Author: Daniel Kuhn, Deputy Editor-in-Chief of Consensus Magazine
Translation: Mary Liu from BlockingBitpushNews
After news broke that the U.S. Securities and Exchange Commission (SEC) was suing the world’s largest cryptocurrency exchange, Binance, CEO Changpeng Zhao (CZ) took a familiar tactic to fight back: tweeting. The first text CZ responded with was the number “4,” while at the same time SEC Chairman Gary Gensler may have been busy giving media interviews.
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For most of us, this might be a headache-inducing issue. But for many of CZ’s 8 million followers, the tweet was a message, a joke, and a familiar kind of comfort.
In CZ’s own words, “4” means “ignore FUD, fake news, attacks, etc.” FUD (fear, uncertainty, and doubt) is a popular acronym in the crypto field. It shows that attacks on cryptocurrency regulation and law enforcement have become so widespread that one of the industry’s most influential participants is now using it as a blunt response. Additionally, CZ’s tweet suggests that the company’s regulatory strategy will remain largely unchanged, even as it faces lawsuits from two of the top financial regulators in the U.S.
In fact, that’s pretty much the case. In the days following the lawsuit (during which time the SEC also sued rival U.S. exchange Coinbase), Binance has stuck to its long-held arguments: that the SEC’s regulation through enforcement is wrong; that customer funds are always safe; and that the exchange’s “compliance” practices before were very diligent, it was just a matter of SEC’s lack of cooperation.
Binance says, “While we take the SEC’s allegations seriously, they should not be the subject of an SEC enforcement action, let alone on an emergency basis. We intend to vigorously defend the platform.”
Of course, some things are different this time around. For one, the company has appointed a new “regional markets head,” Richard Teng, who will oversee operations in Asia, Europe, the Middle East, and all regional markets outside of the U.S. Several crypto strategists have said that strategically this is a good PR move, as it may help Binance offset some of the “deafening” blows from the U.S. Securities and Exchange Commission.
Secondly, Binance US is nominally an independent US business for the exchange, and its operational capacity is facing tremendous pressure due to the SEC’s “temporary restrictions” on its assets. It has already delisted tokens on a large scale, which may reduce the volume of transactions that have not been counterfeited.
So the question is whether Binance can operate as usual and whether it can really – in the long run – continue to operate?
Given the seriousness of the charges in the SEC lawsuit, at least from my limited perspective, it is a strange question to some extent. In addition to facing allegations of “not obtaining proper operating licenses” as Coinbase, Binance and CZ are also accused of misusing customer funds, secretly promoting wash transactions on Binance.US, transferring customer funds improperly without consent, and a series of other issues. In other words, Binance’s legal issues far exceed Coinbase. These charges not only focus on whether its listing is an unregistered security issue, but also on whether it mishandles customer funds improperly, and whether it secretly encourages U.S. citizens to trade on non-U.S. platforms.
Of course, Binance’s reputation has already declined. Two months ago, the U.S. Commodity Futures Trading Commission (CFTC) filed a lawsuit against the exchange for improper licensing and providing wrong financial products to U.S. consumers. Some internal documents and communications have been exposed, indicating that Binance is occasionally an almost ridiculous inactive company and occasionally an improper competitor that places customer funds at risk for expansion.
Industry experts are now very skeptical that Binance can continue to survive. It is worth mentioning that the worst case has not yet ended. Binance is currently facing two civil lawsuits, but also faces pressure from the US Department of Justice (DOJ), which may launch a criminal investigation, and if successful, may result in one or two Binance executives being imprisoned.
When CoinDesk asked whether the SEC lawsuit would lead to the closure of Binance, securities lawyer Brian Frye said “this is a very realistic possibility.”
If the SEC wins the lawsuit, in the widely expected case that Gensler’s term expires, it may impose huge fines on the exchange; disable or reduce Binance’s key operational businesses, such as internal BNB tokens, and strictly supervise them; permanently ban CZ from operating his exchange or operating a financial company. Given that the SEC claims that Binance.US has placed $2.2 billion in customer funds at “serious risk,” if these funds are found to be related to illegal activities, these funds may be confiscated.
