CFTC Takes Action Against Binance and Exchange CEO, Changpeng Zhao ‘CZ’

Dating back to mid-2021, Binance has found itself under the watchful eye of United States regulatory body the Commodities Futures and Trading Commission (CFTC).  Now, it would appear as though this attention being paid to the exchange is finally rearing its head in the U.S. District Court for the Northern District of Illinois, with the CFTC having just filed a lawsuit based on a litany of allegations.

The Charges

The charges put forth by the CFTC name Binance, its CEO Changpeng Zhao ‘CZ', and Samuel Lim as defendants.  While the charges are various, they stem from a Binance catering to and serving U.S. based clientele, while failing to register with the appropriate regulators.

“Binance has never been registered with the CFTC in any capacity and has disregarded federal laws essential to the integrity and vitality of the U.S. financial markets,”

As a result of this failure to register, a variety of services on offer by the platform (ie. trading futures, options, swaps, etc) are in direct violation of various laws.

“Defendants have disregarded applicable federal laws while fostering Binance's U.S. customer base because it has been profitable for them to do so.”

The CFTC further states that the exchange has taken a “…calculated, phased approach to increase its United States presence,”  while simultaneously obfuscating the location of its operations.

By taking these actions, the CFTC believes that the defendants have not only violated U.S. law themselves, but facilitated violations by U.S. residents by aiding platform access through KYC workarounds.

Interestingly, the CFTC specifically notes three assets as being offered that it views as commodities – Bitcoin (BTC), Ethereum (ETH), and Litecoin (LTC).

Regulatory Blitz

This development is the latest in a recent series of legal actions taken against major players within the digital asset sector.  To many, it appears as though this is a coordinated blitz, meant to put the industry on its heels as the U.S. government simultaneously looks to deflect from the on-going banking crisis, and prepares to push its own CBDC.

Multiple things can be true though, and the fact of the matter is that scores of companies leverage digital assets operating on a global scale, in an attempt to avoid oversight.  This is something that needs to change if the industry expects to thrive moving forward.

A few examples of recent enforcement actions taken against major companies involved with digital assets include,

• Kraken sued for offering a staking program
• Coinbase issued an ambiguous Wells notice for platform services
• Paxos issued Wells notice surrounding its stablecoin activity

The crackdown goes beyond enforcement actions though.  Recently the Federal Reserve invoke the ire of many, as it explicitly stated that it denied an application by Custodia Bank to function as a full-reserve bank due to its affiliation with digital assets.

Furthermore, after the forced shuttering of Signature bank, its sale was made to Flagstar Bank with all ties to ‘crypto-focused' clients being severed.  This occurred despite the FDIC assuring the public to the contrary days prior.

Market Reaction

With Binance being the worlds largest exchange of its kind, there was a quick but unsurprising widespread downturn across the market.  At time of writing, Bitcoin (BTC) was trading down muted 3% on the day, with the majority of the market following closely.

The coming days should shine a light on market resilience, as Bitcoin in particular has been increasingly viewed as safe-harbour from financial turmoil in recent weeks.  Will news of the worlds largest digital asset exchange being faced with enforcement actions change this narrative? Or will the market quickly rebound an continue on its upwards trajectory?

Short-Sighted?

Interestingly, despite genuine issues surrounding fraud, poor practices, etc. within the sector, many of the recent moves by U.S. regulators have not been well-received by the public.  There is a growing consensus that the U.S. government is doing itself more harm that good by failing to offer a clear regulatory environment, which is now resulting in services moving offshore.

At a time when the USD is faltering and countries around the world are working hard to reduce reliance on it as a reserve currency, the U.S. is also priming itself to potentially miss out on a sector which is believed by most to be pivotal in the future world economy.