The news that the Commodity Futures Trading Commission (CFTC) sued CEO of Binance, known as CZ, broke on March 28th and caused an immediate impact on the world of crypto. Despite CZ claiming he had an understanding with the US governmental agencies and calling the news “disappointing”, it was, in fact, a matter of time until this would happen. Why is that? Simply because Americans are not allowed to trade crypto derivatives. Had Binance not been the largest crypto trading network, this could have been avoided. But let’s agree it is naïve to have the leading role in the cryptocurrency market and expect no attention from the government.
Overview of Allegations of regulatory violations
At the core of the CFTC lawsuit is the statement that CZ deliberately ignored the US regulations by instructing Binance clients to use Virtual Private Networks (VPNs) to avoid them. Although CZ claimed Binance did not have any business in America, the reports point to almost 20% of its clients and the total profit coming from the US. Besides, the clients that were expected to bring significant profit were directed to create shell companies in places where they could avoid the existing US restrictions. On the surface, Binance was blocking users from the US or those claiming to be US citizens anywhere in the world, but the “alleged” truth is they always had a way through.
Yet another allegation was that Binance’s money-laundering reporting process was a “sham,” where an employee was supposed to create fake annual reports on how the company deals with that. In fact, CFTC believes that all compliance measures implemented by Binance were a cover up, and the crypto exchange platform management was fully aware of that, referencing the internal communication that they somehow got access to.
Besides, CFTC believes that Binance intentionally destroyed the documents and used Signal for communication with their US clients, which is an app that allows for encryption and auto-deletion of the messages. Allegedly, the company knowingly engaged in business in the US because it was a lucrative market, disregarding relevant laws and regulations. In fact, only one account in Chicago constitutes 12% of the total volume traded on Binance. I wouldn’t want to lose that client if I were Binance, either.
Potential consequences
Although the CFTC cannot press criminal charges, it can still make the company pay heavy fines for crypto exchange regulatory violations and ban Binance from the registration in the US once and for all. Besides, the Binance and CZ lawsuits can bring the attention of the government to the company, which may cause new lawsuits in the future and, in the worst case scenario, charges from other agencies. However, the latter is not very likely due to there being no effective crypto exchange regulation in the US, although allegations of violating securities and commodities laws have brought up discussions in the government that crypto regulation is necessary.
Impact on Binance
The Binance lawsuit was likely no surprise to the organization, and it had been investigated for a period of time, was expected to pay fines for the previous violations (which we all understand what it implies). The current lawsuit will likely be time-consuming for the company and will likely cause additional expenses.
Although it is unlikely that Binance will be less trusted by its customers, many people would opt out of trading using a platform that is being investigated by US authorities. On the other hand, Binance is still a large and reputable platform in the crypto market, and it is not the only one under investigation.
Market Reaction to CFTC Lawsuit
One of the main short-term concerns expressed by observers is market liquidity. With Binance and CZ sued, operations in the US may stop; it part, because of the limitations and also because traders may opt out of large-scale operations. As a result, big market players will not be as active as before either. Finally, the crypto regulation CFTC wants is very likely to make the BTC prices go down.
Immediate Impact on Crypto Prices
In response to the news, the trading prices of ETH and BTC dropped by almost 4%, but later that day gained back some of their value and stabilized. BNB, which is a Binance exchange token, fell by 6%. The price of altcoins also dropped; there was a 3.1% fall in Cardano price, Solana went down by 5%, and the price of Polygon reduced by 4.4%. Stocks related to crypto also fell noticeably. Coinbase and Microstrategy went down by 10% each. Such platforms as Hut 8, Riot Platforms, and Miners Marathon Digital each lost about 8% as a result. Besides, an immediate growth in bond yields occurred due to the exchange price drop.
Future implications for Crypto Markets
Overall, with large exchanges shutting down, which we recently witnessed, the crypto market has become less stable and saturated. Given the US constitutes a large crypto market share, even though it is not allowed by local regulations, monitoring crypto exchanges and chasing stakeholders adds to the volatility that already exists. In general, most experts believe the current news just makes the market even more uncertain, which I couldn’t agree more with. We are all well aware of the fact that crypto, just like any other financial market, significantly relies on stability.
Due to the instability, dropping exchange rates of multiple cryptocurrencies, and rising bond yields, the growth of crypto becomes less predictable, if expected at all. Knowing that the enthusiasm around crypto is very likely to fall because the field may become riskier than it used to be.
However, it is likely to be a temporary crisis that may lead to a major change in the field. Crypto is relatively new to governments and regulations, and one of the possibilities to stabilize the market is to come up with the rules that all players would respect and follow, which would likely transform the field but may be a step toward making crypto more stable.
