Binance Crackdown! | CFTC vs. The Biggest Exchange in The World

I’m Scott McGregor, @scottrades on Twitter; it’s the Hot Wallet Podcast.  Just a few days after the S.E.C. came after Coinbase, the Commodity Futures Trading Commission or CFTC filed a lawsuit against Binance, CEO CZ and another executive, and other Binance companies in what they are calling a Willfull Evasion of U.S. Law.  Some of these charges go as far back as 2018, and a lot of them are from events back in 2019. Regardless of the date, some of these are very serious and could be the biggest shoe to drop for Exchanges since the Fall of FTX. We saw a 4% drop in The price of Bitcoin on this news. 

Now while that may sound hyperbolic, the truth is Binance is a 20 Billion Dollar a year Business. Binance is one of the biggest exchanges in the world, and a win for the CFTC here could be a huge win politically but also monetarily. CZs net worth is around the 10 Billion Dollar range, but at one point, it was as high as 65 Billion.

One of the main allegations is that Binance allowed and even advised people to use a VPN to access their services from the United States to circumvent Know You Customer Laws in the U.S. They are also angry at Binance for becoming such a large player in derivatives and suggest they broke the CFTC Rules. 

They also allege that the terrorist group hammas was sending low-dollar Transactions so as not to be caught money laundering and that some employees knew about it and turned a blind eye.

They alleged that Binance has 300 House Accounts that traded against it’s own users by way of 2 entities one called Merit Peak registered in the cayman islands and one in Switzerland called Sigma Chain, which was a prop trading firm and dealt in the derivatives market…and that it is not disclosed to customers. 

From the CFTC: “Consistent with its apparent attempt to keep its proprietary trading activity on its own markets top secret, Binance has refused to respond to Commission-issued investigative subpoenas seeking information concerning its proprietary trading activity on Binance, including transaction data and communications among the members of the Binance ‘quant desk.’”

I borrowed that quote from a Blockworks article from David Canellis.

A lot of them, however, are about skirting around Know Your Customer Laws and the CFTC has a ton of chat texts where CZ is talking about using creative means to onboard customers. Including Institutional size investors, trading under shell-company names. All in all the CFTC released a 74-page document with all their allegations and it’s a lot to go through. This is a developing story and a serious situation for Binance. 

Crypto investors and speculators, in my opinion, should never have any allegiance to platforms, exchanges or any trusted 3rd party. The point of Decentralization is so that we don’t need to trust any one person to do the right thing, it’s so we trust that the code is law and it doesn't change without a consensus from the community. 

The best-case scenario for Binance is a fine, but these allegations are such that even if they do get off with paying money, I have very little confidence that any executive of Binance caught breaking the law will be around in the space for the mainstream build-out. 

Now the potential WIN for the sector in this situation is that the CFTC clearly stated in their lawsuit that Bitcoin, Ethereum, Litecoin and at least 2 Fiat Backed Stablecoins, Tether, and Binance USD are all commodities. This flies in the face of the SEC, which is trying to push the idea that Ethereum and anything that isn’t Bitcoin is a security and should be under current US Securities laws. So while we’re continuing to see a huge Crackdown on 3rd parties in this space, we’re also getting a sense that there’s also an internal battle underway for who should really be in charge. Regulation by enforcement is the new normal until America figures out who is going to oversee this space.

As always a reminder to consider being a custodian of your own digital assets by way of a Digital Wallet on your phone with your seed phase stored in a safe place or a hardware wallet like a Ledger or Trezor. 

Thanks for listening to the Hot Wallet Podcast. Please share this with a friend if you found it helpful and check out our back catalog for more shows. I’m scott McGregor, @scottrades on Twitter, I’ll see you in the Metaverse.