Crypto markets dipped on Monday and Tuesday in the wake of the Commodity Futures Trading Commission’s announcement that it will be suing Binance, and its CEO, CZ Zhao, over alleged violations of U.S. law. Chief among the complaints are that Binance knowingly had weak compliance controls. They actively instructed American users how to avoid these controls. And lastly, they intentionally made Binance’s corporate structure vague and opaque in an effort to subvert regulations.
To anyone familiar with crypto trading, the above allegations are not really a surprise. What is a surprise is the level of detail in the CFTC’s press release. The communiqué alleges that CZ’s “own emails and chats reflect that Binance’s compliance efforts have been a sham.” The complaint continues accusing Binance of instructing “employees to communicate with U.S.-based customers concerning control evasion through a messaging application that was set to automatically delete written communications… Binance used [auto-delete] to avoid leaving any evidence” of wrongdoing. In other words, the company “instructed its customers–in particular its commercially valuable U.S.-based VIP customers–on the best methods for evading Binance’s compliance controls.”
My Response to the CFTC Complaint | Binance Blog https://t.co/TadyotM7HN— CZ 🔶 Binance (@cz_binance) March 27, 2023
In response to the allegations, CZ posted a list of the ways that Binance does indeed follow the regulations of the U.S. and other nations. He claimed that the CFTC made an “incomplete recitation of facts.” It seems likely that this issue will be settled in court.
Perhaps the most interesting thing about the CFTC’s press release is what it DIDN”T say. Nowhere in the post are there references to VPNs or other obvious methods that ip-restricted customers would use to gain access to Binance’s site. More notably, there were no references to individual cryptocurrencies or even the word "crypto" at all! Instead, the CFTC says Binance “offered and executed commodity derivatives transactions.” The word “commodity” has A LOT of weight here. It could set up an end result that is great for the cryptocurrency industry as a whole!
1/ Today Coinbase received a Wells notice from the SEC focused on staking and asset listings. A Wells notice typically precedes an enforcement action.— Brian Armstrong (@brian_armstrong) March 22, 2023
This move by the CFTC is as much an action against Binance as it is against the SEC. Currently, Gary Gensler’s Security and Exchange Commision is in a battle with XRP over whether that token is a security or commodity. Last week, the SEC sent Coinbase a Wells Notice over its Ethereum staking services. The notice is essentially a prelude to a lawsuit which will claim Coinbase illegally offered securities to Americans. Between these SEC actions, and the CFTC’s suit against Binance, there are two separate U.S. regulators claiming that crypto is both a security and a commodity. Both can’t be true.
It would be much more beneficial to the average crypto holder if tokens were deemed commodities. The regulations around buying, selling and trading commodities is much less intensive than the interminable dross of interwoven reporting standards for securities. Ironically, it would be great for the industry if the CFTC quickly won its case and set a precedent deeming every cryptocurrency as a commodity. In the meantime, web3’s faithful will just have to sit back and root against the SEC.