The SEC has significant leeway to require companies to “cease and desist” certain activities and prevent them from engaging in securities business because Gensler believes that all cryptocurrencies (except Bitcoin) are securities.
Worse still, as suggested by Willkie Farr & Gallagher partner Michael Lewis, SEC enforcement seems to agree with Gensler’s view. In its recent court filings, it specifically targeted all of the top 10 tokens except Bitcoin (BTC) and Ethereum (ETH), which is bad news for any exchange hoping to offer trades other than Bitcoin to U.S. customers.
But the purpose of this article is not to spread negativity. It’s worth noting that a lot of money has already been withdrawn from Binance, and at least for now, it seems clear that we haven’t experienced something similar to FTX. As early as 2019, Binance’s auditors may have warned the company not to mix funds, but even if the SEC is throwing mud, these funds seem to be at least safe. Binance publicly denies mixing customer deposits and corporate funds, and it’s unclear what the CZ-related Binance shell companies like Merit Blockingrk and Key Vision Development Limited did with those funds.
On the “Unchained” podcast, Gauntlet CEO Tarun Chitra said that the outflow of funds has decreased significantly because global users, like ordinary retail investors in Chile or Abu Dhabi, don’t care about what’s happening with Binance and the SEC, and as far as cryptocurrency exchanges go, Binance is the most trustworthy choice, which is why it has grown to become the largest cryptocurrency exchange by far. Yes, the SEC’s charges against Binance and its CEO look serious, but that doesn’t mean users will suddenly turn to trusting some small crypto platform.
Do ordinary crypto users care if Binance uses shady strategies to attract “crypto whales,” or if it suggests high net worth clients use VPNs to circumvent firewalls to trade on the exchange? No, they may find it interesting. (Although the CFTC found evidence that Binance derives a substantial portion of its revenue from U.S. customers it shouldn’t be servicing, the company still has a huge global user base.)
I think it makes sense to boycott Binance if the charges against it are true. CZ is accused of enriching himself at the cost of sacrificing users (someone has produced evidence that CZ’s net worth exceeded that of Elon Musk during the recent bull market peak). But the trust metric in the crypto industry is different from other areas of finance, and if banks have to build sturdy, ornate headquarters to signal the “business long rainbow” to potential customers, trust is “fleeting” in the crypto industry. Binance has become stronger because it has the tokens people want to trade, and it seems to be able to resist hacker attacks.
CEO of the Blockchain Association, Jake Chervinsky, said that even if Coinbase loses in the lawsuit brought by the U.S. Securities and Exchange Commission, it still has ways to avoid registering as a securities exchange. It can simply delist tokens that are deemed securities. Willkie Farr & Gallagher’s Michael Lewis agrees, saying that “it’s unlikely that current law or regulation in the United States would effectively prohibit all crypto assets.”
Binance may also ultimately delist tokens, resulting in a sharp decline in revenue and possibly losing its founder/CEO as a puppet and trusted spokesperson for the exchange (although he may still be a major shareholder). The exchange may be forced to implement costly controls while also cleaning out some potential users. Binance.US may be doomed to fail (although it doesn’t seem like anyone is using it). The joint fines of the SEC and CFTC could bankrupt the company, and U.S. Senators like Liz Warren (D.-MA) may call for the Justice Department to intervene.
To some extent, if Binance’s worst crime is faking trading volume, then I guess users will forgive it. Of course, it all depends on the users themselves. But Binance has now become a scapegoat for the SEC’s anger, arrogantly attempting to crack down on an exchange without a headquarters within the scope of U.S. law, possibly forcing the company to “yield” to some of the laws.
There is a large group of fans who support CZ’s response and are willing to “ignore fake news, uncertainty, and doubt,” and I have something else to say: you can kill a flesh, but you can’t destroy an idea.
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