Binance Crackdown reveals how rigged the crypto game is

As a job-creating, economy-driving small business owner, I come to you with two pieces of business advice. First, you should disclose where your business is headquartered, and second, if you suspect that people are using your business to facilitate the commission of crimes, you should not write things like “Come on. They’re here for crime” or “we see the bad, but we close 2 eyes” in work communication that could ever conceivably become public. The exact communication became public on Monday when the US Commodity Futures Trading Commission filed a sweeping civil suit against Binance for alleged violations of the Commodity Exchange Act. The specific breaches, and the brazenness with which the Binance honchos allegedly committed them, are certainly interesting, but not as interesting as what they reveal about the lies at the heart of the cryptocurrency industry.

Binance, the largest cryptocurrency exchange in the world by a significant margin, has spent the last five or so years trying, sometimes succeeding, but mostly failing to open the US, the largest cryptocurrency market in the world by a significant margin. An insurmountable problem for Binance and founder Changpeng Zhao (known as CZ) is that they have never been particularly interested in playing by the rules governing the buying and selling of fake money in the US, which is a marked contrast from their former competitor FTX. While Sam Bankman-Fried’s now-kaput exchange kept regulators at bay by swallowing and donating to them, Binance chose to simply pretend those regulators didn’t exist, never registering with the CFTC.

The most important point here is crypto derivatives trading, essentially a turbocharged form of crypto trading where buyers bet on the future prices of, in this case, deeply volatile assets. It’s riskier, it makes up an estimated 70 percent of the crypto market, and it’s not allowed in the United States. Binance oversaw $1.26 trillion worth of derivatives trading on its platform in January 2023. That huge number could be significantly larger if US-based traders were legally allowed in the casino, and the CFTC claims that Binance was doing everything it could to bring in its biggest customers anyway. , including publishing guidance on their website that walks users through the process of setting up a VPN. They were successful enough that 16 percent of the derivatives volume came from the US

In an attempt to make it seem legitimate, Binance underwent a supposed audit in October 2020. According to a series of messages highlighted in the lawsuit, Binance employees were hilariously open about how much of a fraud the audit was. Former Binance Chief Compliance Officer Samuel Lim said they chose an auditor who would “only do a half-assed individual sub-audit on geo[fencing] to buy us more time.” Lim worked with Binance’s money laundering reporting officer, who complained to her boss about the hoops she had to jump through, such as “need[ing] to write a fake annual MLRO report to Binance’s board wtf.” Binance doesn’t have a board and Lim told her “‘yeah that’s fine, I can get mgmt. to sign the false report.” The team also frequently discussed the ways their platform was being used to facilitate money laundering and other illegal activities, and when made aware, actively looked the other way to ensure that business stayed on. their platform. As CZ put it, “We’re already doing a lot of things that are obviously not in line with the US.”

All of this is bad for Binance and CZ and will surely result in a hefty fine and an order to cease US operations. What is most intriguing about the way Binance is alleged to have operated is the way it manipulated its own markets and stacked the deck for its largest accounts. A central idea in the pitch for cryptocurrency is its supposedly decentralized nature. If all these digital assets are not hybrid gambling chips/unregulated securities, they must necessarily have a use, and since proponents do not want to have to make the logical but morally reprehensible case that counterfeit money’s most obvious use is to facilitate the transfer of illegal goods and services , the rhetoric about decentralization comes to the fore. Participating in pump-and-dump schemes and hastening the death of the planet is anti-big bank practice, the logic goes.

Cryptocurrency markets are, especially because they are unregulated, extremely exposed to manipulation. The complaint alleges that Binance offered special treatment to many high-roller accounts, such as someone in Chicago who is responsible for 12 percent of all trading on Binance. It also identified three named US trading firms as important, helping them set up shell companies to continue trading on the platform without notifying regulators, giving them preferential access to facilitate faster trading and thus more advantageous positions than what was available to regular customers. Or in computer parlance, they set up, “low-latency futures api/fstream … [to] carry a different domain than the public fapi/fstream . . . which will route to a more dedicated machine/gateway that opens exclusively to MM and top level VIP clients. So in general, the client can expect a small latency reduction of 5-10 ms round trip for a normal trading environment and more normalized waiting time (less extreme tail) in busy environments.”

More worryingly, the company is also accused of operating around 300 accounts “that have engaged in proprietary trading activity on the Binance trading platform”. This is definitional insider trading, but on a more dramatic scale, as it is clear that the volume of “wash trading” was enough to manipulate the market. So even a crypto trader who is knowingly and willingly in the game for the gambling aspect, freed from rationalizations about decentralization, is still playing. Markets whose prices appear to be the product of millions of traders buying and selling cryptocurrencies, derivatives, shitcoins, all that, are really just casinos with stacked decks shuffling things around and ensuring you lose and they win.

The CFTC cannot bring charges here, although it doesn’t need to for Binance’s US operations to be seriously threatened. The evidence they have is staggering and all these loopholes seem to be closing soon. The SEC is also turning its attention to Binance and other crypto players, so the game is likely up sooner rather than later. Even though Binance is the largest crypto exchange, you’d be foolish to think that any of this fraudulent behavior begins or ends there.