Published: March 15th, 2021
The U.S. agency in charge of derivatives market is investigating Binance, a leading cryptocurrency exchange, to establish if it allowed U.S. residents to trade virtual currency. However, no wrongdoing has been preferred on the exchange.
The world's largest cryptocurrency exchange, Binance Holdings Ltd., is under investigation by the Commodity Futures Trading Commission (CFTC), an independent agency that regulates the country's derivatives market, to determine if it allowed U.S. residents to buy derivatives.
The agency has concerns that Binance allowed Americans to place wagers on derivatives, violating the country's rules. According to individuals close to the matter, the CFTC wants to establish if the exchange, which is not registered with the agency, allowed U.S. residents to trade in derivatives that the agency monitors.
The sources who asked to speak to the press on the condition of anonymity because of the confidential nature of the inquest added that the Singapore-based exchange, which lacks a corporate headquarter, had not been accused of any misconduct. The investigations might not end up in enforcement action.
The probe is the latest indication that the market overseer wants to trim the crypto industry's hopes of becoming the alternative to mainstream investment options for U.S. investors. According to the CFTC, virtual currencies such as Bitcoin and Ether are commodities, and their futures and other derivatives fall under the agency's jurisdiction.
The rule implies that crypto platforms must abide by strict customer protection and oversight demands if residents of the U.S. trade them. This regulation applies regardless of the location of the crypto exchange.
On Friday, March 12, Changpeng Zhao, the CEO and co-founder of Binance, said that his company closely follows and respects U.S. regulations. He added that the exchange has robust control systems that prevent customers from laundering money. However, he refused to confirm if the CFTC was probing his firm.
Zhao, who spoke to the press in an event hosted on the social media platform Clubhouse, said Binance would continue to improve its compliance. He added that the exchange would work closely with regulators worldwide to improve the industry's compliance standards.
In an earlier statement, the exchange reiterated that it sieves U.S. residents from its trading platform and applies advanced technology to scrutinize deposits and withdrawals for any signs of untoward transactions. Binance respects its compliance obligations, the statement added.
The CFTC was reached for comment but declined to confirm if they are probing the mammoth exchange. Bitcoin price dropped after the media reported the news of Binance's investigation. The coin lost 2% to trade at $56,420.45 on Friday, March 12, at 10:42 a.m. EST.
The CFTC investigation adds to the U.S.'s increasing crackdown on virtual currencies. The agency has already sued BitMEX for flouting the broker registration process. As a result, the exchange has seen its market share decline since the agency's keen eye fell on it.
Coinbase Global Inc., the biggest U.S.-based crypto exchange, also announced in February that it had responded to a sweeping CFTC investigation. Elsewhere, the Treasure Department is contemplating introducing new regulations that will require banks to record the identities of individuals who invest in cryptocurrencies.
Advocates of the move argue that the move would curtail money laundering and other related illegal activities. However, crypto enthusiasts and holders think such a regulation would undermine virtual currencies' key characteristics: the ability to send or receive value without an intermediary's towering shoulder.
Binance has become the poster boy of virtual currencies' breakneck rise. A legal or enforcement action against the exchange would be the most significant CFTC case targeting cryptocurrencies. Such a move would seem like a vindication against crypto enthusiasts like Zhao.
The Binance CEO regularly touts cryptocurrencies as an asset class on social media and television, adding that they are the reason he is a billionaire.
In 2019, the crypto exchange set up Binance U.S., a San Francisco-based entity. The CEO said that Binance U.S. is an autonomous establishment targeting U.S. residents only. He added that the California-based exchange is registered with the
Financial Crimes Enforcement Network (FinCEN) of the U.S. Treasury Department and has several state licenses.
Despite having a subsidiary targeting U.S. residents, Zhao said he could not shake off the feeling that improper trades often slip through the cracks. He said that Binance blocks U.S. residents from accessing the site. However, he admitted that users often find intelligent means of beating such restrictions.
The CEO said it is time the exchange got smarter about its geographic limitation strategies.
The surge in Bitcoin price past $50,000 has been a blessing for cryptocurrency exchanges. Most of the firms are bringing in new users a lot faster than before. Binance has seen its registration of new users increase by more than 300,000 accounts daily, a lot more than the previous peak recorded in 2017.
Unfortunately, any spontaneous and meteoric growth tends to attract the attention of U.S. regulatory agencies. Such agencies are worried about money laundering, illegal trading, price manipulation, and violations of sanctions. However, they hardly look at situations comprehensively, Zhao said.
In October 2020, the CFTC charged BitMEX, a Seychelles-based crypto exchange, alleging that it allowed American residents to trade crypto derivatives when it did not have the requisite brokerage licensing. The Justice Department charged the exchange's founders with separate crimes that included violating laws that prevent money laundering.
Preferring BitMEX-like charges on Binance will be a tough sell because the exchange has an unusual corporate structure. The CEO said that unlike most companies, his organization consists of several entities located around the world.
The structure has irked competitors. In the documents presented before the panel examining the process of going public, Coinbase said it is competing with companies with varying degrees of regulatory adherence.
The CFTC is allegedly probing Binance for allowing American residents to trade derivatives on the site. According to individuals close to the probe, the agency has not preferred any wrongdoing, and the inquest might not end up in an enforcement action.