The U.S. Commodity Futures Trading Commission (CFTC) has filed a lawsuit against Binance and its executives. The regulator intends to completely strip the largest crypto exchange of the U.S. market and accuses it of facilitating illegal activities and trade manipulation.
The text of the indictment took 74 pages. Citing quotes from internal chats that the agency was able to access, the regulator accuses the exchange, its head Changpeng Zhao and former chief compliance officer Samuel Lim of knowingly allowing Americans to trade cryptocurrency derivatives without a license, in flagrant violation of U.S. law. The CFTC also alleges that Binance, bypassing money laundering laws (AMLs) and know-your-customer (KYC) rules, deliberately helped large U.S. clients circumvent their own compliance procedures, RBC Crypto writes.
The CFTC is seeking a complete ban on Binance’s operations in the U.S. and the return of all trading revenues and commissions illegally, according to the agency, derived from U.S. user transactions. The CFTC estimates that 18 to 20 percent of Binance’s revenues in 2019 and 2020 came from “illegal” transactions by U.S. citizens, though no figures are provided for later periods. The exchange’s management supposedly turned a blind eye to the violations to maintain market share in its key jurisdiction.
The document claims that the exchange offered U.S. citizens to trade leveraged futures and options contracts on Bitcoin, Ethereum and Litecoin without registering with the CFTC as a futures commodities trader (FCM). The agency considers these assets to be commodities, which is at odds with the Securities and Exchange Commission (SEC), which considers most cryptoassets to be securities.
Even if any of those charges are seriously litigated, the investigation itself would require months of work by lawyers on both sides of the conflict, the expert reasoned, when asked about the possible consequences for Binance. In the short term, it is unlikely to have any effect on the sustainability of the exchange, believes Zuborev.
Binance.US, a separate division of the exchange for the US market, does not offer derivatives trading and is not mentioned in the complaint. Behind the platform is a separate legal entity, but Binance itself is not registered in the United States, and access to the exchange of the Americans are formally prohibited. At the same time, the CFTC representatives are bringing charges against “global” Binance, arguing that the exchange is subject to U.S. law, working with local customers.
The CFTC complaint alleges that Binance not only serviced U.S. users, but also knowingly failed to take steps to block their accounts. Exchange executives also allegedly advised large institutional clients to move trading accounts to jurisdictions inaccessible to U.S. regulators and tacitly encouraged the use of VPNs to circumvent blocking. A spokesperson for Radix Trading of Chicago confirmed to The Wall Street Journal that they had been trading on Binance for several years through offshore affiliates and a separate broker, with legal support for any cryptocurrency transactions.
The regulator also uncovered several other likely violations based on conversations from internal correspondence in work chats. In addition, the CFTC accuses Binance of having about 300 internal trading accounts under its management that were “directly or indirectly owned by Zhao,” and the exchange failed to report them under its anti-insider trading policy. In a statement in response, Zhao, calling the allegations “an incomplete statement of facts,” claimed that Binance “under no circumstances” manipulated the market and that “affiliates’ liquidity work” was under special scrutiny.
The lawsuit against Binance is not the first precedent for a confrontation between the CFTC and the crypto business. In October 2020, the agency filed charges against the BitMEX trading platform and its three founders, Arthur Hayes, Benjamin Delo and Samuel Reed. The exchange actually invented a new format of cryptocurrency derivatives – perpetual futures contracts – and created an entire market around the instrument, whose popularity quickly led to its appearance on other trading platforms. The Commission also accused BitMEX of operating in the U.S. futures market without proper authorization and FCM status.
The case was closed when BitMEX agreed to pay a record $100 million fine for the crypto industry, forcibly shut down the accounts of all U.S. customers and implement proper anti-money laundering measures. Hayes and Delo resigned from the company and pleaded guilty. They each paid an additional $10 million fine and were sentenced to two years’ probation.
This ended BitMEX’s influence in the cryptocurrency derivatives market, which it controlled nearly 100 percent of until August 2019. However, her absence led to the rise of other platforms that now dominate this niche. These include Deribit, ByBit, and Binance, which regularly lists perpetual futures on most liquid crypto assets in demand.
According to Stephen Zheng, senior analyst at The Block Research, if Binance is forced to cut its market share, ByBit as the next largest exchange in terms of trading volume in the futures market would benefit the most. Kraken and Coinbase will be able to pick up the remaining volumes, given that both have the necessary statuses and licenses to operate in the US.
When it comes to the global crypto market, Binance’s role as a U.S. player is not as significant as in other states, said cryptocurrency market analyst Victor Pershikov. Binance.US has been trying to increase its share and its weight through the purchase of troubled assets from companies that left the market in 2022, but U.S. authorities have prevented the exchange from doing so.
Coinbase, Gemini, eToro, Kraken and some other exchanges are much more present in the U.S. market than Binance and are ahead of its American division in terms of trading volumes. In this regard, the departure of Binance from the North American market will not create difficulties for U.S. investors who have alternative projects, causing fewer questions from regulators, the expert added.
What are the risks
For quite some time, Binance has been under the scrutiny of U.S. regulators. Major business media have released several investigations into the inner workings of the exchange, accusing it of various manipulations or non-transparent practices. The day after the CFTC lawsuit, the British Financial Times spoke about Binance’s longstanding ties with China, citing internal documents which were obtained by journalists. A few days before that, the exchange experienced a technical glitch that caused it to stop trading for four hours. The combination of negative events inevitably affected the actions of traders – in less than a week assets worth $2.2 billion were withdrawn from the exchange.
According to Pershikov, a further development of this case could “increase customer nervousness,” leading to a continued outflow of assets from Binance. The erosion of confidence could create problems for the project and negatively affect the market’s capitalization. However, the emerging trend of self-custody (storage of cryptocurrency on non-custodial wallets, full access to which is retained directly by the owner. – “RBC Crypto”) after the collapse of the FTX exchange suggests that the cryptocurrency market can survive the potential collapse of Binance and, despite the local fall in the prices of digital assets, it is unlikely to lead to the collapse of the industry.
In the context of the CFTC lawsuit, it is alarming that there is access to the correspondence of exchange employees, Zuborev argues. In his opinion, this may be an indirect sign of authorized “at the highest level” surveillance, which may be due to investigations on very serious charges, not excluding even complicity in illegal or terrorist activities. “Such charges could carry more serious risks in the future,” the analyst notes. – But thanks to the fairly distributed structure of the exchange, we do not see any real risks of a complete halt in trading or paralyzing difficulties.
The decision to withdraw assets from centralized exchanges depends on an investor’s individual needs and strategy: it should be remembered that token withdrawal to non-custodial wallets by itself allows to seriously reduce the risks of storing cryptocurrencies, explains Zuborev, answering the question of whether to withdraw funds from Binance. In the case of exchanges “involved in politicized scandals,” the feasibility of such funds transfer increases by an order of magnitude, the analyst adds.