CFTC vs. Binance: Is The Market Still Positive?
- According to the CFTC, Binance failed to register as a US derivatives exchange.
- The agency goes on to say that the cryptocurrency exchange arranged its business activities in such a way that it avoided registration requirements.
- The exchange accounts for 70% of all crypto spot market trading volumes. This is one of the reasons for the CFTC’s firm stance.
The US Commodity Futures Trading Commission (CFTC) announced the prosecution of Binance and its CEO and founder, Changpeng Zhao (CZ), for allegedly violating federal law and running an “illegal” digital asset derivatives exchange.
The case pits the Commodities Futures Trading Commission, one of the United States smallest financial authorities, against a worldwide corporation whose top executive, Changpeng Zhao, is one of the industry’s most powerful players. Binance has survived and expanded even while many other cryptocurrency startups have gone bankrupt in the last year.
In addition to CZ and other Binance affiliates, the CFTC accused Binance’s former top compliance officer, Samuel Lim, of aiding and abetting Binance’s offenses.
Since the CFTC is a civil government body, it cannot initiate criminal charges against firms or seek jail sentences for individuals. Nonetheless, the regulator’s case might result in significant fines and other punishments for businesses and people.
And its principal enforcement weapon is the power to seek orders that would permanently exclude persons from participation in US derivatives markets or deal in cryptocurrencies that qualify as commodities.
Why is the CFTC targeting Binance?
The CFTC also said that Binance and CZ violated US regulations by promoting US clients to utilize VPNs and so circumvent their location information. Binance also pushed its “VIP clients” to register accounts in the names of shell organizations, according to the agency. While Binance has denied all of the claims in its blog post, industry participants feel the CFTC’s charges are serious.
Tim Massad, former CFTC chairman and current director of the Harvard Kennedy School’s Digital Assets Policy Project, told Bloomberg:
“It’s a set of very strong allegations. They are seeking a permanent injunction against the defendants, so that would include CZ personally as well as Binance, from essentially doing business in the US, basically from ever registering in the US or engaging in commodities transactions in the US.”
Binance Is Significantly Larger Than FTX; Is It Too Huge to Fail? Binance’s dominance in the crypto sector grew steadily after the demise of FTX in November 2022.
The exchange accounts for 70% of all crypto spot market trading volumes. Similarly, in terms of perpetual futures, Binance will dominate 62% of worldwide trading in 2022. As a result, it has a distinct advantage over competitors like Coinbase in the crypto market.
What happened to Binance in US?
Binance said that it had made attempts to operate lawfully in the United States, including the establishment of a subsidiary, Binance.US, that sells a limited menu of crypto products to US consumers.
Binance is accused in the case of putting economic success above regulatory compliance. It claimed that Binance violated relevant federal laws while expanding its user base in the United States.
In addition to the regulatory infractions, the complaint explicitly targets Binance’s American trading units, Merit Peak and Binance.US. According to the CFTC, Binance and its connected businesses are a single company with an ultimate beneficial owner (UBO) and are directly controlled by CZ.
Learn more about what the CFTC emphasized in the complaint
According to the CFTC complaint, Binance’s organizational structure is a maze of company organizations meant to mislead who owns and controls the exchange. Binance’s compliance efforts, according to CFTC Senior Enforcement Officer Gretchen Lowe, are a fraud.
According to internal documents acquired by the CFTC, in addition to enabling unlawful transactions in the United States, the lackadaisical approach to compliance might lead to more severe consequences, such as the possibility of U.S. and EU-designated terrorist organizations trading on the platform.
Many conversations concerning Binance’s usage of the Signal communication app are included in the paper, including conversations between CZ and Binance staff, U.S. consumers, and others. The conversation logs also claimed that staff was given instructions to utilize Signal to discuss the “US prohibition.”
Binance is also accused of failing to create an effective anti-money laundering policy, according to the CFTC. According to the agency, it also failed to put in place the required protections to confirm a customer’s genuine identity. According to the complaint, the company did not file any suspicious activity reports in the US until at least May 2022.
How does the crypto industry view the lawsuit?
According to certain industry participants, US officials are attempting to impose regulation in the lack of a complete framework for the crypto business.
BitMEX reached an agreement with the CFTC and the Financial Crimes Enforcement Network (FinCEN) in August 2021 after US officials accused BitMEX of unlawfully taking orders and cash from US consumers to trade Bitcoin, Ethereum, and Litecoin futures for $100 million.
According to Meltem Demirors, chief strategy officer of cryptocurrency investment company CoinShares, all eyes are on the case. She added that the issue is comparable to the CFTC’s investigation against BitMEX but that it is less focused on OFAC breaches and more focused on marketing and product availability for US retail businesses.
According to Demirors, the CFTC’s argument in its recent case against Binance that bitcoin and ethereum are commodities contradicts the SEC’s position. In interviews over the last year, SEC Chairman Gary Gensler has said repeatedly that, although he considers Bitcoin to be a commodity, most other crypto tokens are securities.
Litecoin, USDT, and BUSD were also included as commodities in the CFTC lawsuit. The difference demonstrated the uncertainty caused by the lack of clarity in the United States.
According to Jeffrey Blockinger, chief legal counsel of Vertex Protocol, a decentralized exchange, Binance may negotiate an agreement or initiate a lawsuit.
The CFTC’s latest action against Binance might have a larger market effect. As soon as the news of the CFTC’s action against Binance became public, Bitcoin and the larger crypto market fell by 3%.
With the recent bankruptcy of Signature Bank, Binance’s connections with conventional financial partners have also been strained. If the Binance litigation continues on for a longer period of time, as it did in the case of Ripple, it might have a bigger impact on the crypto ecosystem than previous events.
What is the future for other exchanges?
With the crypto crisis and demise of major competitor FTX, the exchange has increased its dominance.
But, the crypto-giant has recently suffered significant setbacks. Binance stated last week that it momentarily paused spot trading for hours as it corrected a technical fault.
Paxos Trust, which issues and lists Binance’s dollar-pegged cryptocurrency, was ordered by New York regulators in February to stop producing more Binance USD tokens.
The growth rate of Binance is unquestionable, but if there is a major event like FTX, it will most likely become a big bomb for Bitcoin and the crypto market.
DISCLAIMER: The Information on this website is provided as general market commentary and does not constitute investment advice. We encourage you to do your own research before investing.
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