The US sues the largest crypto exchange Binance. What consequences can this bring?

The US sues the largest crypto exchange Binance. What consequences can this bring?

And what is the conflict in attempts to regulate the cryptocurrency market

The US sues the largest crypto exchange Binance. What consequences can this bring?

The relevant US regulator has filed a lawsuit against Binance, the world's largest cryptocurrency exchange. The accusation was officially filed by the US Commodity Futures Trading Commission (CFTC). The lawsuit text can be downloaded here.

And just yesterday, on 6 April, Bloomberg published the names of the companies anonymously mentioned in the lawsuit – Jane Street Group, Tower Research Capital and Radix Trading. The CFTC mentions the operation of these firms under the code names "Trading firm A, B, C" (details: clauses 150-186 of the lawsuit).

After last year's large-scale collapse of one of the industry leaders, FTX, it is hard to surprise the community with accusations of abuse in the crypto industry against a business: a new information bomb pops up almost every week. Moreover, any measures to tighten regulation historically occur after newsworthy events, when even the liberal-minded public reacts more favourably to belt-tightening.

Mind has analysed the details of the lawsuit, tried to estimate the situation and make a forecast for the future for Binance and the crypto industry in general.

What does the lawsuit contain?

The text of the lawsuit consists of 75 pages, containing charges and facts that directly or indirectly point to certain violations. The first important point is the list of defendants. They are three legal entities and two individuals:

  1. Binance Holdings Limited, the group's parent company, which owns intellectual property and trademarks;
  2. Binance Holdings (IE) Limited;
  3. Binance (Services) Holdings Limited;
  4. Changpeng Zhao is the founder and key beneficiary of the group;
  5. Samuel Lim – Chief Compliance Officer of the company in 2018-2022.

At the same time, BAM Trading Services Inc. which operates Binance.US and serves US clients, is listed only in an additional list of "other responsible persons".

Thus, despite the fact that the lawsuit was filed by the US regulator, it concerns the global organisation of Binance (the entire group), not just its US subsidiary. US regulation is stricter, which prompts the need to fragment the business and set up separate entities to operate in the United States. If we compare the global (.com) and US (.us) exchanges, we see the following:

The US sues the largest crypto exchange Binance. What consequences can this bring?
Source: CoinGecko and SimilarWeb data (at the day of the publication)

As can be seen from these figures, the US business is relatively small in comparison to the global one. actually offers only spot trading, while provides an opportunity to work with derivatives. This is, in fact, the direct area of control of the CFTC, which filed the lawsuit.


Established in 1974, the Commodity Futures Trading Commission (CFTC) protects the public from fraud, manipulation and abuse in connection with the sale of commodity and financial futures and options, and promotes openness, competition and financial stability of futures and options markets.

Derivatives (as defined in the lawsuit) are financial instruments, such as futures, options or swaps, whose value depends on something else, including, for example, a prime rate, a physical commodity such as oil or wheat, or digital asset commodities.

According to the commission members, the problem lies precisely in the fact that Binance did not maintain a clear distinction between its companies and conducted transactions for which it was not licensed with US citizens. To work with them, it is necessary to keep licences in various states (the website is accessible only from an American IP address) and at the federal level. And even then, the list of operations is limited. For example, some states were not available for operation even for

     Binance.    ?


What were the origins of the current situation?

The derivatives market is large and profitable, and this may explain the desire of crypto exchanges to work in it. According to CoinGecko, the daily traded value by press time of this article was $148 billion (compare with the daily value of the spot market that is estimated at $46 billion), and the leading exchanges look like this:

     Binance.    ?

Source: CoinGecko data 

Binance is among the leaders here. About $9 billion of open interest shows the amount of existing contracts that have not yet been settled. For example, the lawsuit provides some figures on the commissions that Binance received from derivatives trading at different times:

"In August 2020, the platform earned $63 million in derivatives transaction fees and approximately 16% of its accounts were held by Binance customers based in the United States. By May 2021, Binance's monthly revenue from derivatives transactions had grown to $1.14 billion" (source: Clause 4 of the lawsuit).

