Legal headaches are piling up for the world's largest crypto exchange.
See here: Federal regulators sued Binance on Monday, accusing the company of running an illegal exchange in the United States and mishandling billions of dollars' worth of customer funds.
The Securities and Exchange Commission, Wall Street's primary regulator, alleges the company acted in "blatant disregard" of US securities laws. It also named Binance's CEO Changpeng Zhao, picture above, as a defendant.
"Through 13 charges, we allege that Zhao and Binance entities engaged in an extensive web of deception, conflicts of interest, lack of disclosure, and calculated evasion of the law," said SEC Chair Gary Gensler.
The SEC also alleges that Zhao and Binance commingled customer assets and even diverted some to an entity controlled by Zhao.
(And, um, if any of that sounds vaguely familiar, you may be thinking of FTX, which was also a massive crypto platform accused of commingling funds and diverting them to a sister hedge fund as part of an elaborate scheme to defraud customers before it collapsed into bankruptcy ... Which is not to say that the two are the same, but if you're a big crypto firm you sure don't want the words "commingling funds" appearing in headlines next to your name right now.)
Just to pile on: The SEC also claims that Binance knew very well what it was doing. The complaint highlights an absolutely devastating remark from Binance's chief compliance officer, who bluntly admitted to a colleague in 2018: "We are operating as a fking unlicensed securities exchange in the USA bro."
A spokesperson for Binance said the company takes the SEC's allegations seriously, but it believes the agency's accusations are "unjustified."
"We respectfully disagree with the SEC's allegations that Binance operated as an unregistered securities exchange or illegally offered and sold securities," the company said in a statement. "Because of our size and global name recognition, Binance has found itself an easy target caught in the middle of a US regulatory tug-of-war."
Bitcoin, the world's most popular crypto asset and a bellwether for the broader digital asset industry, fell 6% Monday to $25,600.
Binance has long argued that it isn't subject to US laws because it doesn't have a physical headquarters in America. Zhao claims that the company's headquarters are wherever he is at any point in time, "reflecting a deliberate approach to attempt to avoid regulation," according to a separate complaint from the Commodity Futures Trading Commission.
Big picture
If you live in the United States, you're not allowed to trade crypto derivatives. Period. And if you're a non-US-based crypto firm, you can't let Americans trade those products without getting a license from the feds. Those are the rules.
But, like, it's pretty much an open secret that US investors are getting their hands on these things through back doors. American customers are estimated to make up 16% of the revenue for Binance's derivatives product, according to the CFTC's complaint.
All anyone needs is a VPN and an iron stomach, because crypto derivatives are leveraged bets on wildly unstable assets. (And like everything in this newsletter, that shouldn't be taken as any kind of advice.)
Still, none of this regulatory scrutiny is great news for Binance, or for crypto broadly. The industry is just over a decade old and has so far failed to make its case for widespread adoption while building a reputation as volatile, bro-y, and at times fraudulent.
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