What does the Binance CFTC lawsuit mean for crypto?

The Commodities Futures Trading Commission’s Enforcement Action Against Binance Could Shut Down The Crypto Giant If Regulator’s Injunction And Sanctions Requests Are Upheld—but there is much more to unpack in the Commission lawsuit.

The CFTC filed its lawsuit against Binance on Monday morning, which the company called “unexpected and disappointing,” citing its continued cooperation with regulators. The company also said in its statement that it has invested heavily in its compliance team “to ensure that we have no active US users on our platform.”

The lawsuit alleges that Binance committed multiple derivatives trading violations, including not being properly registered to offer derivatives to US customers, not adequately supervising activity on its exchange, insufficient anti-money laundering controls (AML) and Know-Your-Customer (KYC), knowingly evading or helping US clients evade regulators, and perhaps most damning: trading against one’s own clients.

Zhao himself is specifically named as a defendant in the CFTC lawsuit with Binance Holdings Limited (registered in the Cayman Islands), Binance Holdings (IE) Limited and Binance (Services) Holdings Limited (both registered in Ireland), and ex- Chief Compliance Officer Samuel Lim.

Zhao rejected the 74 page complaint like “FUD” (a popular crypto acronym for Fear, Uncertainty, and Doubt) by writing “4on Twitter on Monday.

Earlier this year, he said “4” would be his shorthand for telling subscribers to “ignore the FUD.” He has made extensive use of it since: On March 24, when a problem has caused a temporary problem with cash withdrawals and transactions; on March 5When THE the wall street journal reported that private transcripts showed Binance intentionally avoiding US regulators; on 3rd of March, when the US Securities and Exchange Commission tried to block Binance US from acquiring bankrupt crypto broker Voyager Digital; in February, when New York-based Paxos severed ties with the company in anticipation of being sued by the SEC for its role in issuing Binance USD (BUSD) tokens; And in JanuaryWhen Forbes reported that the exchange recorded outflows totaling $12 billion in two months.

Late Monday evening, Zhao posted a longer answer in a Binance blog post. “I myself strictly observe these policies,” he wrote of Binance’s compliance practices. “I also never participated in Binance Launchpad, Earn, Margin or Futures,” he added, in a nod to allegations that he personally controlled accounts used to trade against clients.

It is clear from the CFTC complaint that hundreds of internal messages, conversations and documents were shared with the commission as part of its investigation. This isn’t the first time Binance has been sued, but it appears to be the most thorough. As former CFTC attorney Braden Perry said Decrypt in an email: Law enforcement agencies like the CFTC don’t like to lose.

Compliance was (allegedly) a joke

The CFTC lawsuit contains numerous excerpts from internal company discussions about compliance or lack thereof.

In one section of their complaint, US prosecutors cited messages from Lim referring to transactions suspected of being linked to Hamas, a militant offshoot of the Egyptian Muslim Brotherhood. In the 2019 posts, he said small transactions were not worth worrying about because someone “can barely buy an AK47 with $600,” according to the CFTC complaint.

Then in February 2020, Lim reportedly said of Russian clients, “Come on. They are here for the crime.

The commission alleges that employees tasked with making it look like Binance takes compliance seriously, like a money laundering reporting agent, complained that they were stuck with a sisyphean task. “I HAVE NO CONFIDENCE IN OUR GEOFENCING,” the employee told Lim in a chat message.

Bitcoin and Ethereum are commodities, says CFTC

In its only direct mention of Bitcoin and Ethereum in its complaint, the CFTC refers to both assets as commodities.

The years-long investigation and Monday’s lawsuit filing already imply that the CFTC believes it has jurisdiction over Binance’s dealings with US investors. But the regulator explicitly calling BTC and ETH products could prove very important for the industry.

The lawsuit also makes mention of Litecoin (LTC), which has fallen far from its record market capitalization of $27 billion to a $6 billion Tuesday afternoon. The team behind Litecoin’s main Twitter account shared a screenshot of the lawsuit and joked that “good to know we’re all in agreement on this now.”