At the same time, cannot offer derivatives trading services. In general, even a cursory comparison of the range of services on the .us and .com websites shows the limited capabilities of the former.


     Binance.    ?

Some of the products (derivatives) of

     Binance.    ?

To work with derivatives, it is necessary to obtain an appropriate licence from the CFTC, which none of the Binance group organisations had. So, let's get to the heart of the regulator's claims.

What exactly is Binance accused of?

Among the massive list of accusations, it is important to highlight two key ones:

  1. Working with US citizens through organisations that do not have the right to do so (i.e. not through or under existing permits).
  2. Providing services for trading in derivative financial instruments (derivatives) in the US market.

Along with these charges go:

  • advising clients on circumventing restrictions (in particular through VPN services);
  • absence of or non-compliance with KYC (Know your client) and anti-money laundering measures;
  • using related accounts for trading.

We can summarise it as follows: in the SFTC opinion, Binance received income from working with US residents, bypassing the restrictions and requirements of the law and without having the appropriate licences.

What facts confirm this?

As evidence of the allegations, the CFTC refers to a large volume of correspondence in messengers to which they were able to gain access. It also emphasises the frequent use of Signal with the function of automatic deletion of messages.

When reading the lawsuit, one can get the impression that such facts are presented with a somewhat exaggerated emotional overtone, since the mere use of messengers (even with disappearing messages) is not a crime. Another thing is if there is factual evidence of violations, which are going to be proved or disproved by the court.

For example, the indictment cites examples of work with US-based companies that Binance managers assisted in transferring accounts to unregulated jurisdictions to circumvent restrictions. The indictment notes that the beneficiaries of the trade remained US residents, while the trading accounts were transferred to other countries, enabling evasion of the US regulators.

     Binance.    ?
     Binance.    ?

The lawsuit also includes data from internal reports that were accessed by the commission's employees. At some point, data on US clients disappeared, and instead, the numbers of clients with unknown residency increased. In particular, the lawsuit contains two infographics (unfortunately, the quality of the original leaves much to be desired).

The lawsuit also says that in September 2020, these internal records mentioned 2.51 million US customers and 0.31 million "unknown" customers. However, in October, the number of the latter increased to 2.83, along with the disappearance of the US share.

The article adds that similar actions were related to the BitMAX trial (more on this trial below, in the Historical Parallels section) and quotes a conversation between the Chief Operating Officer and his colleague:

"The recent Bitmex incident has had a great impact on the industry. Please remove US data from all our charts along with Big Data. In the future, only a narrow group of people should see our American data."

And in an internal chat on 17 November 2020, the COO explained:

"At this time, the keyword 'US' is sensitive for internal audiences as well, so you should use 'Unknown' to indicate the country."

Thus, the CFTC adds to the direct allegations of violations the claims of attempts to conceal these violations. At the same time, the key evidence should be not just the existence of American accounts, but also transactions on them. After all, it is possible that the accounts could have remained dormant, and the renaming of the accounts to "US" was simply a security measure. But it is the task of Binance lawyers to prove this.

Much attention was paid to violations of Know-Your-Customer (KYC) and anti-money laundering (AML). This opens up a potential opportunity for persons from sanctioned territories to access the exchange's services, legalise money obtained illegally, etc.

The lawsuit contains many other facts of varying degrees of potential guilt and likelihood of being confirmed. Mind will monitor the developments and highlight the data that becomes public. At the moment, we can only rely on the experience of past cases of this kind.

Historical parallels

In August 2021, the CFTC already succeeded in a similar case against BitMEX. The hearing resulted in a $100 million fine. The fact of the case was close to the current one: it also involved abuses over a several-year period (from 2014 to 2020), namely the delivery of margin trading and derivatives trading services to retail and institutional clients in the USA.

