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CFTC hands Binance a lawsuit, ban looking inevitable

CFTC — The cryptocurrency sector is in shambles in the United States as firms are clashing with regulators.

For example, crypto enthusiasts living in America aren’t allowed to trade crypto derivatives.

To add salt to the wound, major international platforms for trading crypto derivatives are prohibited from letting Americans trade the products.

They can only do so if they are registered with the influential federal regulator, the Commodity Futures Trading Commission (CFTC).

The CFTC recently sued the world’s most prominent cryptocurrency exchange Binance for trading products without registering with the regulator.

In November 2022, Binance briefly entertained the idea of bailing out its rival exchange FTX.

However, after monitoring the exchange platform, Binance dropped out, dodging a bullet as FTX is now at the center of a massive federal fraud investigation.

What happened?

The CFTC alleged that Binance and CEO Changpeng Zhao violated US laws.

Among their alleged violations is secretly coaching “VIP” customers based in the United States on how they could evade compliance rules.

The commission also regulates US derivatives trading.

According to the CFTC, Binance and Zhao instructed employees and customers to go around compliance controls to maximize corporate profits.

The CFTC is unable to bring criminal charges.

However, the agency can seek heavy fines that could potentially ban Binance from registering in the United States in the future.

The potential ban could deal the company a major blow as the United States is home to thousands, if not millions, of crypto enthusiasts.

The response

When the news hit the crypto exchange platform, Binance said the lawsuit was unexpected and disappointing.

The company underscored making significant investments in the past two years to ensure regulators that US-based investors are not active on the platform.

On Monday, when news of the lawsuit emerged, Zhao tweeted the number 4, alluding to a previous statement he made:

“Ignore FUD, fake news, attacks, etc.”

In the crypto space, FUD is a commonly used acronym that means “fear, uncertainty, doubt.”

For years, Binance argued that it wasn’t subject to laws set by the United States due to a lack of a physical headquarters in the country.

The crypto exchange platform doesn’t actually have a physical headquarters despite originating from China.

According to Changpeng Zhao, the company’s headquarters are based on wherever he is.

The CFTC’s lawsuit blasted Binance’s approach, saying it was a deliberate attempt to avoid regulation.

Read also: Nvidia CTO blasts crypto for lack of usefulness

The bigger picture

The CFTC’s lawsuit may be a blow to Binance, but it also broadly affects the crypto space.

However, the lawsuit doesn’t have the same magnitude as everything else that happened in 2022.

For example, the FTX collapse created a domino effect throughout the crypto space, causing firms and projects exposed to the company to either freeze or shut down.

Terra/Luna also experienced a meltdown that led to the price of crypto assets and NFTs to collapse.

However, 2023 has witnessed some significant improvements to the Terra/Luna dilemma.

On Monday, prices of the two largest cryptocurrencies – Bitcoin and Ethereum – fell by more than 3%, which was a typical day for trading crypto.

Worst-kept secret

The most significant part of the CFTC’s lawsuit is the way it called out one of its worst-kept secrets in crypto.

Customers based in the United States are gaining access to risky offshore crypto derivatives that should be prohibited very easily.

Due to crypto derivatives being leveraged bets on wildly unstable assets, anyone can access them through the use of a VPN.

While easy to do, it is highly discouraged to follow such a method.

The endgame

According to Blockchain Intelligence Group crypto compliance and regulation expert Timothy Cradle, the most likely outcome would see Binance paying the CFTC hundreds of millions of dollars in fines.

The company would also be banned from registering derivatives exchanges.

The move would not only make a severe blow for users in the US, but also hit a significant portion of Binance’s revenue.

The lawsuit says US users produce 16% of the revenue for Binance’s derivatives products.

Other regulators

The Monday news only adds more regulatory scrutiny on one of crypto’s most prominent names.

Bloomberg also reported that the Internal Revenue Service and Securities and Exchange Commission are also investigating Binance.

Last week, Coinbase, one of the biggest US-listed crypto exchanges, received a Wells Notice from the SEC for possible securities law violations.

In early March, the crypto industry lost two prominent connections to the mainstream finance world: Silvergate and Signature Bank.


Opinions expressed by Coin Week contributors are their own.