There has been a tussle between the SEC and the CFTC over how to classify, and therefore regulate, cryptocurrencies, particularly ETH. In the ongoing legal battle between the SEC and Ripple, a Speech 2018 made by SEC Chief Financial Officer William Hinman in which he argues that ETH is unlikely to be a stock has featured prominently. Ripple’s lawyers won their fight for access to SEC emails regarding the speech, but the commission decided to seal them.

“This is not a new position for the CFTC,” attorney Braden Perry said. Decrypt in an email. “But what’s important is the CFTC’s commitment to ETH as a commodity based on the SEC’s recent view that ETH’s move from proof-of-work to proof-of-work of participation was akin to security.”

Perry, a former CFTC attorney and chief compliance officer, handles regulatory and enforcement matters at the Kansas City-based law firm Kennyhertz Perry.

It should be noted that SEC Chairman Gary Gensler was quite indirect in his characterization of ETH as a security. In September he said The Wall Street Journal that proof-of-stake assets could qualify as securities using the Howey test.

The test originated from a 1946 Supreme Court decision and was used as the basis for determining what falls within the jurisdiction of the SEC. It got a lot of attention from the crypto industry and even SEC Commissioner Hester Peirce.

The detail of ETH in the Binance lawsuit could be seen as a counterpoint to the suggestion that ETH became more like a security when it transitioned to proof-of-stake. That doesn’t solve anything though. There won’t be much real clarity on how US regulators classify ETH until there’s a statutory definition or court ruling, Perry said.

The traveling HQ

The CFTC also called Binance’s bluff on its elusive seat in its complaint.

The Commission alleged in its lawsuit that Zhao said at an internal meeting in 2019 that the company’s strategy was to conduct operations through various business entities registered in different jurisdictions to “keep countries clean.” [of violations of law]’by’ not landing .com anywhere. This is the main reason why .com lands nowhere.

For years, Binance avoided appointing an executive seat. He offered feints that he would name one “soon”, but never tracked a location.

“We haven’t announced it yet,” Zhao said during a 2022 episode of gm. Decrypt podcast. “We will announce it in due course. But it’s very simple. It’s not that complicated.”

It’s not uncommon for companies to look for ways to do business with US customers in a way that limits their interactions with the country’s regulators, which have a reputation for being among the most onerous in the world. But even if the “no headquarters, no violations” tactic is new, it’s unlikely to make it as an argument in court, according to Perry.

“Many crypto companies are based overseas and try to avoid regulation, but this is the first time I’ve heard of a ‘traveling head office’ located where the CEO is at any given time. “, did he declare.

Yamina Sara Chekroun, who leads US legal affairs for noncustodial payment service Ramp, agreed the lawsuit will change the jurisdictional strategy for companies hoping to avoid regulatory burdens.

“While it is far too early to comment on the outcome of this case given the factual intensity of this analysis, it is a signal to the industry that judicial reviews are going to be closely monitored and enforced and that global players may have to respond in US courts,” she said. Decrypt on Telegram, adding that she thinks most companies will increase the intensity with which they investigate compliance issues.

Should Crypto Worry?

But if you ask Shipyard CEO Mark Lurie, crypto as a whole shouldn’t be worried about the allegations the CFTC has made against Binance.

Shipyard creates white-label software for decentralized exchanges, as a programmatic way to detect wallet addresses that have been added to the US Office of Foreign Assets Control sanctions list.

“Interpreting this as an attack on crypto would be a mistake,” he said. Decrypt on Telegram. “The allegations are not about problems that exist ‘in a regulatory gray area’, but rather about the circumvention of simple, well-understood regulations and rules that exist for pretty good reasons.”

But it’s still a sloppy way to bring the industry into compliance, Perry said. Letting crypto firms deduce what they should and shouldn’t do can be messy for a booming industry.

“This is dangerous territory for regulators,” he said. “A hasty attempt to contain all potential wrongdoing or anticipated events would likely fail and cause more damage than good to the cryptocurrency community.”