FIRST: The CFTC's complaint, a/k/a "The Binance Complaint," online here, reads a page or so into its start:
6. Zhao, Lim, and other members of Binance’s senior management have failed to properly supervise Binance’s activities and, indeed, have actively facilitated violations of U.S. law, including by assisting and instructing customers located in the United States to evade the compliance controls Binance purported to implement to prevent and detect violations of U.S. law. Binance and its officers, employees, and agents have instructed U.S. customers to use virtual private networks (“VPNs”) to obscure their location; allowed customers that had not submitted proof of their identity and location to continue to trade on the platform long after announcing such conduct was prohibited; and directed VIP customers with ultimate beneficial owners, key employees who control trading decisions, trading algorithms, and other assets all located in the United States to open Binance accounts under the name of newly incorporated shell companies to evade Binance’s compliance controls.
7. Despite Binance’s solicitation of and reliance on customers located in the United States to generate revenue and provide liquidity for its various markets, Binance has never been registered with the CFTC in any capacity and has disregarded federal laws essential to the integrity and vitality of the U.S. financial markets, including laws that require the implementation of controls designed to prevent and detect money laundering and terrorism financing, in violation of the Commodity Exchange Act (“Act” or “CEA”), 7 U.S.C. §§ 1–26, and the CFTC Regulations (“Regulations”), 17 C.F.R. pts. 1–190 (2022).
8. Throughout the Relevant Period, and through the operation of the Binance platform, Defendants Binance, aided and abetted by Lim, and Zhao have violated core provisions of the CEA and the Regulations, [..]
The Binance Complaint is over seventy pages long, and Crabgrass admits to not having studied it fully. As to impact, one outlet reports today, March 29, 2023:
Binance Experiences $2 Billion in Outflows as Troubles Intensify
Updated:
[Defendant Zhao] Traders have been withdrawing billions of dollars from Binance as the world’s largest crypto exchange faces mounting issues. In what many see as the next step in “Operation Choke Point 2.0”, Binance was sued by the Commodity Futures Trading Commission (CFTC) on Monday and accused of operating illegally in the U.S. and violating rules designed to prevent illicit financial activities.
According to crypto data provider Nansen, Binance experienced net outflows of $2.1 billion on the Ethereum blockchain over seven days as of Monday evening. Overall, Binance holds $63.2 billion in the exchange’s publicly disclosed wallets, as per Nansen data. Nansen analyst Andrew Thurman said on Monday that the pace of withdrawals had increased compared to normal activity and picked up after the CFTC announcement.
Probably due to these troubles, last week, Binance announced the reinstatement of fees on spot bitcoin trading after temporarily removing them last summer. As if all the news wasn’t bad enough, the exchange also had to temporarily suspend spot trading for a few hours to fix a software error.
Yet another setback for the crypto giant occurred on Tuesday when a federal judge blocked Binance.US, the American affiliate of Binance, from buying Voyager Digital’s customer accounts out of bankruptcy while federal authorities challenge the deal.
Not good news for Binance, is a way to summarize coverage.
See, also; CoinDesk and Id. here and here, https://markets.businessinsider.com/, and The Block quaintly opening, then reporting:
Binance gave the ‘middle finger’ to the US: experts tell us what they think will happen next
Quick Take
- An unusually detailed Commodity Futures Trading Commission lawsuit against Binance has crypto watchers wondering if other federal agencies will file their own complaints.
- [...]
Binance was just accused of undermining its own compliance program and operating illegally in the U.S. in a stunning, and stunningly detailed, 74-page lawsuit.
Industry watchers are still waiting for the other shoe to drop.
The Commodity Futures Trading Commission sued Binance on Monday, but experts pointing to the meticulously documented filing say it may not be the only federal agency to take the crypto behemoth and its CEO Changpeng Zhao to court over alleged wrongdoing.
The CFTC lawsuit, which says Binance purposely evaded compliance controls to maximize profits and has facilitated illegal activities, could prompt the Justice Department to file criminal charges. The complaint included headline-grabbing internal messages from Binance [...]
[...] Internal messages in the CFTC complaint show that Binance executives discussed transactions by Hamas on the exchange in 2019. Binance officers even acknowledged some of their customers are “here for crime” on the platform, but said “we see the bad, but we close 2 eyes.”
SEC eyeing Binance?
If not the Department of Justice, others see the Securities and Exchange Commission potentially stepping in soon and launching its own enforcement action.
“It wouldn’t be unexpected for the SEC to pursue a separate action given how active they’ve been in the crypto exchange space,” said Marc Fagel, the former Regional Director of the SEC’s San Francisco office who now lectures at Stanford Law School. “Parallel CFTC and SEC actions raise difficult questions about whether digital assets are commodities or securities, although, as they did with the FTX, the regulators can find ways to navigate.”
