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If you live in America, you are not allowed to trade crypto derivatives. And if you are a large international crypto derivatives trading platform, you can’t let Americans trade these products if you haven’t registered with the boring-but-not-to-be-exhausted-with federal regulator known as the Commodity Futures Trading Commission, or CFTC.
Today, this regulator sued Binance, the world’s largest cryptocurrency exchange, for allegedly doing just that. (And if that name sounds familiar, it might be because in November Binance briefly flirted with bailing out its smaller rival, FTX. Clearly, Binance took a look under the hood of FTX, now at the center of a massive federal fraud investigation, and bail immediately.)
Here’s the deal: The CFTC alleges that Binance and its CEO violated US trade laws by, among other things, secretly instructing “VIP” customers in the US on how to avoid compliance checks.
The commission, which regulates U.S. derivatives trading, said the company and its CEO, Changpeng Zhao, “instructed its employees and customers to circumvent compliance checks to maximize corporate profits.”
Which, you know, is not something you want to be caught doing. The CFTC cannot bring charges, but it could impose large fines and potentially ban Binance from registering in the US in the future.
Binance said the lawsuit was “unexpected and disappointing,” adding that it has made “significant investments” over the past two years to ensure that US-based investors are not active on the platform.
When news of the lawsuit broke Monday, Zhao, known as “CZ,” tweeted number 4, pointing to part of an earlier statement: “Ignore FUD, fake news, attacks, etc.” (FUD is a commonly used acronym among crypto people that stands for “fear, uncertainty, doubt.”)
Binance has long argued that it is not subject to US laws because it does not have a physical headquarters in America. Or anywhere, really — CZ claims that the company’s headquarters are wherever he is at any given time, “reflecting a deliberate approach to try to avoid regulation,” according to the CFTC’s lawsuit.
The CFTC’s lawsuit is certainly not good news for Binance, or for crypto more generally. But it’s not quite the seismic event that was the FTX collapse, or even the Terra/Luna meltdown. (You can read more about these here and here , but tl;dr: These 2022 events were, to use a technical term, holy-crap-sell-everything-call-your-father-and-cry moments for crypto investors .)
The prices of bitcoin and ethereum, the two most popular cryptocurrencies, fell more than 3% on Monday. That is, it was just another day of virtual currency trading.
Perhaps the most important part of the lawsuit is the way the CFTC loudly calls out one of the worst-kept secrets in all of crypto: That not only are US customers accessing risky offshore crypto derivatives they shouldn’t be accessing, but it’s also quite easy to do so . All anyone needs is a VPN and an iron stomach, because crypto derivatives are bets on wildly volatile assets. (And like everything in this newsletter, it shouldn’t be taken as any kind of advice.)
The likely result, said Timothy Cradle, an expert on crypto compliance and regulation at Blockchain Intelligence Group, will be that Binance will end up paying “hundreds of millions of dollars” in fines and will be prevented from registering a derivatives exchange in the future. It’s “a terminal blow to users of its service located in the US and a significant hit to Binance’s revenue” as the suit claims US users account for 16% of revenue for Binance’s derivatives product.
Monday’s news adds another layer of regulatory scrutiny to crypto’s biggest players. The Internal Revenue Service and the Securities and Exchange Commission are also investigating Binance, according to Bloomberg.
Meanwhile, Coinbase, the largest US-listed crypto exchange, received a so-called Wells notice (usually a precursor to enforcement) from the SEC last week for possible violations of securities laws.
And just to add: earlier this month, the crypto industry lost two of its biggest connections to the mainstream financial world – Silvergate and Signature Bank.
All in all, not a great month for the industry that constantly strains its credibility even when it’s hot. And right now it definitely isn’t.
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