Matt Levine, an opinion columnist for Bloomberg who has previously worked as an investment banker for Goldman Sachs, an acquisitions attorney for Wachtell, Lipton, Rosen and Katz, and a federal appellate law clerk, wrote that the U.S. Commodity Futures Trading Commission's (CFTC) lawsuit against cryptocurrency exchange Binance is centered around the allegation that U.S. customers were able to trade crypto derivatives without proper regulatory approval.
That is a less serious accusation than some other crypto exchanges have faced recently, Levine wrote.
"Today, the U.S. Commodity Futures Trading Commission sued Binance Holdings Ltd., Changpeng Zhao’s big crypto derivatives exchange, for letting Americans trade crypto derivatives," Levin wrote. "There are no accusations that Binance is stealing customer money, or even taking big risks with it, which makes Binance look better than some other crypto exchanges I could name. The CFTC’s case is mainly about letting U.S. customers trade crypto derivatives."
It is illegal to run a crypto derivatives exchange in the U.S. without registering it with the CFTC, "and it’s not exactly easy to do that either," Levine wrote.
"If you have a crypto derivatives exchange abroad, but have not registered it in the U.S., it is illegal to let U.S. customers trade on it," he wrote. "So the basic rule is that U.S .customers can’t trade crypto derivatives, and big international crypto derivatives exchanges (Binance, FTX before it blew up) sometimes have U.S.-only platforms (Binance U.S., FTX.us) that let U.S. customers trade a limited set of products, but not most derivatives."
That is a problem for a big exchange, because a lot of the big high-frequency market-making firms in financial markets happen to be in the U.S., Levine said.
The lawsuit, as filed in the U.S. District Court for the Northern District of Illinois, alleges that Binance leadership was aware of the fact that some U.S. users used tools such as virtual privacy networks (VPNs) to circumvent restrictions that would have prevented them from trading crypto derivatives on Binance's platform, CoinDesk reported.
"VPN use by customers to access and trade on the Binance platform has been an open secret, and Binance has consistently been aware of and encouraged the use of VPNs by U.S. customers," the filing said.
Changpeng Zhao (CZ), the Canadian CEO and founder of Binance, wrote in a blog post that the lawsuit is "unexpected and disappointing" in light of the fact that Binance has worked "cooperatively with the CFTC for over two years." He summarized the work that Binance has done to block U.S. users from accessing services they are not allowed to use, as well as Binance's collaboration with global law enforcement and regulatory agencies. "At Binance, we look for amicable solutions to all problems. We are collaborative with regulators and government agencies all around the world. While we are not perfect, we hold ourselves to a high standard, often higher than what existing regulations require," CZ said.
One attorney who weighed in on the situation said in a Twitter thread that the lawsuit is a "nothingburger," with most of the accusations in the complaint focused on activities that took place in 2019 or 2020, which are now "moot" because of the know-your-customer (KYC) protocols Binance implemented in 2020.
"Half of these are just bogus allegations," the attorney said, adding that "any concrete allegations of market manipulation and violations of AML (anti-money laundering) provisions" are "notably missing."
CFTC Chairman Rostin Behnam said in a March 27 statement, “Today’s enforcement action demonstrates that there is no location, or claimed lack of location, that will prevent the CFTC from protecting American investors. I have been clear that the CFTC will continue to use all of its authority to find and stop misconduct in the volatile and risky digital asset market. For years, Binance knew they were violating CFTC rules, working actively to both keep the money flowing and avoid compliance."
Binance has taken several steps since the collapse of FTX to increase transparency and accountability, and one such step was the launch of its new proof of reserves (PoR) verification system earlier this year, according to a blog post. The new PoR system aims to prove to the public that Binance backs all user funds 1:1, plus additional reserves. Binance’s new zero-knowledge proof protocols resolve potential problems by ensuring that no users can have a negative balance in the Merkle tree and that all leaf nodes are contributing to the claimed total user balance of each asset.
Levine, a Bloomberg Opinion columnist, authors a daily newsletter titled "Money Stuff."