Ever since the collapse of Terra project and FTX, the crypto industry has been subjected to a broader and heightened scrutiny by authorities across the globe. Certainly, one of those countries that has been at the forefront of the high-profile crackdown on crypto firms is the US. Over time, prosecutors in the country have been on the neck of crypto firms, like Ripples, Binance and others, dragging them for alleged illegal offerings and failure to adhere to laws guiding their services. A good example is the lingering lawsuit between the US regulator (SEC) and XRP. The regulator accused the XRP team of amassing $1.3 billion from illegal offerings. Worthy of note that this saga birthed arguments about whether crypto offerings can be regarded as securities or not. Unfortunately, the lawsuit has been ongoing for the past two years now, with no major headway in sight.
Background to the lawsuit between Binance and CFTC
The aforementioned lawsuit is just one of the many currently greeting the industry. However, the purpose of this article is to analyze the latest one, involving Binance, a foremost crypto exchange and the U.S. Commodity Futures Trading Commission (CFTC). According to findings, the CFTC conducts oversights on commodities and derivatives markets, including for Bitcoin.
Recall that the agency sued Binance earlier this week, alleging that the latter operates an “illegal” exchange and a “sham” compliance program. In the lawsuit, CFTC charged the CEO of the exchange, Changpeng Zhao and a former Binance compliance executive, Samuel Lim with “willful evasion” of the US law. According to the agency, the individuals engaged in a “calculated strategy of regulatory arbitrage to their commercial benefit.” CFTC alleged that Zhao instructed the employees and customers of the exchange to compromise compliance measures, citing numerous Reuters reports.
Investigations by Reuters into Binance compliance policies
Earlier, the media outfit had conducted a series of investigations about the compliance policies of the exchange. Upon completion of its investigation last year, Reuters claimed Zhao instructed employees in Binance US subsidiary to register users without conducting any money laundering checks. The investigations by Reuters manifested amidst the probe of Binance by the Justice Department over possible violation of Bank Secrecy Act. Recall that the act mandates crypto firms to register with the Treasury Department and as well adhere to all anti-money laundering laws in the country.
Various investigations by Reuters also claimed Binance processed about $10 billion for criminals aiming to evade U.S. sanctions. Now, the CFTC is banking on the investigations to accuse Binance of promoting money laundering. The agency also claimed the exchange offered commodity derivatives transactions on behalf of US residents in contravention to the laws. Although Binance announced its restrictions of U.S. customers from trading on its platform amid ongoing regulatory crisis. CFTC alleged that the exchange subtly taught many of its VIP customers in the country on how to evade its compliance mechanism. The agency, in its filing, admonished the US District Court to punish Binance with severe penalties like registration bans and so on.
Zhao’s response to the lawsuit and complaint by CFTC
However, in a reaction by Zhao, he described the complaint by CFTC as an incomplete recitation of facts. He claims many of the issues alleged in the complaint did not reflect the truth. The CEO boasted how Binance has continued to develop best-in-class technology to ensure compliance to regulations. According to CZ, the exchange was the first to execute a mandatory KYC program. He insisted that the exchange truly obeyed the then policy by blocking US users by nationality (KYC), IP (including commonly used VPN endpoints outside of the US), mobile carrier, device fingerprints, bank deposit and withdrawals, blockchain deposits and withdrawals, credit card bin numbers, and more.
Zhao added that Binance will continue to cooperate with regulators to foster transparency and compliance. At the moment, he claimed the exchange possesses over 750 professionals in its compliance team. More so, the CEO reflected on how Binance processed 55,000+ LE requests, and aided US LE freeze/seizure of more than $125 million in funds in 2022 and about $160 million so far in 2023.
It is noteworthy that following the initiation of the lawsuit against Binance, investors began to panic. According to a blockchain data tracker Nansen, the exchange recorded a massive increase in withdrawals a few hours after the news dominated the airspace. Since Monday, more than $1.6 billion have been withdrawn by investors as confirmed by Nansen.The native crypto of the platform, BNB also dipped by 4% amid the news of the lawsuit.
