The cryptocurrency market is currently experiencing an explosion of growth quite unlike anything it has seen before. Thanks to the rise in asset prices that started last year and has sustained into 2021, more attention has been put on the industry and its major players.
Regulatory bodies are watching crypto companies now, more than ever before as well, intending to ensure that these organizations maintain best practices and conduct themselves in a way that promotes investor safety. That has led to a flurry of inquiries, and some of the top crypto firms haven't been left out of this.
The CFTC on Binance's Trail
This month, Binance, the world's largest crypto exchange by trading volume, became the latest company to be embroiled in a possible investigation. Last week, Bloomberg reported that the United States Commodity Futures Trading Commission (CFTC) had opened an investigation into the exchange over potential trades made from accounts in the country.
According to the report, the financial regulator is investigating Binance Holdings Ltd. over derivatives trades from American customers after a tip from an anonymous source. While the CFTC didn't accuse the exchange of any wrongdoing, it reportedly opened a case file on the exchange to determine whether there is any veracity to the accusations.
Binance and the U.S. Authorities
Binance has had a relatively rough relationship with the United States. The exchange announced in 2019 that it would block U.S. customers from its main platform as part of efforts to stay regulatory-compliant in the country and maintain its operations. Weeks later, it launched Binance U.S., it’s America-facing platform, and encouraged users in the country to conduct their operations through there.
Binance U.S. still works to this day, and it is a fully compliant platform that has had to get licenses from several jurisdictions. The platform provides several services that users would get from the leading Binance service, although its lesser liquidity could account for why users might prefer to use the latter.
Things have become even dicier as of recent, with Forbes reporting that Changpeng "CZ" Zhao, Binance's chief executive, has been encouraging customers to evade regulatory checks. As Forbes reported, a leaked document from 2018 showed Binance's plans to create a phony U.S.-based entity that would show fake interest in regulatory compliance. However, measures will be implemented to move revenues from the entity into Binance itself.
The document showed that Binance planned to encourage users to employ virtual private networks (VPNs) - software designed to obscure and change traders' locations - to avoid sanctions from regulators. Zhao himself has encouraged traders to use VPNs to evade trading restrictions on several occasions.
Interestingly, Binance sued Forbes and its writers for that article. However, the exchange dropped the suit last month, providing no explanation for the action.
The CFTC Doesn't Joke About
With all the evidence mounting, it is no surprise that the CFTC will open an investigation into Binance and its operations. The agency has been ruthless in its targeting of crypto firms that break the rules, with its case against top derivatives trading platform BitMEX being fresh in crypto enthusiasts' minds.
In October 2020, the CFTC filed a complaint against BitMEX, alleging that the exchange had been operating in the United States for years despite not having the license to do so. The regulatory watchdog added that BitMEX had executed over $1 trillion in trades in the U.S. illegally since it was founded, and that the company has been providing excessive leverage to users, allowing them to make reckless bets on their funds.
The case between the CFTC and BitMEX is still ongoing. The exchange has improved its regulatory compliance and internal control measures over the past few weeks. However, whether its efforts will sway the CFTC in its favor and influence the agency to allow compassion is still the question. Most experts believe that this won't be the case.
Binance on the Defensive
It is unclear whether the CFTC will follow through and open a full-scale investigation into Binance. The exchange is one of the most recognizable names in crypto, and a fault in the company will be catastrophic, to say the least. However, Binance isn't taking chances. A spokesperson for the company told news reports that they would refrain from commenting on communications with regulators and take their compliance measures very seriously.
Days later, Zhao addressed the rumors himself, explaining that they were baseless and "had no teeth." in a live Ask Me Anything (AMA) session on Clubhouse, Zhao said:
"This is a topic that just came up, literally like a few minutes ago or an hour ago. So number one, the news article said there was no, I don't have it in front of me, there was no "misconduct," I have to dig it up. So number one, there was no report of misconduct from Binance, so the report kind of defeated itself."
Zhao reiterated Binance's policy of not commenting on communications with regulators, explaining that he would say little about the current issue. However, he pointed out that an investigation doesn't necessarily translate to the CFTS trying to charge Binance. In fact, the Bloomberg report could have simply been an acknowledgment that Binance and the CFTC had engaged in routine communication.
There is still little information about this case to know where it is headed. However, the crypto industry will want to keep an eye out for it to know its outcome.