The following is almost verbatim from the current charges against Binance:

"BitMEX violated CFTC rules by failing to implement a Customer Information Program (CIP) and Know-Your-Customer (KYC) procedures that would have identified U.S. persons using the platform, and by failing to implement an adequate anti-money laundering (AML) programme," the lawsuit said.

Following the verdict, the accounts of US users were blocked, and BitMEX itself ceased operations and business functions in the United States on 30 June 2021.

The natural persons who founded BitMEX, in turn, had to pay $30 million ($10 million each to Arthur Hayes, Benjamin Delo, and Samuel Reed) under another ruling.

The very lawsuit was filed in October 2020, so the proceedings lasted more than 10 months, and the judgement against the founders had to be waited even longer. Given the much wider scale of Binance's operations, we do not expect a quick resolution of the case.

Read also: Cryptocurrencies go underground: NBU bans withdrawals from crypto wallets. Why is it a sign that the market is being prepared for strict regulation?

What may be the outcome?

The process can go in favour of one side or the other with varied success, leaving no one with a complete victory.

The most likely scenario is a settlement with large fines for the company and natural persons involved. However, we do not see any significant risks for clients who are not US citizens or from sanctioned countries and territories.

They may have to undergo a new KYC procedure, but this should not be a problem for legal clients. And centralised exchanges have never been an appropriate tool for hiding your identity.

The only real risks are possible in one extreme scenario: a large outflow of client funds due to their misuse by the exchange (the situation with FTX, which used client money to finance operations in other projects).

However, Binance confirms the existence of assets and has a high level of Trust Score reliability. You can follow it on geckoterminal and Binance also publishes PoR (Proof-of-Reserves) data. It is important to understand that the current lawsuit against the exchange is related to regulation and control of activities, not to deception of customers or investors.

What are the long-term implications?

The case against Binance will have a significant impact on the entire crypto sphere. It is not about an ordinary market actor, but about the largest one, which will attract the best lawyers to work on the lawsuit. The most important consequence may be an understanding of who regulates what.

More specifically, in addition to the CFTC, another serious organisation, the Securities and Exchange Commission (SEC), is trying to control the crypto sphere. "The highlight of this story is the different interpretation of the essence of crypto assets by these organisations.

SEC Chairman Gary Gensler considers cryptoassets to be securities (he makes an exception for bitcoin, explaining this by the special nature and history of the project's founding and development – read more in his interview). Mr Gensler is as categorical as possible:

"Behind cryptocurrencies are people who can use various complex and legally opaque mechanisms, but at a basic level, they are trying to promote their tokens and attract investors." This meets the criterion of a security, which he sees as the desire to receive investment income from transactions.

In turn, the CFTC proposes to define crypto assets as a commodity. In particular, the current lawsuit frequently refers to violations of the Commodity Futures Trading Act (derivatives on commodities).

In this context, the protracted SEC case against Ripple, which has been lasting since December 2020, is of particular importance. Ripple Labs Inc. was accused of raising $1.3 billion through the unregistered placement of digital assets.

This case is notable because, unlike other crypto market participants, Ripple Labs Inc. did not agree to a peaceful settlement and payment of fines, but decided to win the case by proving that XRP is not a security. If they succeed in proving this, it could help to lower the SEC's weight.

Currently, XRP ranks sixth in terms of capitalisation among cryptocurrencies at $26 billion.

To summarise. Currently, crypto business representatives can expect accusations from any side, and the emergence of one regulator (perhaps even a new one) will make the situation more predictable. Decentralised exchanges may become another beneficiary. However, as we wrote in one of our reviews, this tool is still difficult to scale to the general public.

Read also: Investment review: Trading through a decentralised crypto exchange

We do not expect a quick resolution of the story, instead, the process of forming a stable legal framework for the crypto sphere, which should protect the interests of investors and contribute to the formation of a civilised market, may accelerate in the coming years.

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