At a good point to allow readers to follow links or not, next item -- from the Congressional website of Rep. Tom Emmer, https://emmer.house.gov/home:
Washington, D.C. – Today, Majority Whip Tom Emmer (MN-06) introduced the Blockchain Regulatory Certainty Act (BCRA), which affirms that blockchain developers and service providers that do not custody consumer funds are not money transmitters. This bipartisan bill is co-led by Representative Darren Soto (FL-09).“Crypto and blockchain technology, by nature, does not easily fit into the frameworks policymakers have considered when crafting regulations in the past. For too long, federal regulators and lawmakers have jammed the blockchain ecosystem into statutory definitions that just do not make sense. It should be simple: If you don’t custody consumer funds, you aren’t a money transmitter. My bill provides that necessary confirmation for the blockchain community,” Emmer said.
“The longer we delay providing this commonsense clarification, the greater risk that this transformative technology is driven overseas, depriving domestic users and investors. This bill will help America remain a technological leader in the crypto space,” Emmer concluded.
“Custody is an incredibly important issue that needs to be considered when defining which regulations apply to who,” said Congressman Darren Soto. “I’m a proud supporter of Rep. Tom Emmer’s bill because it is a step in the right direction policy-wise and provides helpful regulatory clarity for innovators in the ecosystem."
Emmer and Soto serve as co-Chairs of the Congressional Blockchain Caucus.
“Sound cryptocurrency policy requires calibrating regulations specifically for the activities that present risks that should be mitigated. The Blockchain Regulatory Certainty Act would reinforce in law the established understanding that non-custodial services, such as mining or providing wallet software, should not be regulated in the same way as something like running a custodial cryptocurrency exchange,” said Jerry Brito, Executive Director of Coin Center.
Given proximity in time between this Emmer press release and the hurt currently being leveled by the Executive Branch against the Binance crypto exchange, that reported Brito observation - distinction has gravitas. Emmer's distinction of agents that do not "custody funds" means non-exchanges (where according to the two billion Binance cashouts it is clear that exchanges provide liquidity, with it unclear how liquidity in crypto would otherwise exist).
Emmer's press release continues:
"Blockchain Association is proud to support the reintroduction of the Blockchain Regulatory Certainty Act. By providing commonsense regulatory guardrails, this legislation goes a long way in ensuring the U.S. remains at the forefront of crypto innovation," said Blockchain Association CEO Kristin Smith.
“Now more than ever it is vital that we institute regulatory clarity for blockchain developers and service providers in the United States,” said Perianne Boring, Founder and CEO of the Chamber of Digital Commerce. “As the recent infrastructure bill debate proved, the existing lack of clarity is a serious risk to ongoing growth and innovation in the blockchain and digital asset industry. This must be addressed and the Chamber strongly supports this bill, which will help create a more hospitable environment for innovators and encourage growth where inconsistent state and federal legislation has hampered our industry."
"We applaud the reintroduction of the Blockchain Regulatory Clarity Act. This bipartisan legislation will help to protect American innovation by ensuring that developers are not subject to an unnecessary and inappropriate compliance burden that would significantly impede their ability to do their day-to-day jobs. The development of digital assets in the United States is critical to our national and economic security, and we appreciate efforts to establish the regulatory clarity that is desperately needed," said Sheila Warren, CEO of the Crypto Council.
The bill clarifies the existing overburdensome state-by-state money transmission regulatory process by asserting that blockchain entities that never custody consumer funds are not money transmitters. This legal certainty would help establish the necessary confidence required to keep noncustodial blockchain developers or service providers, including miners, validators, and wallet providers, from seeking more straightforward regulatory environments overseas.
Emmer first introduced BCRA in 2018. Today’s introduction marks its fourth successive Emmer-led introduction.
The bill is available here.
If you buy and hold the stuff, and then want to cash out crypto for dollars at prevailing market rates; how, other than via an exchange could you do so?
Emmer and other Congressional crypto boosters, as far as Crabgrass can determine, have no answer to the cashout - liquidity dilemma, other than exchanges of one form or another, and the Executive seems on a course to shut exchanges down tightly unless they follow federal law and file and accept federal regulation.
Crypto without exchange capability seems a questionable asset to be holding these days. Per the run on Binance after the CFTC filing. Emmer's effort to wall off non-exchange activity from attack as "not money transmitters" begs the question - if letting them operate without being exchanges remains lawful, what of the where and how of liquidity provision?
Would Wall Street, regulated, get that function or if not Wall Street, who?
Jamie Dimen and Goldman, et al., love business if it yields them a hefty profit. Will they be allowed to profit off of crypto-related liquidity provision; per possibly some collective exchange formation and self-regulation?
Will crypto die, instead? A slow tortured death with people holding but not being able to transact? Is there a middle ground?
