CFTC Delivers Enforcement Action Against Binance

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Binance enforcement – overview

The Commodity Futures Trading Commission (CFTC) announced an enforcement action against cryptocurrency platform Binance and its founder/CEO Changpeng “CZ” Zhao yesterday. “The defendants allegedly chose to knowingly disregard applicable provisions of the CEA (define) while engaging in a calculated strategy of regulatory arbitrage to their commercial benefit.”

Press release: “CFTC Charges Binance and Its Founder, Changpeng Zhao, with Willful Evasion of Federal Law and Operating an Illegal Digital Asset Derivatives Exchange“

CFTC Chair Rostin Behnam commented in the release, “For years, Binance knew they were violating CFTC rules, working actively to both keep the money flowing and avoid compliance. This should be a warning to anyone…”

Complaint: The 74-page complaint filed in the Northern District of Illinois (PDF)

The initial charges are about Binance’s derivatives products and continuing (years-long) violation of Anti-Money-Laundering and Know-Your-Customer requirements which are meant to curtail illicit/terrorist financing. At the same time, it appears that Binance also onboarded U.S. customers outside of their Binance.US entity.

Binance enforcement – winners & losers

- CFTC wins – The CFTC beat the SEC to the punch here. The CFTC is staking out its ground for oversight of digital assets with this action.
- Commodity wins over security – From page 2 of the complaint: “…leveraged retail commodity transactions involving digital assets that are commodities including bitcoin (BTC), ether (ETH), and litecoin (LTC) for persons in the United States” – this is the CFTC saying Ether, Litecoin and Bitcoin are a commodity. SEC Chair Gary Gensler has grudgingly admitted that only Bitcoin is a commodity.
- More charges are rumored to be imminent for Binance from FinCEN and/or the U.S. Justice Department. Binance was already in trouble with FinCEN in January.
- Beginning of the end of Binance in the US? – This will undoubtedly mean huge fines. To what extent a shutdown will be effected of all U.S. business for Binance and its subsidiaries including Binance.US is to be determined.
- China – Given all the anti-China rhetoric on Capitol Hill these days, when will China’s rumored involvement with Binance rear its head? Here’s how Changpeng “CZ” Zhao sees China on the Binance blog.
- The future – We don’t know what the SEC charges will be for Coinbase coming out of last week’s Wells notice, but it can’t be as bad as Binance’s issues given the stringent U.S. government oversight of Coinbase, a U.S. based entity. Or can it? When this is all over – assuming any crypto companies in the U.S. are left standing AND that they are provided a regulatory framework by government – the opportunity could be robust.

Binance enforcement – coverage

- Here are 9 eye-popping allegations in the U.S. government’s lawsuit against Binance – Marketwatch
- 7 Biggest Revelations About Binance From CFTC’s Explosive Lawsuit (subscription) – The Information
- ‘Fatal Blow?’: Crypto Industry Reacts to CFTC Suit Against Binance – Blockworks
- ‘Unexpected and Disappointing’: Binance Reacts to CFTC Lawsuit – Decrypt
- Binance Is Hiding U.S. Crypto Trading Activity, Regulator Says – The New York Times

Binance enforcement – CZ

In response to the news, CZ tweeted “4” yesterday. The number likely suggests his pinned tweet at the beginning of 2023 on 4 Do’s and Dont’s.

And then last night, he delivered a blog post titled “CZ’s Response to the CFTC Complaint” and said in part, “While we are not perfect, we hold ourselves to a high standard, often higher than what existing regulations require.”

tradfi banking crypto

In the wake of the collapse of Silvergate and Signature Bank, JP Morgan, Bank of America and several regional banks are among the traditional finance firms helping crypto customers in different shapes and forms according to an article from the Wall Street Journal. Rich Rosenblum of crypto trading firm GSR says, “There are dozens of other banks, both onshore and offshore, that are taking advantage of this opportunity.” Read it.

Also… Opinion: How U.S. Regulators Are Choking Crypto – The Wall Street Journal

hearings

Today (3/28), 10a ET – Senate Banking Committee: “Recent Bank Failures and the Federal Regulatory Response” – Agenda and live video.

Today (3/28), 1p ET – House Committee on Appropriations: CFTC Chair Rostin Behnam testifies on Fiscal Year 2024 Budget Request for the Commodity Futures Trading Commission. Live video.

Tomorrow (3/29), 10a ET – House Financial Services Committee: “The Federal Regulators’ Response to Recent Bank Failures” – Agenda and live video.

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