Crypto advocates in the US fear the country’s authorities are determined to stamp out the sector in its current form after regulators sued Binance and its chief executive Changpeng Zhao. The cryptocurrency exchange, the world’s biggest, stands accused of “wilful evasion of US law”. The core complaint is that despite Binance’s official commitment to blocking U.S. citizens from using its exchange, it has in fact grown its business in the country.
The legal action has been taken by the Commodity Futures Trading Commission (CFTC), which yesterday announced a civil enforcement action has been filed in a federal court in Chicago. The action charges Zhao, along with three entities operating the Binance platform, with multiple violations of both the Commodity Exchange Act and CFTC regulations. The complaint additionally alleges that Samuel Lim, Binance’s former chief compliance officer, aided in the commission of these violations.
Among the complaints is that in violation of its public position, Binance actively advised valuable customers how to evade US compliance controls, including the recommendation to use a VPN.
The regulator also alleges Binance had a policy of communicating advice on how to evade controls to customers via the messaging app Signal, with correspondence set to auto-delete. Zhao is also accused of using Signal to communicate with his messages similarly set to auto-delete.
The CFTC’s statement expands:
“Zhao is alleged to have been responsible for all major strategic decisions at Binance, including devising the secret plot to instruct US-based VIP customers to evade Binance’s compliance controls and instructing Binance employees to ensure all communications about their control subversion took place over applications that facilitated the automatic destruction of evidence.”
Binance is further accused by the CFTC of facilitating money laundering by ignoring suspicious account credentials and behaviour. That adds to the US financial crime watchdog FinCEN listing Binance as a counterparty to Bitzlato in January. Bitzlato is another crypto exchange whose founder was charged with transmitting more than $700 million in cryptocurrency funds flagged as violating US money-laundering regulations.
FTX collapse sparked regulatory action
The high-profile bankruptcy of the Bahamas-based and US-run FTX exchange last year, which saw tens of thousands of American citizens lose money, has prompted a flurry of regulatory activity against the crypto sector in response. Former FTX co-founder and CEO Sam Bankman-Fried, until recently a darling of the crypto sector and seen as a builder of bridges with mainstream financial markets, has been charged with multiple counts of fraud and conspiracy. Today a 13th criminal charge, this time for bribery, was added to those he will stand trial for.
The CFTC is now clearly determined to prevent any cryptocurrency exchange not regulated in the USA, which is all of them, from serving American customers. It is requesting Binance be punished for continuing to service US citizens, and its allegedly active attempts to do so, in the form of both fines and a permanent trading ban. Its statement read:
“Defendants have disregarded applicable federal laws while fostering Binance’s US customer base because it has been profitable for them to do so.”
The CFTC says that as well as exchange facilities for actual cryptocurrencies, Binance has also offered US citizens commodity derivatives transactions, like CFDs, futures and options, over its platform since 2019. The complaint is predicated on cryptocurrencies being classed as commodities, with the CFTC holding jurisdiction over commodity derivatives transactions in the US, or involving US citizens or entities. Binance is not registered with the CFTC.
The Securities and Exchange Commission (SEC), the other major US financial markets regulator, also recently publicly stated it is considering taking action against Coinbase. Coinbase is the world’s second-largest crypto exchange by turnover after Binance.
Are non-regulated crypto exchanges finished in the US?
Quoted in The Guardian newspaper, Howard Fischer, a partner at New York law firm Moses & Singer, said the CFTC action showed US regulators are taking concerted action against cryptocurrency exchanges, commenting:
“In conjunction with the SEC’s expected enforcement action against Coinbase, it looks like US regulators are taking steps to shutter or at least significantly restrict the US activities of the major remaining crypto exchanges.”
For its part, Binance predictably denies the complaints made against it, insisting it has made significant efforts and investments designed to block US citizens from using its platform. It also expressed a willingness to continue to work with regulators including the CFTC. Its statement read:
“This filing is unexpected and disappointing as we have been working collaboratively with the CFTC for more than two years. Nevertheless, we intend to continue to collaborate with regulators in the US and around the world.”
“The best path forward is to protect our users and to collaborate with regulators to develop a clear, thoughtful regulatory regime.”
However, if the CFTC gets its way, the exchange will be slapped with an official trading ban in the US, meaning any future dealings with US citizens could prove catastrophic.
Will the broader US crypto sector survive?
Matt Maley, chief market strategist at Miller Tabak + Co, today told Bloomberg that he believes the outcome of these big cases by US regulators against crypto exchanges, and others expected to be announced imminently, will have a big role in shaping the future of crypto.
If crypto exchanges are strictly outlawed from dealing with US citizens and entities, the whole sector as it stands today would be effectively forced out of the world’s largest economy. US citizens who did wish to use an exchange would have to deal in the shadow economy and face heightened risks.
No major international exchange is likely to risk losing its entire business by being hounded by US regulators as a result of working with US entities.
Other American crypto businesses not directly affected by the regulatory crackdown would likely struggle to survive its ripples or be forced to downsize and adjust business models, or move offshore, to do so. Investment would be expected to dry up.
The loss of the US market, or at least the legal US market, would not necessarily be the end of the crypto sector internationally. But it would be a significant blow and place serious question marks over its future.
The biggest question is if US regulators are open to a potential future of regulated US crypto exchanges. Are the incumbents being forced out with a view to them being replaced by easier-to-control domestic newcomers that will enter the market as regulated exchanges? Or are US authorities now making a concerted move against the crypto sector in its entirety, viewing it as an existential threat to regulated markets?
Most experts believe it is too late to put the crypto genie back in the bottle entirely. But it is far from clear what the future holds for the sector in its current format. Especially when it comes to the USA and its citizens.