Another bomb has fallen on the crypto space — and the impact could be far-reaching
On Monday, the U.S. Commodity Futures and Trading Commission announced it was suing Binance, the world’s largest crypto exchange by volume; its CEO, Changpeng Zhao; and chief compliance officer Samuel Lim. The company, Zhao and Lim are being sued for allegedly breaking trading and derivatives rules.
“Crypto is under attack,” Yankun Guo, partner at Chicago-based law firm Ice Miller, told TechCrunch+. “The past six months has seen a wave of complaints and enforcement actions against blue-chip names including Coinbase, Kraken and KuCoin, and it was only a matter of time until Binance had their turn.”
Binance had about $11 billion in trading volume in the past 24 hours and has over 90 million customers globally, according to CoinMarketCap data. It launched in June 2017, and within 180 days became the largest crypto exchange in the world.
The exchange has never registered with the CFTC in any capacity and has “disregarded federal laws” for U.S. financial markets, including laws that implement controls to prevent and detect money laundering and terrorism financing, among other aspects, the filing said.
TechCrunch+ reached out to CFTC for comment but did not hear back by the time of publication.
A Binance spokesperson said the filing was “unexpected and disappointing as we have been working collaboratively with the CFTC for more than two years.” They added that they intend to continue to collaborate with regulators in the U.S. 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.”
Binance has spent $80 million on external partners like know-your-customer vendors, transaction monitoring, market surveillance and investigative tools to support its compliance programs, the spokesperson added.
The ultimate impact on Binance could send shockwaves through the global digital asset market, Jason Allegrante, chief legal and compliance officer at Fireblocks, said.
The lawsuit is also interesting because two executives, Zhao and Lim, were named, Guo noted. “This is a major shift that shows regulators are not only going after the company but also executives.”
“Zhao and Lim were alleged to be liable for Binance’s violations to the same extent as Binance,” Guo added. “Officials clearly want to deter individuals, and this lawsuit is a warning to other executives who still believe crypto is not regulated.”
With that said, the lawsuit is not a shock, given everything that happened in the crypto industry over the past year — from Terra/LUNA exploding to FTX collapsing — “regulators will keep regulating and regulate more,” Guo said.
This CFTC lawsuit “does not move the needle for the industry,” as there have been a number of other cases related to commodity derivatives and there are likely to be more, Jeffrey Blockinger, chief legal counsel for Vertex Protocol, said. “If the alleged facts are true, the fact that a case was filed is not surprising.”
However, the Binance lawsuit is still “quite serious,” Rory Doyle, financial crime policy manager at regulatory tech solutions provider Fenergo, said. “Obviously Binance is a huge player, and confidence was just about to come back.”
The collapse of FTX created a huge dent in the crypto space back in November, Doyle said. But the chain reaction of events earlier this month of Silicon Valley Bank’s collapse alongside a number of other banks created an influx of deposits into the crypto space, he added.
“It suggested confidence was coming back; essentially the last thing the crypto world as a whole needed was this news,” Doyle said. “Obviously it’s very, very serious news and if you dig deeper underneath it — it has multiple ramifications and multiple unanswered questions from Binance.”
And there could be more lawsuits to come. “Unless and until the United States Congress steps in, we will see the agencies — banking, securities and commodities markets — seek to assert jurisdiction,” Allegrante said. “In the absence of law, these actions will result in increased enforcement and more legal uncertainty.”
If Credit Suisse weren’t registered to trade derivatives in the U.S. and it was trading them in the U.S., the CFTC would have the same attitude it does toward Binance, Doyle said.
“It’s more a case of corporate responsibility in the crypto world they need to understand … they have to obey the rules,” Doyle said. “It’s not a case of regulators just preying on cryptocurrency, it’s just the fact that crypto hasn’t kept up with the legislation and they need to.”
Sources told TechCrunch+ there will be additional lawsuits brought forward by authorities. At some point, though, Blockinger said, regulators will have to question whether their actions toward an industry that’s been developing for nearly a decade make sense. “The situation has become untenable not only for the projects and platforms based in the U.S. but also for the agencies themselves.”
As regulators continue to go after large, well-financed institutions, it will be telling to watch which entities will choose litigation rather than settlement, Blockinger said.
“I feel that from speaking with people in the industry, there’s a feeling that American regulators are ‘out to get crypto’ in some way, and I feel that they’re not,” Doyle said. “I think they’re treating cryptocurrencies and exchanges the exact same way they would treat a traditional financial institution.”
Even so, the Securities and Exchange Commission and CFTC’s inconsistent precedents could lead to “an even murkier situation in which it is not clear to me how American people and businesses are supposed to decide which regulatory scheme to follow,” Blockinger added.