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The world’s largest cryptocurrency exchange Binance was hit with a lawsuit by the Commodity Futures Trading Commission (“CFTC”) late last month in a federal court in Illinois. This is not the first time a cryptocurrency exchange has been charged by a U.S. regulator, but this case is striking (in part) because involves a regulator that does not directly oversee cryptocurrencies, which indicates how regulators – particularly those in the U.S. – hope to clamp down on crypto and the industry around it. The CFTC’s lawsuit alleges that three Binance entities violated U.S. derivatives laws by offering derivative trading services to U.S. customers without registering with the appropriate market regulators, thereby, prioritizing commercial success over regulatory compliance. 

In its March 27 complaint, the CFTC also named Binance’s founder and CEO Changpeng Zhao (known as CZ) and the company’s former chief compliance officer Samuel Lim as defendants, accusing the two of taking steps to violate U.S. law, including by directing U.S.-based “VIP customers” to open Binance accounts under the name of shell companies. The regulator has pointed to chat messages as evidence of CZ and Sim’s knowledge of various criminal groups making use of the exchange.

People visit Binance nearly 15 million times a week to trade on the over 300 cryptocurrencies it offers in more than 1,600 different markets. CZ is, of course, an outspoken advocate for cryptocurrencies and regularly tweets about the industry and his company; he even tweeted a link to his initial response to the recent CFTC charges, which he characterized as “unexpected and disappointing.” Promising full responses in due time, he said: “Upon an initial review, the complaint appears to contain an incomplete recitation of facts, and we do not agree with the characterization of many of the issues alleged in the complaint.” (Last year, CZ’s tweets arguably helped to contribute to the collapse of FTX, one of his company’s main rivals, and Binance saw its market share grow following FTX’s collapse.)

So, this charge – against not only a crypto giant but also the company of an outspoken industry advocate – has created further upheaval in a market that has already suffered multiple crises over the last year. Investors withdrew a reported $1.6 billion from Binance within days of the CFTC’s announcement of its charges, and these outflows could continue if U.S. regulators tighten their squeeze on crypto companies further, causing major players like Binance to shift focus to other jurisdictions.

Creeping oversight

The CFTC aims to “protect the public from fraud, manipulation, and abusive practices related to the sale of commodity and financial futures and options, and to foster open, competitive, and financially sound futures and option markets.” Previous actions by the regulator in 2021 against Tether and Bitfinex resulted in major fines and a loss of credibility for the crypto industry. But a statement published at the time of the Tether and sitfinex Settlement by one of the CFTC’s five commissioners, Dawn Stump, pointed out that the CFTC does not actually have responsibility for regulating cryptocurrencies. She warned that these fines might “cause confusion about the CFTC’s role in this area,” and noted that the action was based on defining stablecoins (a type of cryptocurrency) as a commodity. “We should seek to ensure the public understands that we do not regulate stablecoins and we do not have daily insight into the businesses of those who issue such,” she continued. 

These latest charges against Binance focus on its activities in derivatives – financial contracts that are linked to the value of an asset such as oil or, in this case, cryptocurrencies, which is a market the CFTC does regulate.

Another U.S. financial regulator, the Securities and Exchange Commission (“SEC”), has also been ramping up its crypto oversight activities. As well as focusing on the Initial Coin Offering market, it saw a 50 percent increase in enforcement actions against digital asset companies last year compared to 2021.

Crypto market changes

Binance is now up against two powerful U.S. financial regulators, and as a result, some experts have warned that “significant regulatory action could prompt Binance to increasingly shift its business operations beyond the United States.” Certainly, the fact that Binance held a 92 percent share of the crypto market at the end of 2022 means it facilitates many transactions – and offers a lot of liquidity to traders – around the world, including in the U.S.

A trader’s capacity to find competitive prices when buying and selling, as well as sources of liquidity (or other people to trade with) would be affected by the loss of or pull back of one of the world’s top ten crypto exchanges. This would be bad news for retail and institutional investors who could be confronted with a smaller and potentially more expensive market as a result. And even if the complaints and investigations by the CFTC and SEC take a while to conclude, as is likely, the US legislature may step in before that. A report published by the Financial Times days after the CFTC announcement alleges that Binance has hidden links to China for many years. A statement issued by the exchange to the FT said this is not “an accurate picture of Binance’s operations” and that the paper’s sources were “citing ancient history (in crypto terms).”

But recent actions against Chinese tech company Huawei and social media platform TikTok indicate political leaders are keen to crack down on Chinese companies’ access to U.S. technology systems and customer data. So, any similar concerns could lead U.S. politicians to start acting in this area, as well.

Andrew Urquhart is a Professor of Finance & Financial Technology at Henley Business School at the University of Reading.

Hossein Jahanshahloo is an Assistant Professor in Finance at Cardiff University.