How Bad Is the Binance Suit?

If the commodities cops are taken at their word, Binance sacrificed regulatory compliance for the sake of growth.

AccessTimeIconMar 28, 2023 at 5:13 p.m. UTC
Updated Sep 28, 2023 at 2:23 p.m. UTC
AccessTimeIconMar 28, 2023 at 5:13 p.m. UTCUpdated Sep 28, 2023 at 2:23 p.m. UTC
AccessTimeIconMar 28, 2023 at 5:13 p.m. UTCUpdated Sep 28, 2023 at 2:23 p.m. UTC

Binance, the largest global crypto exchange by trading volume, and Chief Executive Changpeng Zhao were reportedly taken off guard by the U.S. Commodities and Futures Trading Commission’s (CFTC) decision to file a civil lawsuit against the company on Monday. The firm, which has for years avoided establishing a permanent headquarters, had been in dialogue with U.S. and other regulators about operating compliantly in the hundred-plus jurisdictions it services.

Just last month, Binance Chief Strategy Officer Patrick Hillman told the Wall Street Journal that the exchange had closed “gaps” that formed in its compliance strategy as a result of the exchange’s rapid expansion. At the time, Hillman more or less suggested Binance was prepared to eat flour for its previous crimes, committed unwillingly, but was also having substantive conversations with regulators that would allow it to continue existing.

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The CFTC’s filing was a surprise, to an extent. There have been rumors the U.S. Department of Justice, Securities and Exchange Commission and even the Internal Revenue Service were preparing lawsuits for a range of corporate failings. When U.S. officials sanctioned Russian crypto exchange Bitzlato, they noted Binance was a large counterparty for darknet marketplaces. That the CFTC dropped the first shoe is surprising – if only because it fuels confusion over whether ether (ETH) and other cryptocurrencies are commodities or securities.

In its 74-page complaint, the CFTC, accused Binance of not only servicing U.S. customers without filing for the appropriate licenses but actively helping customers skirt know-your-customer and other compliance rules. Binance’s executives were allegedly aware its geofencing tools were inadequate, and even had a semi-formalized (though confidential) procedure for getting “whales” around it and shielding their U.S. IP addresses.

The case is obviously bad for Binance, and comes during an uncertain time for crypto. Experts say this could be a fatal blow to the exchange (worst case), or disrupt a significant part of its revenues (Bloomberg’s Matt Levine, for instance, essentially said the case is not centered on consumer safety, but designed to prevent Binance from profiting from U.S. hedge funds). CEO Zhao could be barred from running the firm he founded in 2017, and from trading crypto period.

If Zhao, who is thought to be one of the wealthiest people in the world, starts selling off assets, that could have a negative impact on crypto prices. And cutting Binance out of derivatives markets could have deleterious effects on bitcoin’s liquidity and price. If the BitMEX case filed by the CFTC in 2018 provides any insight into how things will play out, the toppling of the largest derivatives exchange sounds worse than it will ultimately be.

Instead, this is likely just another significant blow to crypto’s reputation. Evidence suggests there is at least one informant at Binance, who passed private communications and self-destructing Signal messages to the commodities watchdog. Those messages paint a portrait of Binance – with Zhao at the helm – as a business that would sacrifice rules for the sake of growth. Large traders were privileged with faster settlement connections and lower fees – putting them above retail investors. And, if the CFTC is to be believed, Binance traded against its customers, which seems to be a trend at crypto exchanges.

However, it’s important to note the claims made are just allegations. Too often (in and out of crypto) are the police taken at their word. U.S. regulators are likely not filing a lawsuit based on false evidence, but it is information with a slant. In the Bitzlato suit, U.S. regulators assumed without evidence the exchange’s lifetime transaction volumes were all from illicit sources. In the BitMEX suit, regulators suggested but did not prove the exchange facilitated transfers for terrorists.

Binance, as Hillman said, has made serious mistakes and has operated under a suspicious corporate and regulatory veil. But the worst accusations have not yet been proven, and may have explanations. The U.S. government has taken a hard line against crypto – seemingly coordinating efforts to cut crypto off from the wider economy through banking restrictions and punitive lawsuits – and so it should not be a surprise they would target an exchange that has seemed to weather and grow during the bear market.

Make no mistake, Binance’s apparent conflicts of interests and willingness to flaunt regulations is abhorrent. Zhao and other Binance executives’ internal communications regarding fraud and illicit activity on the exchange, disclosed in the court documents, are laughably inept. But the lawsuit, as bad as it is for Binance, won’t kill blockchain.


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Daniel Kuhn

Daniel Kuhn is a deputy managing editor for Consensus Magazine. He owns minor amounts of BTC and ETH.