In recent months, one of the world’s largest cryptocurrency exchanges, Binance, has faced increasing scrutiny from regulatory bodies worldwide. However, the most significant challenge to date comes from the United States Securities and Exchange Commission (SEC), so the question is, can Binance survive its charges?
Following the announcement of the U.S. Securities and Exchange Commission (SEC) filing a lawsuit against Binance, the CEO of the renowned cryptocurrency exchange, Changpeng Zhao (CZ), resorted to a familiar tactic – taking to Twitter. CZ’s initial communication on the platform consisted of a single tweet containing the numeral “4,” coinciding with SEC Chair Gary Gensler likely preparing for a series of television interviews.
The tweet, which might perplex many of us, held a deeper meaning for the numerous followers among CZ’s 8 million Twitter audience. It served as a message, a playful jest, and an attempt to provide reassurance—an expression that resonated with them, reminiscent of previous instances.
CZ’s Tweet: A Symbolic Response to Regulatory Challenges
According to CZ himself, the number “4” symbolizes the idea of disregarding fear, uncertainty, doubt (FUD), fake news, and various attacks. FUD is a widely recognized acronym within the cryptocurrency community. It is noteworthy that regulatory challenges in the crypto space have become so frequent that a prominent figure in the industry can provide a routine response.
Remaining steadfast in its stance, Binance has continued to adhere to its well-established narratives amidst the aftermath of the lawsuit’s announcement. During this period, which coincided with the SEC also suing rival U.S.-based exchange Coinbase, Binance reiterated their familiar talking points: criticizing the SEC for enforcing regulations in an erroneous manner, emphasizing the safety of customer funds, and attributing the lack of successful compliance efforts to the uncooperative nature of the SEC.
Binance asserted, “Although we acknowledge the gravity of the SEC’s allegations, we firmly believe that they should not warrant immediate enforcement action, let alone on an urgent basis. We are fully committed to robustly defending our platform.”
Strategic Response: Appointing Richard Teng and Shaping the Narrative
Undeniably, certain aspects have undergone changes during this particular episode. Notably, Binance appointed Richard Teng, the former chief regulator in Singapore, as the “head of regional markets.” Teng’s responsibilities encompass overseeing the exchange’s operations across Asia, Europe, the Middle East, and all other regions except the United States. Many crypto strategists have lauded this decision as a shrewd public relations move, as it potentially assisted in mitigating the otherwise overwhelming impact of the SEC’s charges, which would have otherwise monopolized the overall narrative.
Additionally, Binance.US, the ostensibly independent U.S. branch of the exchange, is currently grappling with a significant operational challenge. The SEC has sought to impose a “temporary restraint” on its assets, raising legitimate concerns about its ability to continue functioning. The exchange has already initiated a substantial delisting of tokens, which is likely to impact trading volumes that were not artificially inflated. Hence, it is important to ask whether Binance would be able to survive the SEC charges?
The Weight of Allegations: Serious Charges Against Binance and CZ
The question at hand may seem peculiar, considering the gravity of the allegations outlined in the SEC’s lawsuit. Going beyond the typical accusation of operating without the necessary license, which Coinbase also faces, Binance and CZ have been implicated in more severe charges. These include allegations of compromising customer funds, potentially enabling or facilitating wash trading on Binance.US, unauthorized movement of customer funds, and a range of other concerns.
Distinguishing Binance’s legal woes from those of Coinbase, the charges against Binance occupy a higher level of severity. The allegations go beyond the mere question of unregistered securities listings and delve into concerns regarding the potential misleading of customers regarding fund deployment.
Undoubtedly, Binance’s reputation had already suffered a blow. This was evident two months ago when the U.S. Commodities Futures Trading Commission (CFTC) filed a lawsuit against the exchange, alleging improper licensing and the provision of unsuitable financial products to U.S. consumers. During the legal proceedings, leaked documents and internal conversations were disclosed, portraying Binance as a company that displayed elements of comedic ineptitude at times while also exhibiting a cut-throat competitive nature that jeopardized customer funds in pursuit of growth on other occasions.
