Aug 3, 2023

Binance may face Department of Justice fraud charges, though prosecutors are considering alternatives given the risk of an FTX-style bank run, according to Semafor.

Video transcript

The state of crypto is presented by Tron connecting the world to the power of Cryptocurrency. Yeah. All rights for the news publication has reported Binance may face department of Justice fraud charges. However, prosecutors are considering alternatives given the risk of an FTX style bank run and joining us to discuss that is Jones, a partner and former director of the CF DC. I want to say this right? Market participants division, Josh Sterling. Welcome Josh. Hello, pleasure to be here. Thank you. Oh, it's great to have you with us. Uh You know, I couldn't have thought of a the entire team actually could have thought of a better person to have on this day given your previous role. And we were just thinking, what do you make of this? Uh What do you think of officials, uh you know, thinking about the impact on customers if they actually go ahead and take severe action against finance? Absolutely. Well, that is a totally appropriate and normal action that the Department of Justice would take on evaluating whether to bring criminal charges against the corporation. Uh in other contexts, they look at the harm to shareholders. I think algae here, you'd say, what are the harm to people that are using the finance platforms to trade? And I think it is of significant note that I mean, I checked this morning, Binance is, you know, seven times the size of coin base and in daily value, uh it is by far the largest exchange in the world by any measure. And it is well known that us, individuals uh do use that platform and not just finance the US. Uh So they do have to consider these things and assessing uh whether to criminally charge a company because that is, that is usually uh what we call the death blow. Uh And that's uh that's not a legal term, that's just well understood that uh criminal charges are often fatal to a company and has severe consequences for all stakeholders. Uh Can I kind of just follow up real quickly on that because it's interesting that you say that's a death blow because, you know, it seems that some of these companies, these more global companies that are being sued by the SEC or the CFTC, they're kind of blase about it because they're like, oh, we have a global business. I mean, we had Justin son from Ron on the show and he didn't really seem that concerned about what was going on with, with the SEC. So why is the DOJ a death blow when the SEC is not? Right. Well, fair point. I think the significance uh can be distilled into one concept. I'm a, I'm a simple guy. Uh DOJ can put you in jail. Uh SECCFTC can. Uh, so, I mean, if they're, if it's, but if they're outside of the United States and if the majority of their business is outside of the United States, like, and, and, and they're in a place that they can't be extradited to the United States, like does it, does it actually matter? Uh I think it does matter. Uh And in that regard, I would refer you to um other, other recent actions involving large non US Cryptocurrency platforms or trading companies where there were significant issues. I think also it is, it is sometimes quite easy, quite often for the United States to assert jurisdiction over non US companies. All you got to do is use the means or instrumentalities of interstate commerce. Uh And, and that can extend fairly far. There are live arguments about that. The coin and excuse me, in the CF DC and SEC cases against finance right now. And you're certainly right that in one sense, you could say, well, uh a lot of finance is business, its operations, its customers are offshore, so no big deal if they're sanctioned here in the United States and are prohibited from doing business here. Um It can also be though if you're criminally charged, uh and indeed uh convicted, if it were to go to trial, uh as a company, people might just not want to do business with you anywhere. And so you can certainly settle with the SEC or the CFTC or even if you lose in court, you're paying a specific amount of money. You may be subject to some limitations on your business. Um, but it is certainly much more severe to face the possibility of an actual criminal conviction. So it would go ahead. Yes. Sorry. Yeah. Sorry. I just, I just wanted to like, you know, pick this, pick on this a little bit more. The, the article that we have referenced is a publication called Sema. They are the ones who've broken this as a scoop. And they say that, you know, that they are considering fraud charges, but they're worried about bankrupt right now. Fraud charges don't necessarily lead uh to, uh let's say a bank run. Um, we've had those fraud charges. They are not saying that they are thinking of arresting uh an individual or several individuals or that they will seize any websites. That's not what we know right now. So unless they say that there is a worry for a banker, but considering fraud charges, there shouldn't be a worry for a banker. Is that clear enough? I understand. And I'm familiar with the Simao article, I'm not, I'm not sure that I would be so quick to dismiss the likelihood of a people pulling out of the business uh right away. And I think bank run in this context should mean, you know, complete loss of liquidity in many main tokens or the tie up of uh of customer funds. That's the concern. And, and if you're a prosecutor, uh just like you're a civil enforcer, you could look at other contexts. I mean, most notably FTX, most notably Terra Luna, where there were other issues going on, of course, and say, look, the consequences are severe and not entirely predictable because this is definitely an emerging technology and, and the tentacles of Binance and where to go are not fully known. So that could be a substantial issue. Then you might also consider the second order effects. I mean, if you are a major source of liquidity for a