Regulatory issues are nothing new to Binance, and on many occasions in the past, it has managed to overcome or circumvent such hurdles and eventually work with regulators.
However, when it comes to the United States, the exchange has found itself in the crosshairs of multiple agencies.
Several United States financial regulators have ongoing investigations against the crypto exchange. Some of these investigations date back to 2018, and now, one of the main regulators of the derivatives market in the US has filed a lawsuit along with its investigation that began in early 2021.
The US Commodity 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 US derivatives laws by offering its derivatives trading services to US clients without registering with the appropriate market regulators. The CFTC accused Binance of prioritizing trading success over regulatory compliance.
The lawsuit also made headlines because the CFTC has not only filed charges against the exchange, but also against Zhao and Lim. The US regulator also charged Binance and its CEO with seven violations of the Commodity Exchange Act and the controlled foreign companies rules.
David Waugh, managing editor of the Daily Economy at the American Institute for Economic Research, told Cointelegraph that the CFTC's lawsuit is not surprising considering the general approach of the US government towards cryptocurrency companies: regulators appear to be employing every conceivable measure to curb the expansion of the industry. .
โSignificant regulatory action could prompt Binance to increasingly shift its business operations beyond the United States. Furthermore, considering Binance.US's sizable share of US Bitcoin trading volume, the possible shutdown of the exchange's US trading could lead to a decline in domestic trading volume unless the operators make the transition to alternative platforms".
The CFTC has actively gone after big companies, having previously opened regulatory compliance actions against Tether and Bitfinex, resulting in major changes to the crypto landscape. The lawsuit against Binance does not appear to be any different.
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The CFTC has mandated a ban on Binance, Zhao, Lim, and all affiliates from trading in registered entities, holding any interest in commodities, registering or exempting with the CFTC, or acting as a director, officer, or employee of a registered entity. It also demanded that Binance pay any trading profits, revenue, commissions, and fees derived from US clients, as well as pay court-assessed civil penalties and go to a jury trial on this matter.
Binance's fate in the US seems uncertain at present
The CFTC's lawsuit has accumulated evidence, including Zhao's internal chat logs with Binance executives. Some market insiders believe that 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 US sister firm, Binance.US, which the global exchange says operates as one entity. independent. Fidelman said: "The charges against Binance are stiff and the sanctions could put an end to the business."
In addition to the regulatory violations, the lawsuit also specifically names Binance.US trading subsidiaries Merit Peak. The CFTC alleged that Zhao directly controls Binance and all of its connected companies.
The lawsuit also specifically links Trust Wallet, Binance Labs (due to US exposure), and many Binance employees with US exposure, including community builders employed on the exchange called "Binance Angels." " as reasons for a presentation in the US.
The most daunting allegation might be that Binance had nearly 300 accounts directly or indirectly linked to Zhao that traded with clients.
CFTC lawsuits against crypto companies have been settled with heavy fines and cease operations orders in the past. Terrence Yang, a JD in law from Harvard and managing director of Bitcoin-focused firm Swan Bitcoin, told Cointelegraph that it seems unlikely that Binance.US will continue to operate for much longer, depending on what the CFTC proves in court. .
โFor one thing, Binance.US offered fewer products than Binance and has clients who identify as US and Binance.US recognizes as US clients. On the other hand, if the CFTC can prove to a judge that Binance.US helped Binance misdirect US clients who wanted to make more exotic products and use VPNs to hide their US identity, then Binance.US may not be viable in the future. future".
Binance did not directly respond to Cointelegraph's request for comment.
The firm issued a public response to the lawsuit, in which Zhao said the complaint appears to contain an incomplete listing of the facts and that they "disagree with the characterization of many of the issues alleged in the complaint."
Many view the lawsuit as critical to the future of Binance in the US, with some classifying it as a political move among regulators.
NEW: According to known sources, the @CFTC the lawsuit was dropped @binance without warning, similar to @coinbaseWells Notice. Some industry professionals believe this was a political move by the CFTC to show the SEC that this is a commodity issue rather than
โ Eleanor Terrett (@EleanorTerrett) March 27, 2023
Adam Cochran, decentralized finance developer and angel investor, in a Twitter thread explained the final scenario of the lawsuit. He saying that if Binance and other aforementioned executives do not engage with US courts or appear to defend themselves in court, then the CFTC would win. However, if they do get involved, "then the discovery process will open all their books internationally to US regulators of all entities, including those personally owned by Zhao, to resolve other issues."
18/23
The only semi-safe path for Binance here is likely a deal that the CFTC would still push for the billions in full payouts, chargebacks, and civil penalties, but may allow CZ et al to avoid an admission of guilt.
โAdam Cochran (adamscochran.eth) (@adamscochran) March 27, 2023
Possible effects on the crypto market
The CFTC's allegations 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, Justice Department and internal revenue service.
At the end of 2022, Binance had a 92% Bitcoin total volume market share (BTC) transactions. The exchange's market share was just 45% at the beginning of last year, but the removal of trading fees in June and the crash of rival exchange FTX in November helped attract consumers.
Binance is a major source of market liquidity. Key market makers use Binance to execute trades and gain liquidity. The market's ability to find prices and sources of liquidity will be affected by any disruption to Binance's operations. Retail clients and institutional traders would ultimately suffer as a result of this.
While most of these ongoing investigations and CFTC allegations are mere accusations at this point and have not been proven in court, Jason Allegrante, director of legal and compliance at digital asset bank FireBlocks, told Cointelegraph that the outcome of the CFTC lawsuit could be expedited. the trend of companies exiting the US market.
โDepending on how Binance is ultimately affected, this may send shockwaves through the global digital asset markets. For better or worse, Binance is now akin to critical financial market infrastructure given the volume of global transactions that pass through it. A service interruption on Binance will result in a serious deterioration of the supply of liquidity in the market,โ he explained.
He added that in the long term, alternative sources of liquidity will emerge in the form of new entrants, including traditional financial market participants such as Nasdaq, which has just announced plans to enter digital asset markets.
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Allegrante said that US regulators are working to โboost cryptocurrencies by creating legal adversity and also legal uncertainty.โ She cited the example of Coinbase, a US-regulated public crypto exchange that recently received a Wells notice from the SEC.
He said: โNow, you have a different exchange that received an enforcement complaint from the commodity regulator for basically being in the same business. For cryptocurrencies, this is the worst of both worlds: one company that has a complaint with the SEC, Coinbase, and another that has a complaint with the CFTC, Binance.โ
Binance has been walking a regulatory tightrope around the world and over the years has received numerous compliance complaints from countries like the UK, Japan, Germany, Australia and many more. However, the CFTC lawsuit, according to many experts, could become a drag on the exchange.
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