the staff of the Ridgewood blog
Ridgewood NJ, the Commodity Futures Trading Commission announced it has filed a civil enforcement action in the U.S. District Court for the Northern District of Illinois charging Changpeng Zhao and three entities that operate the Binance platform with numerous violations of the Commodity Exchange Act (CEA) and CFTC regulations. The complaint also charges Samuel Lim, Binance’s former chief compliance officer, with aiding and abetting Binance’s violations.
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The complaint charges that Binance Holdings Limited, Binance Holdings (IE) Limited, and Binance (Services) Holdings Limited (together, Binance) operate the Binance centralized digital asset trading platform along with numerous other corporate vehicles through an intentionally opaque common enterprise, with Zhao at the helm as Binance’s owner and chief executive officer. The defendants allegedly chose to knowingly disregard applicable provisions of the CEA while engaging in a calculated strategy of regulatory arbitrage to their commercial benefit.
Privately held crypto exchanges are setting new lows in corporate governance. If you thought the initial bankruptcy filing for Sam Bankman-Fried’s FTX was stunning in what it revealed about how that company was run, check out the Commodity Futures Trading Commissions lawsuit against Binance today. Here’s a business empire controlled by one person, Changpeng Zhao, which has no board of directors and no fixed headquarters. Its executives routinely discuss all sorts of business matters over Signal, “with its auto-delete functionality enabled,” the complaint alleges, “even after Binance received document requests from the CFTC.” You can figure out what that means.
Even better: When a business partner wanted a compliance audit, Binance staffers hired someone they knew would do “a half assed” job, the lawsuit says, citing an executive. And as part of the audit, another staffer discussed writing a “fake” report for the nonexistent board of directors! None of this is the main point of the lawsuit, however. That would be the CFTC’s contention that Binance deliberately lured American investors to use its platform despite its failure to register with U.S. authorities, as is required by law. (Binance in turn called the complaint “unexpected and disappointing.”) For more details of the lawsuit, see our report here.
Oh, and there’s also the small matter that Binance executives allegedly knew some bad people were using the exchange to move money around. That would include, the lawsuit indicates, terrorist groups such as Hamas. Executives knew Binance was ignoring U.S. sanctions by dealing with such people, but “Zhao desired to place competitive advantage over compliance,” Binance’s former chief compliance officer, Samuel Lim, said, according to the lawsuit. These are serious allegations. It’s hard to imagine this case disappearing like one of Zhao’s Signal messages.
According to Sheila Warren, CEO of the Crypto Council for Innovation. “We can all agree that blatantly flouting the laws of a country is not acceptable. In situations where this is alleged, the CFTC doesn’t waste its time on jabs – it goes straight for the knockout.
In the case of Binance, they are going after an organization with a checkered past, and many have been waiting for the US government to act. Last year, Reuters reported that the US Justice Department was investigating the company for suspected sanctions violations and money laundering. It’s safe to assume that this action from the CFTC was a long time in the making.
The action against Binance alleges deliberate fraud and evasion of regulatory requirements and stands in stark contrast to the Wells notice issued by the SEC to Coinbase. In the case against Binance, text messages discuss sidestepping regulation, hiding internal documents, and defrauding the US. Coinbase, by contrast, has a fossil record a mile deep of attempts to engage with the SEC and come into the regulatory perimeter.
The interplay between the CFTC and SEC is critically important to note here. In this action, the CFTC is asserting that both bitcoin and ethereum are commodities. This is a powerful shot across the bow of the SEC that could have significant implications for the industry and for which agency has ultimate authority.
The outcome of the Binance case will depend on the company’s response, but a settlement is a likely possibility. This action will hopefully mean the end of people coming into the crypto space trying to take advantage of the lack of regulatory clarity in the United States.”
But Nic Carter has a different take. The well-known crypto entrepreneur, analyst, and writer. He is the co-founder of Castle Island Ventures, a venture capital firm that invests in early-stage startups focused on blockchain technology and cryptocurrencies. He is also the co-founder of Coin Metrics, a provider of cryptocurrency market and network data, and serves as its Chairman.
Nic Carter is a widely respected figure in the cryptocurrency industry and is known for his thoughtful analysis and commentary on the space. He has written extensively about cryptocurrencies, blockchain technology, and the broader financial industry, and his work has been published in a variety of publications, including Forbes, Bloomberg, and CoinDesk. He is also a frequent speaker at industry conferences and events.
In an essay Carter asks , “Did The Government Start A Global Financial Crisis In An Attempt To Destroy Crypto? ” Carter dives into the crisis that started with one Californian bank and has since escalated to a global scale, with the Federal Reserve providing substantial funding to stabilize financial institutions. Amidst the chaos, the US government is cracking down on banks dealing with crypto clients. Two crypto-focused banks, Silvergate and Signature, faced liquidation and receivership, respectively, with evidence suggesting a coordinated campaign to undermine banks serving the crypto industry. In addition to banking regulators, the SEC and other organizations have made moves against the crypto sector, intensifying scrutiny on an already fragile industry.
I have all my money under the mattress.
Won’t get fooled again.