given token and there's 300 some tokens, I think at least, uh I'm probably understating that on uh uh traded on, on Binance and all of a sudden that venue uh dries up because people are trying to get off of bin that could severely affect the token as it's traded on other platforms if I understand things correctly. So, yeah. Yes, I I'm, I, I, I'm scratching my head at this because on the one hand, it sounds like you're saying the DOJ is I, I don't wanna say cowardly, but they're kind of hesitant to uh to, to put a stop to something that they think may be a fraud. Uh at the same time, they're like, well, you know, we could prosecute a guy who runs the large one of the largest political parties and, and has had, had half the votes in the United States and, uh, the consequences on that's not a big deal, but the consequences apparently of trying bin is, is, is such a problem. They have to sit there and worry like, oh my God, what if this happens? What if, what if like five banks in Minnesota fall apart? It, it doesn't make sense. It, it just, just on the surface if they're committing fraud and if the Doj thinks they're committing fraud, who cares? So, what it implodes, you know what the justice isn't justice supposed to be more important than the consequences about uh uh you know, uh you know, a bunch of uh kids in, in their basement trading, a bunch of degen trading uh coins all day when they shouldn't be trading on Binance to begin with. I, I don't get this part. Sure. That's fair. Um I, I can completely understand that and that's, that's definitely a uh a timely perspective you've offered compared to other prosecutions that are going on not three blocks from my office. Um So I think what I would say is that, that uh there is a policy of the Department of Justice. They've used it, they still use it that says you've got to consider the collateral consequences of your actions. I mean, going back decades, uh leaders of the Department of Justice have said, you know, the power of the prosecutor is, you know, uh really substantial. Uh It is life altering and it has to be used judiciously. Um So they look, they may well fully decide, like, look, let's go ahead and charge uh c or any individuals or even the corporate entity with fraud. Let's charge them criminally. Um They may not and they may try to seek a different resolution, a nonprosecution agreement or deferred prosecution agreement. Um I can, what do you think they'll do? What do you think they'll do? We got to ask you that. Well, that's fair. Well, if, if I were uh in the prediction game, uh I'd be in a different line of business. But what I think is if I were sitting there, uh, in a, in government, again, I might want to see where the SEC and the coin base or excuse me, the SEC and the CF DC cases go against B uh and then, you know, make a determination on that. There are motions to dismiss right now. The civil charges they've put to the court, you know, what, what, what the extra territorial reach of us law is. At least in the civil context. I do think that is a live issue. They might just let that run and let the SEC and the CFTC lead the charge. Um Then again, they might say, look, we're so convinced of with the evidence we have that we need to charge because there are other issues which I'll mention uh that, that necessitate charging and collateral consequences considered. But set aside, um we're gonna charge, um you can charge and prosecute, you could charge and, and proceed and try to get to a, you know, a deferred prosecution agreement or nonprosecution agreement. Uh So that you're not, you're not getting a conviction. Um But I think that, you know, one thing that the procedures say at the Department of Justice is you have to consider other law enforcement priorities and look, there could be national security or tax priorities that might say we do need to proceed here. I mean, I think they would be considering that. Yeah, so assuming Hunter Biden isn't on the board of Finance that we don't know about and they go through and they decide to prosecute and what have you. Ok. Well, who goes to jail? Like, ultimately, does anyone actually go to jail? Well, uh, if they charge individuals, uh, and they're able to assert personal jurisdiction over them and get them into court and try certainly those individuals could go to jail. Um, you know, there is, there's obviously plenty of precedent for people involved in, uh, corporate wrongdoing, serving hard prison time. Uh, you know, uh, I began my career when Enron was falling apart. Uh, some people there spent some real time in jail. Um, so, so what? Well, sure. But, you know, if you were, uh, you know, an Austrian official at Enron I'll pick on Enron because it doesn't exist anymore. Uh And you participated in video calls or you sent wires uh into the United States, your fair game. Um There is a, the US jurisdiction over wrongdoing, particularly fraud where the national interest is considered is pretty substantial. Uh And so they would have a basis for doing it. Now, you could well imagine scenarios in which certain, you know, potential persons of interest in the case wind up being charged, take measures to avoid us jurisdiction. That can certainly happen. I know in the, the terra luna case, Doan is certainly had attempted to do that. It was not successful. Um, so I think that, so what is, um, for an individual? Yes. Uh, you know, service could be made on you. You could be extradited to the US. You could face charges and go to jail for a company. I mean, it will just end the company if you're criminally convicted. No one's gonna want to do business with you. Probably even criminal. Yeah. No. Uh, we should note right now that Binance declined to comment and the justice department also, uh, didn't immediately respond to request for comment. Thank you so much. Uh, Josh, uh, that was Jones Day partner and former CFTC division director, Josh Sting. Thank you very much.

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