Binance, the largest global crypto exchange by trading volume, and Chief Executive Changpeng Zhao were reportedly taken off guard by the U.S. Commodities and Futures Trading Commission’s (CFTC) decision to file a civil lawsuit against the company on Monday. The firm, which has for years avoided establishing a permanent headquarters, had been in dialogue with U.S. and other regulators about operating compliantly in the hundred-plus jurisdictions it services.
The CFTC’s filing was a surprise, to an extent. There have been rumors the U.S. Department of Justice, Securities and Exchange Commission and even the Internal Revenue Service were preparing lawsuits for a range of corporate failings. When U.S. officials sanctioned Russian crypto exchange Bitzlato, they noted Binance was a large counterparty for darknet marketplaces. That the CFTC dropped the first shoe is surprising – if only because it fuels confusion over whether ether (ETH) and other cryptocurrencies are commodities or securities.
In its 74-page complaint, the CFTC, accused Binance of not only servicing U.S. customers without filing for the appropriate licenses but actively helping customers skirt know-your-customer and other compliance rules. Binance’s executives were allegedly aware its geofencing tools were inadequate, and even had a semi-formalized (though confidential) procedure for getting “whales” around it and shielding their U.S. IP addresses.
The case is obviously bad for Binance, and comes during an uncertain time for crypto. Experts say this could be a fatal blow to the exchange (worst case), or disrupt a significant part of its revenues (Bloomberg’s Matt Levine, for instance, essentially said the case is not centered on consumer safety, but designed to prevent Binance from profiting from U.S. hedge funds). CEO Zhao could be barred from running the firm he founded in 2017, and from trading crypto period.
If Zhao, who is thought to be one of the wealthiest people in the world, starts selling off assets, that could have a negative impact on crypto prices. And cutting Binance out of derivatives markets could have deleterious effects on bitcoin’s liquidity and price. If the BitMEX case filed by the CFTC in 2018 provides any insight into how things will play out, the toppling of the largest derivatives exchange may be worse than it sounds.
