path for Binance here is likely a settlement which CFTC would still push for the billions in make whole, disgorgement and civil penalty payments but may allow CZ et al to avoid admission of guilt.
Possible effects on the crypto market
The CFTC’s accusations against Binance are serious, and the crypto exchange has more to worry about than just the CFTC. The exchange is also currently under investigation by the SEC, Department of Justice and Internal Revenue Service.
At the end of 2022, Binance had a 92% market share of the total volume of Bitcoin (BTC) transactions. The exchange’s market share was a mere 45% at the beginning of the last year, but the removal of trading fees in June and the downfall of rival exchange FTX in November helped it attract consumers.
Binance is a significant market liquidity source. Key market makers use Binance to execute trades and obtain liquidity. The market’s capacity to find prices and sources of liquidity will be impacted by any disruption to Binance’s operations. Retail customers and institutional traders would ultimately suffer as a result of this.
While the majority of these ongoing investigations and CFTC allegations are mere accusations at this point and haven’t been proven in court, Jason Allegrante, chief legal and compliance officer at digital asset bank FireBlocks, told Cointelegraph that the outcome of the CFTC lawsuit could accelerate the trend of businesses exiting the U.S. market.
“Depending on how Binance is ultimately impacted, this may send shockwaves through global digital asset markets. For better or worse, Binance is now akin to a critical financial market infrastructure given the volume of global trades that pass through it. An interruption of service at Binance will result in a serious impairment of liquidity sourcing in the marketplace,” he explained.
He added that, in the long run, alternative sources of liquidity will emerge in the form of new entrants, including traditional financial market participants, such as Nasdaq, which just announced plans to enter digital asset markets.
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Allegrante said that U.S. regulators are working to “push out crypto by creating legal adversity and also legal uncertainty.” He cited the example of Coinbase, a U.S.-regulated public crypto exchange that recently received a Wells notice from the SEC.
He stated, “Now, you have a different exchange that’s received an enforcement complaint from the commodities regulator for basically being in the same business. For crypto, this is the worst of both worlds — one company having an SEC allegation, Coinbase, and one having a CFTC allegation, Binance.”
Binance has been walking on a regulatory tightrope around the globe, and over the years, it has received numerous compliance complaints from countries, such as the United Kingdom, Japan, Germany, Australia and many more. However, the CFTC lawsuit, according to many experts, could become an albatross around the exchange’s neck.