CFTC is suing Binance: is it time to find another exchange?

The Commodity Futures Trading Commission has accused Binance of “intentional evasion” of the US commodity trading law, among other alleged violations. In a month in which the SEC has already threatened Coinbase with legal action, this latest regulatory maneuver comes as a serious blow for cryptocurrencies in general and Binance in particular, with the exchange facing charges of some very serious crimes. These include insider trading by CEO Changpeng Zhao and attempts to allow US-based customers to evade compliance requirements.

In initiating its action, the CFTC is seeking a series of punishments for Binance, including “exit, civil financial penalties [and] permanent trading and registration bans.” As such, Binance now faces potentially an existential threat, with its customers already responding to the news of the allegations by withdrawing approximately $2 billion in funds.

Does this mean that Binance could crash? That your customers need to find a new trading platform? Well, while some of his clients have apparently already come to that conclusion, it is not certain that the CFTC’s allegations will be upheld in court (in this case, the United States District Court for the Northern District of Illinois). And even if they were, a ban in the United States would leave Binance open to continue its operations in the rest of the world.

CFTC makes a list of alleged Binance violations and misdeeds

Needless to say, the CFTC filing with the District Court for the Northern District of Illinois makes for excellent bedtime reading (unless you’re Changpeng Zhao, of course). He makes the following accusations, which could potentially result in Binance being hit with very severe punishment, assuming that the court rules in favor of the regulator.

  • CEO Changpeng Zhao directly or indirectly managed about 300 Binance trading accounts, with the purpose of conducting insider trading activities on the stock exchange.

  • Binance has repeatedly advised US-based customers (and also its employees) on how to evade CFTC compliance checks, with the exchange having “never been registered with the CFTC in any way” in order to legally provide for the trading of commodity-based derivatives.

  • The exchange deliberately structured its business and branch network with the aim of evading registration requirements in the United States, despite the fact that 16% of its accounts were held by customers that the platform identified as located in the United States.

  • Binance has ignored laws that require controls for the prevention and detection of money laundering and terrorist financing.

  • Binance intentionally hides and obfuscates the identities of the business entities that manage its platform, as well as their positions.

  • It has committed numerous violations of the Commodity Exchange Act (CEA), including seeking and accepting orders for commodity futures, options, swaps, and retail commodity transactions, as well as facilitating swaps without being registered as a swap execution facility.

Perhaps unsurprisingly, for those within the cryptocurrency community itself, the accusation regarding insider trading has attracted most of the attention and most of the criticism. Although for more than a few people, it’s not really a surprise.

What is particularly damaging about the CFTC’s allegations is that the commodity regulator appears to have obtained internal communications from Binance, including text messages and emails sent between Zhao and various other staff members.

Some of the most embarrassing of these reveal that Binance was apparently aware that its platform was being used by terrorists. For example, the exchange’s former compliance officer — Samuel Lim — was involved in a February 2019 conversation ‘regarding Hamas transactions’ on his platform, with Lim explaining to his colleague that terrorists usually send ‘small sums of money’, since ‘large sums constitute money laundering’.

Is Binance in serious trouble?

While all of this almost certainly seems negative, it is perhaps not surprising that Binance itself responded vigorously to the CFTC’s action and accusations, with Changpeng Zhao writing a blog the day the allegations were filed.

He uses it to deny the CFTC’s allegations, stating that the exchange “does not agree with the characterization of many of the issues alleged in the complaint.” This includes statements regarding the laxity of KYC and AML controls and also with regard to insider trading, while it also states that the exchange blocks “US users by nationality (KYC), IPs (including VPN endpoints commonly used outside the United States), mobile operator, device fingerprints, bank deposits and withdrawals, blockchain deposits and withdrawals, credit card bin numbers”.

Of course, this short blog post doesn’t provide much evidence for these claims. Based on a quick reading of the public facts, it is therefore reasonable to assume that the United States District Court for the Northern District of Illinois will ultimately rule in favor of the CFTC’s assertions.

However, this doesn’t necessarily mean the fate of Binance. As a small handful of commentators have pointed out (e.g. Bloomberg columnist Matt Levine), even though the CFTC report contains a wide variety of statements and details, the actual civil allegations boil down to allowing US-based clients to trade derivatives.

As such, Binance would likely face two penalties: a heavy fine (including the possible ‘clearing’ of revenues made from US negotiations) and potentially a ‘permanent ban on trading and registration’ (as the CFTC writes in its press release). This last punishment would obviously mean a ban on trading and registration in the United States, which would simply amount to a confirmation of the current status quo (since Binance is not registered anyway to facilitate trading in the United States).

In other words, Binance will definitely take a hit, with the loss of its (presumed) US customers causing a reduction in its revenues. But it will probably continue in other parts of the world, perhaps with more rigorous and reliable screening mechanisms for customer verification, and so on.

Even the market seems to think so. Even though bitcoin (BTC) lost around $1,000 — down to $26,800 — in response to the release of the CFTC stock, it has since recovered, and is now about $500 higher than it was shortly before the news broke. Binance’s BNB has also started to recover, at the time of writing.

Yes, some observers had initially gone so far as to say that the CFTC has a “strong chance here of overthrowing the Binance empire,” and yes, some customers have withdrawn funds. But with Binance still having an on-chain balance of around $64 billion, it may take more than one US regulator to remove it from its position at the top of the crypto pyramid.

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