Binance Lawsuit Explained: Why CFTC Involvement Is a Big Deal

The CFTC lawsuit spells serious trouble for the largest crypto exchange in the world.

Binance CEO holding a fireball in the desert, symbolizing the trouble that's coming after the CFTC lawsuit.
  • US agency is going after Binance with a potentially fatal lawsuit.
  • CFTC revealed damning private logs between Binance employees in its lawsuit.
  • The agency is “going for the jugular,” experts believe.

Crypto markets could be in trouble as another exchange giant faces scrutiny. Binance, the world’s largest crypto exchange, is facing a lawsuit from a major US regulator. Details from the lawsuit suggest the agency is going in for the kill. 

On Monday, the Commodity Futures Trading Commission (CFTC) brought a lawsuit against Binance, its CEO, and related entities. The lawsuit alleges that Binance has been operating illegally in the US by offering unregistered derivatives contracts to US investors. Binance executives also allegedly suggested US investors use VPNs to bypass its restrictions.

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Some of the most damming claims include that Binance participated in market manipulation and used its position to trade against its users.

The lawsuit suggests that the CFTC is not playing around, and Binance could be in serious trouble. Here are some reasons why the CFTC lawsuit could be fatal for Binance.

CFTC Lawsuit Ties Binance to Binance.US

To demonstrate that Binance offered derivative products to US investors, the CFTC used extensive chat logs between Binance employees to demonstrate the tied between Binance and Binance.US.

Earlier WSJ leaks from Binance suggested that Binance started Binance.US as a separate platform mainly to evade US regulators. In reality, Binance and Binance.US continued to operate as one entity. The lawsuit suggests CEO Changpeng “CZ” Zhao retained direct control over the entire Binance ecosystem.

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“Binance operates the world’s largest centralized digital asset exchange, emerging through an opaque web of corporate entities, all of which are ultimately controlled by Zhao,” the lawsuit writes.

CZ’s control went so far that he involved himself in the most minute decisions in the Binance empire, including Binance.US. For instance, CZ personally approved a $60 furniture expense in January 2021, when Binance earned $700 million in revenue.

For the CFTC, this fact means that the entire Binance ecosystem is under its authority. The CFTC claims jurisdiction over every entity that offers derivatives contracts to US investors.

Binance Told US Customers to Use VPNs

The CFTC went on to show that Binance made no serious effort to prevent US customers from accessing its services. While Binance would block US users from using its services to avoid regulatory scrutiny from US authorities, executives helped some users avoid these restrictions.

“Much of Binance’s reported trading volume, and its profitability, has come from its extensive solicitation of and access to customers located in the United States,” the lawsuit claims.

The lawsuit alleges that Binance went after “VIP” investors from the US. These big players had special treatment at Binance and could bypass any restrictions on the platform.

“Binance and its officers, employees, and agents have instructed U.S. customers to use virtual private networks (“VPNs”) to obscure their location,” the lawsuit stated.

The lawsuit also corroborated earlier WSJ leaks that showed Binance executives discussing how to suggest to clients that they should use VPNs. “Have them be creative and VPN,” said Binance compliance chief Samuel Lim.

CZ Traded Against Binance Users?

A critical part of the Binance lawsuit is proving that its practices potentially hurt US investors. According to the lawsuit, CZ owned several entities, including Merit Peak Limited and Sigma Chain AG trading firms. He also owned approximately 300 Binance accounts that traded on the platform.

Binance did not subject these firms to “any anti-fraud or anti-manipulation” controls. Moreover, the exchange exempted CZ’s 300 trading wallets from insider trading policies.

The existence of a large number of executives’ wallets on Binance suggests a potential risk for market manipulation. Executives can use inside information, including that of user accounts, to achieve a better trading position.

Binance’s CEO denied these claims in a blog post, saying that Binance does not trade for profit. “Personally, I have two accounts at Binance; one for Binance Card, one for my crypto holdings. I eat our own dog food and store my crypto on Binance.com.”

Lawsuit Could End Binance.US – and Binance

The CFTC does not have the power to persecute Binance executives for criminal offenses. However, it does have a series of powerful instruments at its disposal that could be fatal for the exchange.

In its lawsuit against Binance, the CFTC asks for an injunction to prevent the exchange from doing business in the US.

In addition, the lawsuit would prohibit CZ and Binance entities from “trading in registered entities, holding any commodity interest,, and directing any trading of digital assets.”

The loss of the American market alone would be a huge blow for Binance, as US-based users accounted for 16% of accounts in 2020.

The CFTC can also leverage hefty fines against the exchange, including making the exchange return all trading fees to users. This alone could be enough to destroy Binance, said Adam Cochran, a partner at Cinneamhain Ventures.

‘CFTC Is Going for the Jugular’ in Binance Lawsuit

Details from the lawsuit suggest that the CFTC wants to strike a “fatal blow” to Binance. Cochran believes that the agency has a good chance of succeeding.

He highlighted that the agency prepared the lawsuit for maximum potential impact on the exchange. The CFTC even pitted Binance executives against each other, hoping to induce infighting.

“Make no mistake, this is the CFTC going for the jugular,” Cochran said. “CFTC doesn't go after small frequent cases like the SEC. It's a different beast, and its cases are often fatal,” he added.

On the Flipside

  • The potential upside from the CFTC is that the agency referred to both Bitcoin and Ethereum as commodities.
  • The lawsuit could also move crypto from opaque centralized players to decentralized protocols.

Why You Should Care

Binance is by far the largest crypto exchange in the world. Troubles in Binance would rock the entire crypto market.

Read more about Binance:

Binance Leaks Spell Trouble with SEC, ‘Nuclear Fallout’

Binance Finalizing BUSD Phase Out with New Range of TUSD Pairs

This article is for information purposes only and should not be considered trading or investment advice. Nothing herein shall be construed as financial, legal, or tax advice. Trading forex, cryptocurrencies, and CFDs pose a considerable risk of loss.

Author
David Marsanic

David Marsanic is a journalist for DailyCoin who covers the intersection of crypto, traditional finance, and government. He focuses on institutionalized crypto entities like major cryptocurrency exchanges and Solana, breaking down complex topics into easy-to-understand writing. David's prior experience as a business journalist at various crypto and traditional news sites has enabled him to maintain a critical approach to news while adhering to high journalistic integrity standards.