Why Binance is the latest crypto exchange to run into trouble with the authorities
Binance is the latest crypto exchange to get into hot water with regulators.
Binance, the world’s largest cryptocurrency exchange, is dealing with great uncertainty after being hit by a lawsuit from the US Commodity Futures Trading Commission, or CFTC. It is the latest example of the increased federal scrutiny the industry has been under after a wave of scandals in recent years.
The lawsuit, which was filed on Monday, alleges that Binance willfully evaded US laws, including failing to register in the country and allow Americans to trade crypto derivatives, which is barred to retail investors. Binance CEO Changpeng Zhao has called the lawsuit an “incomplete recitation of the facts” in response. Since then, investors using the platform have withdrawn $1.6 billion, a significant increase in withdrawals, although experts note that Binance’s reserves may be large enough to withstand such a hit.
The lawsuit could have larger ramifications for Binance’s business in the long term, according to a report from CNN’s Allison Morrow. If successful, the CFTC lawsuit could result in “hundreds of millions” in fines, as well as a possible ban on Binance’s ability to register as a derivatives trader in the US. That would deal a serious blow to Binance’s derivatives revenue, 16 percent of which comes from the United States, CNN notes.
“The cryptocurrency industry has recently faced several significant challenges, starting with the Terra/Luna meltdown, followed by FTX, and now Binance,” says Christian Catalini, founder of the MIT Cryptoeconomics Lab. “Concerns regarding Binance’s compliance and regulatory practices have been raised for some time, and the evidence presented by the CFTC is quite damning.”
What this could mean for crypto in general
Also, for those who may not know Binance, it is one of the largest crypto exchanges in the industry and it handled approximately $23 trillion in trades in 2022. Previously, Binance also reportedly considered bailing out cryptocurrency exchange FTX when it declared bankruptcy among founder Sam Bankman -Fried’s legal troubles, although it ultimately decided not to. Binance is well known globally and is a dominant exchange abroad, while other exchanges such as Coinbase are more established in the US.
One of the core issues in the Binance lawsuit is that it intentionally tried to evade US regulations by allowing US customers to engage in illegal purchases and trades via VPN and other tactics that would not give away their location. The CFTC lawsuit also alleges that the platform has not done enough to combat potential money laundering and other crimes that it could be used for.
The CFTC’s actions highlight how regulators continue to confront crypto companies, and also follow another lawsuit by the Securities and Exchange Commission against Ripple Labs, another crypto company.
Recent chaos with companies like FTX has probably strengthened regulators, says Duke University finance professor Campbell Harvey. “Given these meltdowns and bankruptcies, it’s made it a lot easier for regulators to pull the trigger,” he notes.
Such regulatory actions are unlikely to harm the crypto market overall, experts say. This week, for example, the price of bitcoin has remained stable amid the Binance news. And while Binance has seen large withdrawals, they seem to have the reserves to handle it and are not facing a bank run comparable to Silicon Valley Bank. “We don’t know what kind of money is in their war chest,” says Campbell. “It’s not clear that it has a very big impact on their bottom line.”
Experts also warn that US officials need to strike a balance between regulations that are too strict, which could have the effect of operating companies outside the US, and providing a clearer framework for crypto to operate under that protects customers.
“If regulators push too hard, they would just go. My personal opinion is that would be a bad thing, because then the United States would not have a seat at the table,” said William Johnson, a finance professor at the University of Massachusetts Lowell.