Implication of unclear crypto regulation
The lack of clear-cut regulation has clouded the future of the industry. Contradictory claims from the two prominent crypto regulator in the U.S. hasn’t helped the issue at all. The absence of regulatory clarity about cryptocurrency is slowing down the growth of the industry in the U.S. The growing confusion among regulators also extends to firms in the crypto space as they are devoid of what the future holds.Thus, hampering the mainstream adoption of crypto in the country.
The slow in growth of mainstream adoption of crypto in the U.S has affected other innovations in virtual payment. The absence of clear-cut regulation has cut off individuals and organizations from the privilege of enjoying seamless virtual payment gateways. The CFTC lawsuit against Binance has worsened the situation. As it is, crypto businesses in the U.S. will start looking elsewhere to pitch their tenth for a favorable atmosphere. This could possibly birth their exodus to other regions that are willing to let the industry strive under their watch.
Presently, the lawsuit against Binance points to the reality that the U.S. is intentionally giving away its position as a leading destination for the industry. With this push, the country is on the verge of suffering similar fate with China. Recall, that the People’s Bank of China banned cryptocurrency transactions in the country in September 2021. Now, the country is way behind to have a glimpse of how the market has grown outside its region since the ban.
Other emerging crypto hubs Binance and other exchanges can consider
The statement of the U.S. government is clear; crypto doesn’t have a place in the U.S. The U.S. government’s tireless efforts in shutting out crypto firms from its domain can force them to consider other countries. Presently, Hong Kong is proving to be the most accommodating region for the crypto space. The region has gained huge attention of late owing to its embracement of the indsutry.
In a recent statement by Hong Kong’s Financial Secreatry, crypto firms are aiming to venture into the region’s market of late. The secretary revealed how more than 80 firms have enquired about the regulatory criteria for virtual assets services in the region.
Meanwhile, the increasing attention on this region is a reflection of Hong Kong’s relaxed approach towards the industry. Parts of its efforts towards the growth of the industry in it region include a $6.3 million fund from the Hong Kong goverment for the Web3 space. Crypto exchanges will be jostling to have a business presence in the region. Other emerging crypto hubs that can aid the growth of top crypto firms like Binance are Dubai, Switzerland, Singapore, and the U.K.
The need for clear regulation
However, the introduction of clear-cut regulations in the U.S will not only benefit the industry. The U.S. for the sake of its citizen must consider introducing regulatory measures for the industry. First, it’ll clearly define the roles of regulators, investors, and businesses. Having regulations in place could have prevented the contradictory statement from the SEC and CFTC.
Also, clear regulation will protect investors against dubious projects. A proper regulation will keep crypto businesses on their toes towards ensuring that they champion the safety of users’ assets in their custody. Similarly, a good regulation will serve as a guide for crypto firms in maintaining good standards that are in conformity with the legal terrain of the country. With proper regulation in place, investors wouldn’t have become a victim of dubious projects like FTX.
Additionally, the prosperity of the crypto space occasioned by good regulation will as well help the U.S. Accordingly, it’ll provide citizens of the country more financial freedom. More so, it’ll attract more investment into the country. Another benefit the U.S. government could enjoy from the crypto industry is providing citizens with ways of making seamless payments. Top crypto firms like Binance have invented various innovations that can contribute to the advancement of digital payments.
The lawsuit from the CFTC against Binance has numerous negative impact. By now, the U.S. government should have no choice but to proffer proper regulation if it’s of good faith towards the industry. The divorce of the U.S. and the crypto marriage will have a negative toll on the former. The confusing atmosphere will only push crypto firms away from the U.S, much to the detriment of the country. Lastly, crypto enthusiasts should be bracing up for the departure of top crypto firms from the U.S.
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