The head of the US derivatives watchdog said the lawsuit against Binance is probably his “most significant” cryptocurrency case to date, setting up a make-or-break contest with ramifications for the crypto market and Washington.
The lawsuit, announced on Monday, has set the Commodity Futures Trading Commission, one of the US’s smaller federal regulators, against Binance, the world’s largest crypto exchange.
A win for the CFTC would be a boon for the agency’s standing as a top US crypto cop, which has suffered from perceptions it was too lenient with Binance’s collapsed rival FTX, while sending a clear message to digital asset platforms that attempt to circumvent federal rules.
“The stakes are extremely high given the scope of [the Binance complaint],” said Kevin Werbach, professor at the Wharton School of the University of Pennsylvania.
“If the CFTC succeeds in getting the relief that they are seeking, which is effectively to shut down . . . the biggest actor in this space, then that would be tremendously significant.” A loss, however, would be a “pretty strong indictment of the US regulatory environment generally”, he added.
The CFTC’s 74-page complaint alleged Binance had, since its launch in 2017, sought out US customers and prioritised “commercial success over compliance with US law”.
“There’s a clear recognition that depending on the outcomes of the case, this will have a different level of impact on markets because of the size of Binance and its reach across the globe,” CFTC chair Rostin Behnam told the Financial Times.
He described the lawsuit as “likely the most significant case we’ve brought” since his appointment at the start of last year.
The CFTC alleges Binance encouraged customers to skirt compliance controls via measures such as using virtual private networks, and was accommodating of the exchange’s biggest, most active and most lucrative traders, like high speed traders in Chicago and New York.
The case also included allegations that Binance warned its most important customers of any impending law enforcement action.
The regulator estimated that Binance made $1.1bn in revenue from derivatives deals in May 2021 alone, with a substantial proportion coming from the US.
The CFTC is seeking permanent injunctions against Binance to stop it from ever working with US-based customers, even if the customer is trading through an offshore account. And it wants Binance to hand over all benefits received, such as trading profits.
Binance said it does “not agree with the characterisation of many of the issues alleged in the complaint”.
Experts said it would not be unusual for additional legal action to arise from the Binance complaint. Behnam did not exclude that further action may stem from the Binance probe, without elaborating further.
One US regulatory expert said the lawsuit “feeds into the narrative of foreign exchanges using US businesses to cover for what they are really doing, which is funnelling US business into their unregistered, foreign exchanges.” Binance says its US affiliate is operationally independent from the group.
For the CFTC, the case also represents an opportunity to assert its credentials after widespread accusations the agency has been too close to the crypto industry and slow to prosecute wrongdoing, even though it secured a $100mn settlement with another crypto exchange, BitMex, in 2021.
Those criticisms reached a peak after the failure of the FTX crypto exchange in November; founder Sam Bankman-Fried had held many meetings with the CFTC and been pictured lobbying its commissioners in Washington. FTX had sought the agency’s approval to automate risk management of crypto derivatives. The heavy lobbying strengthened the perception that the CFTC was the crypto market’s preferred regulator.
“The idea that we were supportive of FTX is just incorrect because we didn’t approve what they requested,” Behnam said.
Its much larger sister agency, the Securities and Exchange Commission, did not receive the same criticisms. Its chair, Gary Gensler, had earned a reputation as a hard-charging Washington regulator, and had crypto as his next target. After months of warnings the SEC has initiated a series of cases on companies, executives and even celebrities like Kim Kardashian.
“The perspective, whether fair or not, after FTX collapsed was that the CFTC had been too supportive of Bankman-Fried while the SEC remained wary,” said Charley Cooper, former chief of staff at the CFTC. “That crisis reset the terms of the debate and strengthened the SEC’s hand in claiming they are the more forceful, diligent regulator.”
“Now what does Benham do? He can’t go back to [Congress] and convince them behind the scenes that the CFTC is the way to go. He has to rebuild trust through the Gary Gensler route: regulating through enforcement and looking to make a territory grab by filing a major lawsuit,” one former CFTC official said.
Charles Whitehead, professor of business law at Cornell Law School, argued the deeply detailed Binance lawsuit makes it “pretty clear . . . that the CFTC is going to be just as focused on investor protection as the SEC has been”.
The CFTC chair insisted there is “no turf war” with the SEC. The suit is “further proof that the CFTC oversees an extremely important market and that we are ready to tackle this market if we’re given additional authority”, Behnam said.
But ultimately, Washington politics may a sideshow when authorities are presented with pages of hard evidence of potential federal law violations.
Based on the regulator’s allegations, Binance appears to be a “massive player essentially ignoring US law”, Werbach said. “If any big player can simply not officially locate in the US and then ignore all of those rules . . . then something is broken.”
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