Latest Crypto Battle: US Regulator Targets Binance

The U.S. government is cracking down on the cryptocurrency market once again. This time, the Commodities and Futures Trading Commission has taken legal action against Binance and its CEO, Changpeng Zhao. They are being sued for selling derivatives that are based on digital assets to American customers, even though they are not registered to do so. This shows that authorities are keeping a close eye on the world of cryptocurrencies and are taking steps to ensure that it is regulated and operating legally.

The case was brought to a federal court in Chicago, alleging that Binance has been actively seeking and accepting orders for trading products, including futures and options, that are based on cryptocurrencies since July 2019. As the biggest cryptocurrency exchange, Binance has clarified that they do not offer their services to customers in the U.S.

According to Gretchen Lowe, who is the principal deputy director and chief counsel of CFTC’s enforcement division, the emails and chats of the defendants indicate that Binance’s efforts towards compliance have been insincere. It is also evident that Binance has repeatedly shown a preference for making profits over obeying the law.

The lawsuit has implicated Samuel Lim, who is in charge of ensuring Binance follows all applicable laws and regulations. He is being accused of knowingly and significantly aiding these questionable actions. In response to the lawsuit going public, the CEO of Binance put the number "4" on his account. This number corresponds to a previous target he had set for 2023, which he has prominently displayed at the top of his profile. The target's message is to ignore negative publicity, false information, and attacks.

The spokesperson for Binance expressed surprise and dismay regarding the legal action taken against them, as Binance has been cooperating with the CFTC for over two years. According to the spokesperson, Binance has made substantial efforts to ensure that there are no active users from the United States on its platform. They have achieved this by ramping up their compliance team from 100 to 750 members, as well as investing $80 million to fortify their compliance programs.

Bitcoin and Ether, which are types of virtual money known as cryptocurrencies, have decreased by more than 2% by 1 pm ET if we compare it with the previous 24 hours. Moreover, the aggregate market value for all digital currencies declined by 2.3% during that timeframe.

Changpeng Zhao, the individual who established Binance. A picture of him was taken by REUTERS/Benoit Tessier.

This marks yet another significant conflict between a regulatory body in the United States and the broader cryptocurrency community, adding to a growing list of similar incidents in the recent past.

On March 22, Coinbase Global (COIN), the biggest cryptocurrency exchange in the USA, revealed through a regulatory filing that they received a Wells Notice from the Securities and Exchange Commission. This notice declares that SEC staff made a "preliminary determination" to recommend taking enforcement action against them for violating federal securities laws. Coinbase made it clear on a blog post last week that they do not provide commodities or derivatives to retail customers in the USA, and they believe that their assets and services are completely legal. The company remains optimistic in the face of these challenges.

Since the start of January, 11 enforcement actions have been issued by the SEC against individuals and companies in the crypto industry. Among them was an action targeting Justin Sun, a crypto entrepreneur, which was issued just last week. Many of these actions allege that specific cryptocurrencies or crypto-related products are actually securities.

The legal disputes occurring could play a significant role in determining the regulation of cryptocurrencies in the United States. A major point of contention centers on whether particular forms of digital currency should be classified as commodities or securities, thereby falling within the purview of the CFTC or SEC. The CFTC has specifically claimed that bitcoin, ether, and litecoin are commodities.

According to the CFTC, Binance has been attempting to avoid regulation in the United States since 2017. The regulator stated that Binance has been following a planned, gradual strategy to expand its presence in the country, despite publicly declaring its supposed intention to prevent or limit customers located in the United States.

The CFTC claimed that Binance earned $63 million in transaction fees in August 2020, as indicated in the lawsuit. Furthermore, the suit revealed that roughly 16% of the exchange's accounts were owned by U.S. clients. Binance was found to have actually advised U.S. customers on how to avoid the company's limitations by using virtual private networks (VPNs). The suit additionally stated that Binance allowed clients to bypass and present inadequate evidence of identification or location.

Zhao told Lim to advise the VIP team at Binance to create accounts using fake company names so they could avoid following regulations. This was only for important customers and employees in charge of the trading derivatives operation.

According to internal chat records that the CFTC obtained, Lim instructed the team to refrain from directly advising the user to run. Instead, they were instructed to inform them that their account had been unfrozen and that it had been investigated by XXX. Lim suggested that if the user was a large or experienced trader, they would likely pick up on the hint.

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