Binance Lawsuit Means More Regulatory Hurdles for Crypto

Binance’s latest legal troubles show how muddy the jurisdictional waters are for crypto. 

The CFTC’s lawsuit against Binance alleges that the exchange and affiliated executives violated commodities and derivatives laws, shows how complicated the relationship between US agencies is when it comes to overseeing crypto. The CFTC’s lawsuit, filed on Monday, follows the SEC’s series of enforcement actions, and The White House’s Council of Economic Advisors has weighed in on the sector. 

“Binance is being sued for options, futures, and other derivatives activities of these tokens. This shows that the underlying asset can be a security but, since it’s being traded like a derivative, that activity is regulated by the CFTC,” said Yankun Guo, a partner at Chicago law firm Ice Miller. “This, coupled with the multifaceted nature of how tokens function and are used, can cause them to fall under multiple agency’s jurisdiction.”

The lawsuit, irrespective of its resolution, will impact how Binance interacts with US markets going forward, legal experts said. A Binance spokesperson told Blockworks in a statement on Monday that the filing is “unexpected and disappointing,” considering the exchange has been “working collaboratively with the CFTC for more than two years.” 

“Nevertheless, we intend to continue to collaborate with regulators in the US and around the world,” the statement said, adding that Binance has increased its compliance headcount from about 100 two years ago to “around 750 core and supporting compliance personnel today.”

Jeffrey Blockinger, chief legal counsel at decentralized exchange Vertex Protocol, said that a settlement or litigation is possible for Binance.

“Any settlement will certainly include an agreement by Binance to cease and desist from any further violations related to derivative sales and Bank Secrecy Act violations,” Blockinger said. 

Added Blockinger: “If the matter is litigated, this could take years to resolve. During that period Binance will seek to correct any deficiencies that exist to avoid any further charges and show good faith to the CFTC.”

In fact, Dave Weisberger, the CEO and co-founder of CoinRoutes, an algorithmic-trading platform for the digital asset industry, told Blockworks that the case could potentially damage the Binance.US platform completely.

“It’s possible that Binance might soon see its operations in the United States come to an end entirely,” Weisberger said.

Such a drastic move, if it comes to fruition, could momentarily impact crypto liquidity in the United States. Weiserberger said that there are “many quality exchanges that operate in the United States and have more liquidity than BinanceUS.”

There was no immediate indication on Monday that Binance would have to shutter its US operations. The CFTC’s complaint did not name Binance.US as a specific defendant, but did mention the entity a number of times throughout. 

The Binance spokesperson said the exchange has made “significant investments over the past two years to ensure we do not have US users active on our platform.” The spokesperson appeared to be referring to Binance’s core operations, which are not regulated or based in the US. 

“Derivatives trading – of which Binance is currently the largest centralized exchange – might also be impacted,” Weiserberger said. “But, again, there are many global firms looking to expand into that market. It does, however, look like the CFTC action is going to stop whatever US domestic money is trading in the global crypto derivatives market.”

Ongoing blows to crypto

It’s yet another major blow to the crypto industry in recent months. Just last week, Coinbase was issued a Wells Notice from the SEC and Tron’s Justin Sun was served legal papers. 

FTX’s November bankruptcy filing, followed by founder Sam Bankman-Fried’s arrest and indictment, was a major setback for the regulatory process in the US, industry members said. But Binance’s troubles may be less powerful. 

“I think [the Binance lawsuit] will have less of an impact,” said Cody Carbone, vice president of policy at the Chamber of Digital Commerce. “FTX was a gut punch because SBF was a player at the table and made members/regulators feel foolish. They thought FTX was doing things right.” 

Binance, on the other hand, has maintained a different reputation, according to Carbone. 

“Binance has always been viewed more skeptically, rightly or wrongly, even by crypto champions on Capitol Hill,” he said. 

Even markets have, so far, have not been impacted much. Bitcoin lost an initial 4% or so before recovering. It was trading back above $27,000 within the hour. Ether, over the same period, briefly dipped slightly below the $1,700 level before bouncing back. 

Darius Tabatabai, co-founder of decentralized exchange Vertex Protocol, said that the “CFTC taking actions against Binance isn’t entirely surprising,” given the spate of preceding “recent actions taken by US regulators.”

“This may be why the markets are largely nonplussed by the lawsuit,” Tabatabai said.

The silver lining

Following the FTX debacle, regulators have been quite stringent on their examination into centralized exchanges, Aaron Kaplan, co-CEO and co-founder of Prometheum, told Blockworks.

Prometheum is the parent company of Prometheum ATS, an SEC-registered trading firm and FINRA member. 

“Many centralized exchanges operated in gray zones and historically took advantage of regulatory or jurisdictional arbitrage,” Kaplan said. “While this might mark a difficult period for centralized crypto exchanges, this is all part of forced maturation that will see the existing crypto financial services ecosystem being replaced by one that is regulated under the securities and commodities laws.” 

Recent enforcement actions, in fact, could potentially help determine whether specific cryptoassets should be classified as commodities or securities, Luke Hoersten the founder and CEO of Bitnomial, a US-regulated international bitcoin derivatives exchange.

“As federally regulated exchanges become fully operational in the US, we expect a trend towards exchanges that have clearer regulatory standing as investors seek out safer and more secure options for participating in the crypto markets,” Hoersten told Blockworks. “Whether regulatory clarity comes from rule making or enforcement action, ultimately it will enable a much broader customer base to participate in crypto.”

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