Binance CEO CZ, Crypto’s most powerful man, has more than “FUD” to worry him now

by Arthur · March 27, 2023

(Bloomberg) — “I am not an anarchist,” Changpeng Zhao once said. “I don’t think human civilization is advanced enough to live in a world without rules.”

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But now that the US Commodity Futures Trading Commission has sued Zhao and his Binance cryptocurrency exchange for alleged violations of derivatives regulations, the world is finding out how the most powerful person in crypto reacts when he himself is accused of breaking the rules. .

The outcome could help shape the future of the crypto industry as its major players wrestle with today’s pressing dilemma: whether to resist increasingly aggressive efforts by the US government to bring the industry into compliance with financial laws, or cooperate in an effort to salvage operations in the world largest economy.

A spokesperson for Binance called the CFTC’s actions “unexpected and disappointing” and said the company had “made significant investments over the past two years to ensure we do not have US users active on our platform,” including more money spent on compliance tools and increased staffing. in that area. The firm intends “to continue to cooperate with regulators in the United States and around the world. The best way forward is to protect our users and to work with regulators to develop a clear, thoughtful regulatory regime,” the spokesperson said.

As for CZ himself, his first public response was to tweet “4,” an apparent reference to an earlier post where he laid out his “Do’s and Don’ts for 2023: “4. Ignore FUD, fake news, attacks, etc.”

Getting past a CFTC lawsuit will be harder to do than ignoring “FUD,” the acronym for “fear, uncertainty, and doubt” that so often belies crypto projects. And indeed, CZ followed up his initial reaction with a longer blog post in which he echoed the Binance spokesperson on compliance efforts and cooperation with regulators, while adding that the CFTC’s case “appears to contain an incomplete recitation of the facts, and we do not agree in the characterization of many of the issues alleged in the complaint.”

At the heart of the case are allegations that Binance failed to register as a US derivatives exchange and intentionally structured its businesses and transactions to avoid those registration requirements. The agency alleged that CZ and senior executives took steps to violate U.S. laws, including instructing U.S. customers to use virtual private networks, or VPNs, to hide their location and instructing “VIP customers” to open Binance accounts under the name of shell companies. The CFTC also said that Binance’s own documents for the month of August 2020 showed that the platform earned $63 million in fees from derivatives transactions, and that about 16% of the accounts were identified as held by US customers.

Among other things, the complaint seeks a permanent injunction to stop Binance from continuing to commit violations and prohibit the defendants and related parties from trading digital assets and other goods. It is also seeking to recover trading profits, revenues, wages and other monies derived from Binance as a result of the breaches.

“It’s a set of very strong claims,” Tim Massad, the former chairman of the CFTC who is now director of the Digital Assets Policy Project at the Harvard Kennedy School, said in an interview. “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 commodity transactions in the US.”

CZ said in its response that Binance “does not trade for profit or ‘manipulate’ the market under any circumstances.” He said the company has affiliates that provide liquidity to less liquid trading pairs that are “specifically monitored not to have large profits.” He also said that he strictly follows Binance’s trading policies, including those for anyone with private information such as listing details. Finally, CZ said “we don’t expect everything to be easy,” but that “we don’t shy away from challenges.”

The blog post suggests that Binance is ready to dig in for a legal battle. Meanwhile, it continues to grow its global business in international market hubs that are more friendly to crypto.

Read more: Binance CEO sued by US Derivatives Watchdog for rule violations

Zhao, who has an estimated net worth of nearly $28 billion, bought a home in Dubai in 2021 in what he said was a show of support for a city he describes as “very pro-crypto.” The founders of Three Arrows Capital moved to Dubai after the crypto hedge fund collapsed. Meanwhile, CZ’s former main rival Sam Bankman-Fried of FTX is under house arrest awaiting trial on fraud charges that could, in theory, put him in prison for more than a century.

Even before the news of the pending action by US regulators, CZ appeared to be cozying up to its hosts. The homepage of Binance’s non-US website last week was dominated by a celebration of the start of Ramadan, complete with an Advent-like calendar. “Come back daily to discover all kinds of special promotions, giveaways and events,” it says. “That’s $535,000 worth of sharable rewards!”

On Wednesday, the first day of the Muslim holy month, it linked to a video interview with CZ himself. In that conversation, CZ said he is now based in the Middle East, without naming Dubai specifically, and praised what he called the region’s business-friendly atmosphere. He also acknowledged some regrets.

“In retrospect, there are a lot of things we would have done differently,” he said. “We probably would have, should have engaged with the regulators globally much earlier. More educational efforts earlier. I probably should have learned Arabic earlier.”

One question is whether the risk of trying to defend Binance’s US operations in court is more trouble than it’s worth for Zhao. While the exchange’s dominance of the global crypto market and related derivatives has continued to grow since FTX’s failure, accounting for around 60% of the market in mid-February according to data from CryptoCompare, its smaller US site has struggled to gain that kind of market share in the US. The Binance USA exchange was the fourth most active crypto exchange in the country over the past 24 hours, with volume roughly half that of leader Coinbase Global Inc.

Read more: The world’s biggest crypto fortune began with a friendly game of poker

The action against Binance is the latest twist in the collision course between major national governments and crypto advocates’ vision of a system where money can be freely exchanged around the world without “censorship”. The roots of the crash lie in last year’s failure of Terra’s stablecoin to maintain its $1 peg and the bankruptcy of FTX, which together evaporated nearly $2 trillion of digital wealth. Nevertheless, a tense geopolitical environment, characterized by economic sanctions aimed at Russia and Iran, adds fuel to the investigation.

“Binance now faces investigations into criminal sanctions evasion, money laundering conspiracy, unlicensed money transmission, questions about its financial health and increased scrutiny of its purportedly ‘opaque corporate structure,'” US Senators Elizabeth Warren, Chris Van Hollen and Roger Marshall wrote to CZ and the head of Binance US earlier this month, summarizing a long list of articles critical of the firm and asking for balance sheets and other information about the businesses.The collapses of crypto-friendly banks Silvergate Capital Corp. and Signature Bank also heighten scrutiny.

And while CZ once modeled its ambitions for the Binance US exchange after Coinbase’s successful transition to a public company, that exchange has also been mired in state and federal investigations, including the company’s disclosure last week that it had received a notification that US Securities and the Exchange Commission plans to take an enforcement action.

Read more: Coinbase, Do Kwon, Lohan Ensnared by Widening Crypto Dragnet

“In a week, the CFTC has sued Binance and the SEC has indicated it will sue Coinbase,” said John Coffee, a professor at Columbia Law School who specializes in securities regulation and corporate law. “In either case, they could force these firms to leave the US and do their markets only overseas. Yet we still don’t have a clear definition of the extent to which cryptos constitute securities. These cases will force the issue to the front burner.”

CZ has made its thoughts clear regarding the government’s efforts to rein in the crypto industry. In an interview at the Bloomberg New Economy Forum in Singapore in November 2021, he said he believed the United States was trying to protect the status of the dollar, which he said “is a powerful tool for organizing the world, even stronger than the military. ” Still, he compared this protectionist effort to Eastman Kodak Co.’s failed attempt to defend its film business against digital competition.

“The better thing to do is invest very heavily in things that can disrupt you,” he said. “Technology will develop all over the world. You can’t erase a concept from the minds of 400 million people.”

With the US apparently taking what CZ calls the Kodak approach to cracking down on crypto, the industry will likely continue to be pushed away from the traditional financial industry and into the shadows. Whether or not the most powerful man in crypto comes along for the ride could play a big role in determining what the market looks like when it gets there.

–With assistance from Vildana Hajric and Allyson Versprille.