Binance’s Existential Threat: Multiple Lawsuits and Potential Criminal Investigation
Prominent experts are now raising legitimate concerns about the survival of the Binance brand. It is crucial to note that the worst may not be over yet. Presently, Binance confronts two civil lawsuits while also facing pressure from the U.S. Department of Justice (DOJ), which has the potential to initiate a criminal investigation. If such an investigation were to succeed, it could potentially result in the imprisonment of one or more Binance executives.
In the event that the SEC emerges victorious in the case, which is widely expected to extend beyond Gensler’s term as SEC Chair, significant repercussions could befall Binance. These consequences may include imposing substantial fines on the exchange, curbing or diminishing key aspects of Binance’s operations (such as subjecting its in-house BNB token to stringent oversight and labelling), and permanently banning CZ from operating the exchange or engaging in any financial activities. Notably, the SEC alleges that Binance.US, responsible for safeguarding approximately $2.2 billion of funds held by presumably U.S.-based clients, places these funds “at significant risk.”
The SEC possesses significant discretionary power to issue “cease and desist” orders, prohibiting firms from engaging in certain activities and dealing with securities. This prospect becomes concerning when considering Gensler’s perspective that, apart from Bitcoin, most cryptocurrencies should be classified as securities.
Insights on User Outflows and Trust in Binance
During his appearance on the “Unchained” podcast, Tarun Chitra, the CEO of Gauntlet, highlighted that the outflow of funds from Binance has been relatively slow. Chitra suggested that users worldwide, including typical holders in places like Chile or Abu Dhabi, are not particularly concerned about the ongoing developments surrounding Binance and its situation with the U.S. regulatory authorities. For many individuals, Binance continues to be perceived as the most reliable option among cryptocurrency exchanges, which explains its significant growth and dominant position in the market.
According to Jake Chervinsky, CEO of the Blockchain Association, Coinbase has a potential route where it may not be required to register as a securities exchange, even if it loses the SEC lawsuit. Instead, it could continue its practice of delisting tokens that are proven to be securities, as it has done since a former Coinbase executive faced insider trading charges. Michael Lewis supports this viewpoint from Willkie Farr & Gallagher, who believes that it is unlikely for the current situation to lead to laws or regulations that effectively prohibit cryptocurrency assets in the United States.
The Uncertain Future of Binance
Binance may also face token delistings, impacting its revenues, and there is a possibility of losing its founder and CEO as the public face of the exchange (although he may still remain a majority shareholder). The exchange might be compelled to implement cost controls that could help it survive. Binance.US, which had limited usage, to begin with, could be destined for failure. The combined fines from the SEC and CFTC could potentially bankrupt the company, and influential figures like Senator Liz Warren could push the DOJ to intervene.
In a peculiar sense, Binance has surpassed its original context. If its worst offence was artificially inflating the trading volume of digital currencies, users might be inclined to forgive it. However, this forgiveness is contingent on various factors. Binance has now become a target for the SEC’s retribution, as it attempted to subject an exchange without a physical presence within the United States to its jurisdiction. As a result, the company may be compelled to adhere to laws it should have been following all along.
In conclusion, Binance finds itself in a precarious position as it faces legal challenges and regulatory scrutiny and is trying to survive. The accusations against the exchange and its CEO are serious, ranging from endangering customer funds to facilitating illicit activities. The SEC’s lawsuit and potential fines, along with the possibility of a criminal investigation, pose significant threats to Binance’s future. Delisting tokens, implementing costly controls, and the potential bankruptcy of the firm are all potential outcomes. While some users may remain loyal, Binance’s reputation has been tarnished, and its survival as a trusted brand remains uncertain in the face of mounting legal and regulatory pressures.