FTX Collapse Connects To CFTC vs. Binance Event And Its Consequences

Key Points:

• Binance is currently being accused by the CFTC of violations of the Commodity Exchange Act.
• This event all stemmed from the collapse of FTX and Sam Bankman-Fried’s extensive relationship with politicians.
• If Binance loses the CFTC lawsuit, it will severely damage other crypto companies in the US.

On March 27, the Commodity Futures Trading Commission (CFTC) announced that it had filed a civil enforcement action against Changpeng Zhao (CZ) and three entities that operate the Binance platform in the United States District Court for the Northern District of Illinois, charging them with numerous violations of the Commodity Exchange Act (CEA) and CFTC regulations. The lawsuit also accuses Binance’s former top compliance officer, Samuel Lim, of aiding and abetting Binance’s crimes.

The agency indicated that it has been looking into Binance since at least 2021. Binance has failed to function in the United States market and has committed infractions aimed at preventing unlawful financial activity. It also accessed internal conversation data via an unspecified unique method.

Binance CZ commented that the indictment seemed to include incomplete factual representations, that it disagreed with the characterization of many of the topics relevant to the accusation, and that it urged the community to disregard FUD news, false news, hostile attacks, and so on.

At the same time, the US issued 13 fresh accusations against FTX founder SBF, revealing that SBF had donated tens of millions of dollars in political contributions to American lawmakers before FTX’s collapse in November.

FTX collapsed less than six months ago under the weight of widespread corporate misconduct, resulting in billions of dollars in customer losses and waves of criminal indictments against its leaders.

The FTX dumpster fire was fueled by a series of tweets from Binance CEO Changpeng Zhao himself, and it burned especially hot because of its tight connection with co-founder Sam Bankman-market-making, Fried’s venture investing sister business Alameda Research. In 2021, FTX also employed a number of former CFTC officials.

Binance’s scenario may vary significantly. FTX reportedly allowed Alameda almost unlimited credit to trade on the site, using monies provided by FTX members.

The CFTC does not allege that Binance channeled cash to Zhao’s market makers in the same manner in its current indictment.

Nonetheless, the apparent structure seems familiar: control the markets, own the market makers, then grant enough special privileges to ensure profits from consumers.

As we all know, FTX has much more political clout in the United States than Binance. Let’s take a look back at the event and see whether FTX was the catalyst for this for Binance.

FTX is the root cause of Binance being targeted by the CFTC

With its power and influence only growing after the fall of Sam Bankman-Fried’s FTX empire last year, the unpalatable fact is that Binance controls a $1.1 trillion sector with few analogs in conventional banking. Despite all of the decentralization bluster from crypto’s real believers.

It’s a major event for Binance and Zhao, who famously became crypto’s lone giant following his role in the bankruptcy of FTX.

In its enforcement action, the CFTC is seeking permanent trading and registration prohibitions, as well as specific fines and reparations.

It is one of many US institutions, including the Securities and Exchange Commission and the Department of Justice, that are looking into Binance’s actions.

Bankman-Fried is not only a lobbyist for US crypto regulatory policy, but it is also building a powerful political force with the support of Washington’s regulatory political game. SBF has a solid connection with US authorities.

In addition to the current US SEC chairman and former CFTC chairman Gary Gensler, several of the former’s departments joined FTX during his tenure from 2009 to early 2014.

Back in December 2019, Binance declared a strategic investment in FTX, while also assisting the latter’s ecological growth in keeping pace with Binance’s. $1 billion. Nevertheless, after more than two years of fast growth, the popularity of FTX is equivalent to that of Binance, and the company has generated direct rivalry.

Notwithstanding the excitement surrounding the arrest of erstwhile wunderkind Bankman-Fried, Zhao’s influence in the business is significantly greater, which means the consequences might be far broader.

The company is by far the most prominent target in a US regulatory campaign that has enveloped other major participants, including US exchange Coinbase Global Inc., entrepreneur Justin Sun, and fallen algorithmic stablecoin king Do Kwon.

When FTX announced in July 2021 that it had completed a $900 million Series B round of fundraising at a value of $18 billion, Binance stated that it had totally withdrawn from FTX’s equity investment.

SBF created inextricable links with CFTC officials a year after parting ways with Binance in order to enhance its political power. Ryne Miller, former CFTC chairman and Gary’s legal counsel from 2012 to 2013 was appointed as the exchange’s general counsel in August 2021.

The CFTC’s action is undoubtedly bad news for Binance and crypto in general. Yet, it is neither the seismic event that was FTX’s collapse, nor is it the Terra/Luna meltdown.

Maybe the most important aspect of the case is how the CFTC openly calls out one of crypto’s worst-kept secrets: that not only are US clients acquiring access to hazardous offshore crypto derivatives shouldn’t be able to access, but it’s also rather simple to do so.

FTX is a stain on the economy in 2022, and US regulators do not want the same. Since the influence of the SBF empire is so political, it is no surprise that Binance is a target.

Binance lawsuit could affect crypto companies in the US

Binance denied the CFTC’s accusations, stating that it has been working with the CFTC for more than two years and will continue to work with regulators in the US and around the world in the future.

The agency mentioned Binance does not inform users that it trades on its own marketplaces. Binance’s US platform presently claims that the business depends on third-party market makers, some of whom may be affiliated with the company, however, it’s unclear when that language was first placed.

It is worth noting that Binance.US elected to form its own political action committee after FTX went bankrupt and was no longer able to fund the US political arena.

The federal and presidential elections are completely prepared, and there are no plans to give to the US Political Action Committee at this time (PAC). However, while Binance has never operated in Washington, D.C., it is utilizing the same lobbyist, Hogan Lovells law firm as Binance.US, to influence U.S. politicians. This demonstrates that Binance and CZ were aware of the warning flags and prepared to deal with the authorities.

Overall, the FTX storm has tightened oversight of the whole encryption industry, regardless of whether it seeks to encourage the investigation and repression of rivals via political influence.

The severity of the allegations implies that Binance will have difficulties striking a pre-trial settlement with the Commission that consists of just a warning and a fine. Even if a pre-trial settlement is reached, it will be penalized billions of dollars and barred from trading in the United States.

If the company and Changpeng Zhao are proven guilty by a court of law, most financial institutions across the world will discontinue doing business with the crypto exchange. Moreover, it would enable US law authorities to obtain information on all of their accounts and transactions, perhaps leading to even harsher penalties.

Meanwhile, the SEC issued a Wells notice to Coinbase, the biggest US-listed cryptocurrency exchange, for suspected securities law breaches. Overall, it was a bad month for the sector, which is always undermining its credibility even when things are going well. Nonetheless, be aware that the charges are still supported by exchanges.

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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Harold

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