U.S. exchange regulators are pressing charges against Binance and trying to disconnect it from the U.S. market. Our experts tell us who can take advantage of this situation and what the risks are for Binance and its users
The U.S. Commodity Futures Trading Commission (CFTC) has filed a lawsuit against Binance and its executives. The regulator intends to completely deprive Binance, the largest cryptocurrency exchange of the U.S. market. It also accuses it of facilitating illegal activities and trade manipulation.
The text of the indictment took 74 pages. Citing quotes from internal chats, to which the agency managed to gain access, the service representatives accuse the exchange, its head Changpeng Zhao and former director of compliance Samuel Lim. That they knowingly allowed Americans to trade cryptocurrency derivatives without a license, in flagrant violation of U.S. law. The CFTC also alleges that Binance circumvented money laundering laws (AMLs). And “know your customer” (KYC) rules deliberately helped large U.S. clients circumvent their own compliance procedures.
What are the goals of U.S. regulators ?
The CFTC seeks a complete ban on Binance in the U.S. and return all trading revenues and commissions received from transactions of users from the U.S. Because, in their opinion, they were obtained illegally. The CFTC estimates that in 2019 and 2020, 18 to 20% of Binance’s revenues were generated by “illegal” transactions of U.S. citizens, although no data for later periods are provided. The exchange’s management supposedly turned a blind eye to the violations to maintain its market share in a key jurisdiction.
The document alleges that the exchange offered U.S. residents 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 crypto assets to be securities.
Our experts point out that different agencies in the U.S. have different views on what is going on. This inconsistency in itself can create more doubts. But lawyers can also use some language against others in their defense strategies. Even if a serious trial were to begin on any of the named charges. Then the investigation itself will require many months of work by lawyers on both sides of the conflict, our Crypto-Upvotes experts say.
Charges are directed at Binance, not a separate division of Binance.US
Binance.US is a separate division of Binance for the U.S. market. This division does not offer derivatives trading and is not mentioned in the complaint. There is a separate legal entity behind the platform, while Binance itself has no registration in the United States. And access to the exchange for American citizens is prohibited. In this case, the representatives of the CFTC precisely put forward charges against “global” Binance. They argument that the exchange falls under the U.S. law, working with local customers.
The CFTC complaint says that Binance not only serviced American users. But also deliberately didn’t take measures to block their accounts. Exchange executives also allegedly advised large institutional customers to move trading accounts to jurisdictions inaccessible to U.S. regulators. And they didn’t officially encourage the use of VPNs to bypass blockades. A spokesman 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. While having legal backing 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 accused Binance of having about 300 internal trading accounts under its management. Which “directly or indirectly belonged to the head of Binance,” and the exchange failed to disclose their existence amid an anti-insider trading policy. Zhao responded in a statement, calling the allegations “an incomplete statement of facts.” And claims that Binance “under no circumstances” manipulates the market ! And “affiliates’ liquidity work” is under special control.
Who benefits from this?
The lawsuit against Binance is not the first precedent for a confrontation between the CFTC and the crypto business. In October 2020, the agency brought charges against BitMEX and its three founders, Arthur Hayes, Benjamin Delo and Samuel Reed. The exchange actually invented a new format for cryptocurrency derivatives – perpetual futures contracts. And it created an entire market around the instrument, whose popularity quickly led to its appearance on other trading platforms as well. 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, as well as to forcibly close 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, until August 2019, it controlled nearly 100 percent of. 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.
Our Crypto Upvotes experts believe that if Binance is forced to reduce its share of this market. ByBit, as the next largest exchange in terms of trading volumes on the futures market, will benefit the most from this. 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 player in the U.S. is not as significant compared to other states. Binance.US has tried to increase its share and its weight by buying distressed companies’ assets. Which left the market in 2022, but U.S. authorities prevented Binance from doing so.
What are the risks for exchange users?
Coinbase, Gemini, eToro, Kraken and some other platforms are much more present in the U.S. market than Binance. And also the volume of trades is ahead of its U.S. division. In this regard, leaving Binance from the North American market will not create difficulties for U.S. investors. Which have alternative exchanges, causing less questions from regulators.
For quite a long time Binance has been under the scrutiny of U.S. regulators. Major business media outlets have released several investigations about the internal structure of the exchange’s business. At the same time accusing it of various manipulations or non-transparent practices. The day after the CFTC lawsuit, the British Financial Times spoke about Binance’s longstanding ongoing relationship with China. And at the same time referring to internal documents, which came to the journalists of this edition. A few days before that, the exchange experienced a technical failure due to which it stopped trading for four hours. The cumulative negative events inevitably affected traders’ actions – in less than a week $2.2 billion worth of assets were withdrawn from this exchange.
In the context of the CFTC’s lawsuit, the fact that there is access to the correspondence of Binance employees is alarming. Our experts think that it might be an indirect evidence of an authorized “high-level” surveillance. Which could be due to investigations into very serious allegations. But thanks to the fairly distributed structure of Binance, we do not see any real risks of a complete trading stop or paralyzing difficulties.
The decision to withdraw assets from centralized exchanges depends on each investor’s individual needs and strategy! All investors need to keep in mind that withdrawing tokens to non-custodial wallets in and of themselves can seriously reduce risks of holding cryptocurrencies.
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