Latest court battle could change the crypto landscape in the US

by · April 1, 2023

Regulatory issues are nothing new for Binance and on many occasions, in the past, it has managed to overcome or circumvent such roadblocks and eventually cooperate with regulators.

But when it comes to the US, the exchange has found itself in the crosshairs of several agencies.

A number of US financial regulators have ongoing investigations against the crypto exchange. Some of these investigations date back to 2018, and now one of the primary derivatives market regulators in the US has filed a lawsuit in connection with the investigation that began in early 2021.

The US Commodities Futures Trading Commission filed a lawsuit against Binance along with CEO Changpeng Zhao and former chief compliance officer Samuel Lim on March 28.

The lawsuit alleges that Binance violated US derivatives laws by offering its derivatives trading services to US clients without registering with appropriate market regulators. The CFTC accused Binance of prioritizing commercial success over regulatory compliance.

The lawsuit also made headlines because the CFTC has not only brought charges against the exchange, but also against Zhao and Lim. The US regulator has also charged Binance and its CEO with seven violations of the Commodities Exchange Act and controlled foreign company rules.

David Waugh, managing editor of the Daily Economy at the American Institute for Economic Research, told Cointelegraph that the CFTC lawsuit is not surprising given the US government’s overall approach to cryptocurrency businesses — regulators appear to be using every imaginable measure to curb the industry’s expansion .

“Significant regulatory actions could cause Binance to increasingly shift its business operations outside of the US. In addition, given Binance.US’s significant share of US Bitcoin trading volume, the potential closure of the exchange’s US operations could lead to a decline in domestic trading volume unless traders switch to alternative platforms.

The CFTC has been actively going after major companies, having opened regulatory enforcement actions against Tether and Bitfinex, resulting in major changes to the crypto landscape. The lawsuit against Binance appears to be no different.

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The CFTC has sought an injunction against Binance, Zhao, Lim and any affiliates from dealing in registered entities, holding commodity interests, registering or exempting themselves with the CFTC or acting as a principal, manager or employee of a registered entity. It has also demanded that Binance repay its trading profits, revenues, commissions and fees from US customers, as well as pay civil penalties assessed by the court and face a jury trial in this matter.

Binance’s fate in the US currently looks uncertain

The CFTC lawsuit gathered evidence, including internal chat records of Zhao with Binance executives. Some market experts believe it may well seal the fate of the global crypto exchange in the United States.

Mark Fidelman, the founder of SmartBlocks, told Cointelegraph that the lawsuit has the potential to undo years of progress made by Binance’s US sister company, Binance.US, which the global exchange has claimed operates as an independent entity. Fidelman said: “The charges against Binance are stiff, and the penalties could end the business.”

In addition to regulatory violations, the lawsuit specifically mentions Binance.US trading subsidiary Merit Peak as well. The CFTC alleged that Zhao directly controls Binance and all of its affiliates.

An excerpt from the CFTC lawsuit. Source: CFTC

The lawsuit also specifically links Trust Wallet, Binance Labs (due to US exposure) and many Binance employees with US exposure, including exchange employee community builders called “Binance Angels” as the basis for a US filing.

The most chilling allegation may be that Binance had nearly 300 accounts directly or indirectly linked to Zhao that traded against customers.

An excerpt from the CFTC lawsuit. Source: CFTC

CFTC lawsuits against crypto companies have been settled with hefty fines and cease-and-desist orders in the past. Terrence Yang, a Harvard Law JD and CEO of Bitcoin-focused firm Swan Bitcoin, told Cointelegraph that it seems unlikely that Binance.US will continue operating much longer, depending on what the CFTC proves in court.

“On the one hand, Binance.US offered fewer products than Binance and has customers that identify as US and Binance.US recognizes as US customers. On the other hand, if the CFTC can prove to a judge that Binance.US helped Binance to siphon off US customers who wanted to do more exotic products and use VPNs to hide their US identity, then Binance.US may not be viable going forward.”

Binance did not directly respond to Cointelegraph’s request for comment.

The firm released a public response to the lawsuit, in which Zhao said the complaint appears to contain an incomplete recitation of facts, and they “do not agree with the characterization of many of the issues alleged in the complaint.”

Many see the lawsuit as critical to Binance’s future in the US, with some further classifying it as a political move among regulators.

Adam Cochran, a decentralized finance developer and angel investor, explained in a Twitter thread the end scenario of the lawsuit. He so that if Binance and other named executives fail to engage with US courts or appear unable to defend themselves in a lawsuit, then the CFTC will win. But if they get involved, “then the discovery process will open all their books internationally to US regulators from all entities, including those personally owned by Zhao to find out other issues.”

Possible effects on the crypto market

The CFTC’s charges against Binance are serious, and the crypto exchange has more to worry about than just the CFTC. The exchange is also under investigation by the SEC, Department of Justice and Internal Revenue Service.

By the end of 2022, Binance had a market share of 92% of the total volume of Bitcoin (BTC) transactions. The exchange’s market share was just 45% at the start of last year, but the removal of trading fees in June and the fall of rival exchange FTX in November helped it attract consumers.

Binance is a significant source of market liquidity. Major market players use Binance to execute trades and obtain liquidity. The market’s capacity to find prices and sources of liquidity will be affected by any disruptions in Binance’s operations. Retail clients and institutional traders will ultimately suffer as a result.

While the majority of these ongoing investigations and CFTC charges are only allegations at this point and have not been proven in court, Jason Allegrante, head of legal and compliance at digital asset bank FireBlocks, told Cointelegraph that the outcome of the CFTC lawsuit could accelerate the trend of companies leaving the US market.

“Depending on how Binance is ultimately affected, this could send shockwaves through global digital asset markets. For better or worse, Binance is now akin to a critical financial market infrastructure given the volume of global trades passing through it. An interruption of service at Binance would result in a serious weakening of liquidity in the market,” he explained.

He added that in the long term, alternative sources of liquidity will emerge in the form of new players, including traditional financial market players, such as Nasdaq, which just announced plans to enter digital asset markets.

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Allegrante said that US regulators are working to “extort crypto by creating legal hardship and also legal uncertainty.” He cited the example of Coinbase, a US-regulated public crypto exchange that recently received a Wells notice from the SEC.

He stated, “Now you have another exchange that has received an enforcement complaint from the commodity regulator for essentially being in the same business. For crypto, this is the worst of both worlds – one company that has an SEC allegation, Coinbase, and one that has a CFTC claim, Binance.

Binance has walked a regulatory tightrope around the world, and over the years it has received a number of compliance complaints from countries such as the UK, Japan, Germany, Australia and many more. However, according to many experts, the CFTC lawsuit could become an albatross around the stock market’s neck.