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Allegations and Outflows – Will Binance Survive the SEC?

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Less than a week in to June, and it has already proven to be a tumultuous month for the digital asset sector.  While there have been a few bumps in the road experienced by service providers like Atomic Wallet, it is Binance that hit the largest pothole when the Securities and Exchange Commission (SEC) announced a litany of charges against the world's largest exchange.

Allegations and Fallout

Charges levied against Binance by the SEC are numerous, and extend beyond just securities listing violations.  The charges, which total 13, include allegations of “…deception, conflicts of interest, lack of disclosure, and calculated evasion of the law,”.

These deceptions and conflicts of interest are said to include the comingling of customer and company funds, circumvention of geographical restrictions for wealthy clients and more.

With regards to the alleged securities listing violations, the SEC puts forth that the exchange is guilty of offering unregistered securities with the sale of BUSD, through staking services, and support for various assets that boast a central controlling body or foundation.

Outflows and Freefalls

Unsurprisingly, news of the SEC taking Binance to task has resulted in increased market volatility.  In fact, users of the platform have withdrawn roughly $1 billion in a 24hour span.  The result is decreasing liquidity on the exchange, paired with scores of sellers looking to decrease exposure to assets listed as securities by the SEC.

To its credit, services offered by Binance have appeared to continue functioning without any issues in the face of massive capital outflow.

Despite the widespread drop in market values, the fallout from the SEC's actions against Binance and Coinbase is relatively tame compared to events of the past year (ie. FTX).  This is most likely due to the fact that investors, traders, and the exchanges themselves were already anticipating such moves.

Community Reaction

Despite being tasked with protecting investors, perception of the SEC by the public at large is not the greatest.  Interestingly, Binance CEO ‘CZ' hosted a twitter poll in the hours after news broke of the situation which asked ‘who protects you more? the SEC or Binance?'

While no doubt a skewed poll, as it is much more likely that fans of Binance will take part in polls hosted by the exchange and its CEO, the resulting numbers showed a staggering divide.

Source: Twitter @cz_binance

Realistically, public perception will have little to no impact on the decisions made by the SEC.  So while the public at large may trust Binance more than the regulator, the future of the worlds largest exchange has most definitely become just a little bit murkier.

ARK36 Chairman Mikkel Morch took the time to elaborate on this and the consequences that Binance may soon face.  He states that,

“…for Binance itself, these charges could be highly damaging. Binance is one of the largest and most prominent crypto asset trading platforms globally. If found guilty, the reputational damage alone could be significant, leading to a loss of trust from users and backers. Additionally, the potential legal consequences could include substantial fines, penalties, and even the suspension or cessation of operations in the US market. Binance may also face increased scrutiny from regulatory authorities in other jurisdictions, further impacting its operations and expansion plans.

He continues, noting that in addition to a need for greater transparency and regulatory compliance within the digital asset market, the current approach being taken by U.S. regulators may continue resulting in an exodus of businesses, fleeing towards more welcoming jurisdictions.

On the Defensive

In response to all of this, Binance itself has already taken the time to share its early thoughts on the situation.  Its overall stance is that the ‘SEC complain aims to unilaterally define crypto market structure'.

Echoing similar responses by other companies which find themselves in a similar situation, Binance expressed disappointment with the SEC in filing the charges without ever, allegedly, attempting to actually sit down and engage with the company.

The exchange further underscores its stance that user funds are, and have always been, completely safe.

Casting a Wide Net

As previously mentioned, Binance is not alone in its struggle with the SEC.  Mere months ago, Kraken was forced to shut down its staking services and pay a hefty fine.  Only a day after filing charges against Binance, the SEC did the same with Coinbase.

In the aforementioned response to the SEC shared by Binance, the exchange notes that,

“Today’s action is another in a line of examples where, as with other crypto projects facing similar suits, the Commission has determined to regulate with the blunt weapons of enforcement and litigation rather than the thoughtful, nuanced approach demanded by this dynamic and complex technology. Unilaterally labeling certain tokens and services as securities – even ones over which other U.S. authorities have asserted jurisdiction – only compounds these problems.”

It should be noted that while each of the aforementioned exchanges have become targets of the SEC, the charges faced by Binance have the potential to hurt its brand to a much greater extent.

While Coinbase and Kraken were/are being targeted primarily due to staking services, there were no allegations of co-mingling investor funds and intentionally duplicitous activity involving offshore entities.

A Goal to Sensationalize

With regards to digital assets, the SEC has taken an interesting approach that many feel is one meant to sensationalize hurtful industry narratives.

One will be hard pressed to find another regulator that opts to leverage social media to such an extent.  An example of this is its decision to widely publish select quotes made by a Binance employee years ago – which was no doubt done to sway public opinion and paint Binance as guilty, despite not having been found as such at this time.

Meanwhile, SEC Chair Gary Gensler has yet again drawn the ire of digital asset enthusiasts in his most recent TV outing.  Speaking on CNBC, Chair Gensler appeared to contradict himself stating,

“Look, we as an agency are meant to be merit neutral…”

This was promptly followed by Gensler proclaiming that,

“…Look, we don't need more uhh, digital currency – we already have digital currency.  Its called the US dollar, its called the Euro, its called the Yen.”

SEC Chair Gensler: We don't need more digital currency

Many feel that while the SEC is a self-proclaimed ‘merit neutral' agency, such statements suggest otherwise.  Furthermore, to dismiss an industry as young and potential laden as this one – which has attracted the attention and interest of millions across the globe – is either purposeful ignorance, or being driven by an agenda to protect the status quo.

Naturally, Binance feels much the same, sharing in its response to the allegations that,

“It seems based on these developments that the SEC’s goal here was never to protect investors; if that were truly the case, the Staff would have thoughtfully engaged with us on the facts and in our efforts to demonstrate the safety and security of the Binance.US platform.  The SEC’s real intent here, instead, appears to be to make headlines.”

To the Benefit of Bitcoin and Proof-of-Work?

Without a doubt, there will be short-term pain for the entire digital asset market as a result of these developments.  For the Bitcoin maximalists out there however, such charges may end up being a boon as trading activity flees to what is widely viewed as the only asset safe from being deemed a security by the SEC.

Over the past few years, the market as a whole has become unfocused, with scores of scams and poorly executed projects sapping attention away from Bitcoin as investors gambled on ‘hitting it big'.  Recent actions by the SEC may end up being the catalyst for Bitcoin ramping up its already sizable lead and dominance over the rest of the market, hastening its adoption and the development of scaling solutions.

While Bitcoin is the obvious choice for being a safe asset, there are a few others – eg. Litecoin (LTC), and Monero (XMR) – that are structured in a similar manner that most believe will exempt them from the scrutiny now being placed on Proof-of-Stake assets.

Will Binance Survive?

Binance as a whole will most likely survive.  If found guilty on the charges levied by the SEC though, there will also most definitely be major changes abound.  Binance has already pulled out of Canada, will the United States be next? Will CZ remain CEO? The scenarios that may come to pass are plentiful, and while most exchanges would be doomed in the current situation being faced by Binance, the worlds largest exchange is well-resourced and maintains that its U.S. operations represent only a fraction of its cumulative offerings.

It is important to remember though that, while the SEC may seem like the bad guy in situations like these, digital asset enthusiasts would be wise to tread with caution.  FTX was an industry darling – until it wasn't.  While no one is saying that Binance is running its operations similar to FTX, the point remains that it is hard to know who to trust.