The largest crypto exchange, Binance, is under investigation from the U.S. Commodity Futures Trading Commission (CFTC). The regulator might be scrutinizing Binance for allowing United States (U.S.) residents to trade cryptocurrency derivatives.

According to Bloomberg’s report, an anonymous source revealed the CFTC is investigating whether Binance has violated US law.

The CFTC is a governmental agency that regulates the U.S. derivatives markets, including futures, swaps and certain kinds of options. Binance is officially not registered with the CFTC, meaning that its crypto derivatives-related operations are under the radar of CFTC.

Binance has not commented on the topic, although its CEO Changpeng Zhao supposedly called the investigation a FUD (fear, uncertainty and doubt) on Twitter.

Binance and the U.S.

One of the biggest crypto exchanges has a complicated history in dealing with U.S. clients.

Back in 2019 the crypto exchange warned U.S. passport holders of upcoming restrictions, including potential blocks to crypto trading services. As Binance explained in its official statement, the move was related to its updated terms and conditions that could leave the exchange unable to provide services for U.S. passport holders.

In the same year Binance opened its American branch, Binance U.S., signalling its first formal entry into the U.S. market. The affiliate exchange listed fewer cryptocurrencies and trading pairs, and has never allowed crypto derivatives trading. It was also registered with the Financial Crimes Enforcement Network (FinCEN). However, American passport holders were still able to set up an account on Binance global platform by hiding their IPs and confirming they are not Americans when registering.

In 2020, an article published in Forbes claimed that Binance used smoke-screen tactics to deceive regulators and benefit from American users. The magazine ran a story based on leaked documents from 2018, which revealed the strategic scheme for using an anonymous U.S.-based company known as “Tai Chi” to distract regulators and move revenue to Binance. According to Forbes the leaked documents indicated “Tai Chi” appeared to be Binance U.S.

Binance filed a lawsuit against Forbes and its journalist for defamation, however, voluntarily dropped its allegations after three months, without explanation.

Hiring a Former U.S. Senator

A day before the news of the CFTC investigation came out, former U.S. Senator and ambassador to China Max Baucus joined the Binance team as a Policy and Government Relations Advisor.

According to the official announcement, Binance hired Mr Baucus to “provide high-level guidance on the organization’s government and regulatory efforts including building strong relations with U.S. authorities and regulators.”

On the Flipside

• Critics oppose regulations that destroy the privacy of cryptocurrency users and increase financial surveillance.
• Unregulated exchanges are not obliged to apply Know Your Customer (KYC) measures and anti-money laundering policies.
• Binance, Huobi, OKEx, BitMEX are the largest crypto derivatives exchanges, controlling over 70% of the market.
• Transaction volumes of the crypto derivatives market surpassed $2.7 trillion in Q3 2020, says TokenInsights.
• Derivatives create an exposure to underlying assets without owning them, improve market liquidity and are critically important in financial markets.

Tightening regulations

The CFTC’s latest move on Binance could signify tightening regulations on the cryptocurrency industry. A year ago, the CFTC filed charges on BitMEX trading platform for illegal crypto derivative trading and anti-money laundering violations. Accordingly, one of the biggest crypto exchanges, Coinbase, suspended its crypto margin trading in response to new CFTC rules that apply to any cryptocurrency exchange dealing with crypto derivatives.

The CFTC is currently the main regulator on the crypto-derivatives market in the U.S. Last year, former Congressman Michael Conaway (R-Texas) proposed a bill in which the CFTC would become the federal regulator of all cryptocurrency exchanges based in the U.S.

Currently, the regulations on digital assets vary across states. Multiple institutions, including the Department of Treasury, Securities and Exchange Commission (SEC), Internal Revenue Service (IRS) and Financial Crimes and Enforcement Network (FinCEN) have individualised stances on crypto regulations.

With the increased interest from more traditional institutional investors, the entire cryptocurrency landscape shifted last year. Giant investments in digital assets created more confidence and highlighted the need for legitimate, regulated environments where risk can be managed and better protected.