After it was announced that the U.S. Securities and Exchange Commission (SEC) is taking legal action against Binance, the CEO of the world’s largest cryptocurrency exchange, Changpeng Zhao (also known as CZ), resorted to his usual tactic: tweeting.
CZ’s first tweet simply contained the number “4,” which he posted around the same time SEC Chair Gary Gensler was likely preparing for TV interviews.
This might seem puzzling to most of us, but for many of CZ’s 8 million followers, the tweet was a message, a joke, and an attempt to reassure them, as they had heard similar statements before. In CZ’s own words, “4” means “ignore fear, uncertainty, doubt, fake news, attacks, and so on.”
The term FUD stands for fear, uncertainty, and doubt, which is a well-known acronym in the cryptocurrency world.
It’s noteworthy that regulatory actions against cryptocurrencies have become so common that one of the industry’s most influential figures can respond with a rehearsed answer.
Additionally, CZ’s tweet indicated that Binance’s approach to regulation will likely remain unchanged, even though it is now being sued by two major U.S. financial watchdogs. And indeed, that has largely been the case.
Since the lawsuit was announced (during which the SEC also sued rival U.S.-based exchange Coinbase), Binance has adhered to its longstanding talking points: the SEC is wrong to regulate through enforcement; customer funds have always been and continue to be safe; and the exchange’s previous attempts to “comply” were hindered by an uncooperative SEC.
“While we take the SEC’s allegations seriously, we believe they should not be the basis for immediate SEC enforcement action. We are fully committed to defending our platform,” stated Binance.
However, there are some differences this time. First, the company appointed Richard Teng, the former top regulator in Singapore, as the new “head of regional markets.”
He will oversee the exchange’s operations in Asia, Europe, the Middle East, and all other regions except the U.S. Many cryptocurrency strategists have praised this move as a smart public relations strategy, as it may have helped Binance mitigate the impact of the SEC’s lawsuit, which would have otherwise dominated public discussions.”
“Another important development is that Binance.US, which operates independently within the United States, is facing a significant concern regarding its ability to function.
The SEC has requested to “temporarily restrain” its assets, and as a result, Binance.US is already removing numerous tokens from its platform. This action is likely to reduce trading volumes that were not genuine.
So, the big question is whether Binance can continue its operations as usual and whether it can remain a viable business in the long run.
This question may seem strange, especially considering the seriousness of the allegations in the SEC’s lawsuit.
In addition to the typical complaint of operating without the required license, which Coinbase also faces, Binance and its CEO CZ have been accused of endangering customer funds, allowing or even facilitating wash trading on Binance.US, inappropriately moving customer funds without consent, and other problematic issues.
In simple terms, Binance’s legal troubles are more severe compared to those of Coinbase.
The charges are not only related to whether Binance’s listings are unregistered securities, but also revolve around allegations of misleading customers about how their funds were being used.
Moreover, it is alleged that Binance encouraged U.S. citizens to trade on a non-U.S.-based platform that they were not supposed to have access to.
Naturally, Binance’s reputation was already suffering. Two months ago, the U.S. Commodities Futures Trading Commission (CFTC) filed a lawsuit against the exchange for operating without proper licenses and offering inappropriate financial products to U.S. consumers.
The lawsuit revealed leaked documents and internal conversations that portrayed Binance as an organization that was sometimes laughably incompetent and at other times a ruthless competitor that jeopardized customer funds in pursuit of growth.
Experts are now seriously questioning whether the Binance brand can survive. It’s important to note that the worst may not be over yet.
Binance is currently facing two civil lawsuits, and it is also under pressure from the U.S. Department of Justice (DOJ), which could initiate a criminal investigation.
If successful, this investigation could potentially result in the imprisonment of Binance executives. When asked if just the SEC’s lawsuit could lead to Binance shutting down, securities lawyer and conceptual artist Brian Frye stated that it is a very real possibility.”
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“If the SEC succeeds in the lawsuit against Binance, which is expected to continue even after SEC Chair Gensler’s term ends, it could impose significant fines on the exchange.
It could also restrict or weaken important aspects of Binance’s operations, such as regulating its in-house BNB token and subjecting it to strict oversight. Additionally, the SEC could permanently bar CZ from operating the exchange or being involved in a financial firm.
Furthermore, if the SEC’s claim that Binance.US is putting $2.2 billion of funds from U.S.-based clients at significant risk is proven true, those funds could be confiscated if they are connected to illegal activities.
The SEC has broad authority to demand companies to cease certain activities and prohibit them from dealing with securities.
This is concerning because Gensler considers almost all cryptocurrencies, except Bitcoin, to be securities. Even worse, the SEC Enforcement Division, as indicated in its recent court filings, seems to agree with Gensler.
It has been willing to target all of the top 10 tokens, except for Bitcoin (BTC) and Ether (ETH), which is bad news for any exchange that wants to offer trading beyond Bitcoin and has U.S. customers.
However, dear reader, we won’t dwell on doom and gloom here. While a significant amount of money has been withdrawn from Binance, it’s important to note that it’s not a situation like what happened with FTX, where the funds simply weren’t there.
Binance’s auditor had warned the company about mixing funds as early as 2019, but it appears that the funds were at least kept safe, even if mislabeled.
Binance has publicly denied commingling customer deposits and company funds, and it’s still unclear what Binance shell companies connected to CZ, such as Merit Park and Key Vision Development Limited, were doing with the funds.
Speaking on the “Unchained” podcast, Tarun Chitra, the CEO of Gauntlet, suggested that the outflow of funds from Binance has been slow because global users, including average hodlers in places like Chile or Abu Dhabi, are not particularly concerned about what’s happening with Binance and its situation in the U.S. For many people,
Binance is considered the most reliable option among crypto exchanges, which is why it has become the largest one by a significant margin.
The allegations against the company and its CEO are serious, but that doesn’t mean people suddenly trust their small, domestic crypto exchanges anymore than before.”
“Do average cryptocurrency users really care about Binance using shady tactics to attract ‘Crypto Whales’ or recommending high-net-worth clients to use VPNs to bypass firewalls for trading on the exchange? Probably not.
In fact, they might find it amusing. Despite the CFTC finding evidence that a significant portion of Binance’s revenue came from U.S. customers it wasn’t supposed to serve, the exchange still boasts a massive global user base.
One could argue that if the allegations against Binance are true, a boycott would be justified. CZ, the CEO of Binance, is accused of enriching himself personally at the expense of his users (at one point during the recent bull market, CZ’s net worth was rumored to exceed that of Elon Musk).
However, trust in the crypto industry is measured differently compared to traditional finance.
While banks used to rely on imposing, solid headquarters to convey stability and long-term commitment, trust in crypto is more fleeting.
Binance gained popularity because it offered the tokens people wanted to trade and appeared to be resistant to hacks.
Jake Chervinsky, the CEO of the Blockchain Association, suggests that Coinbase could still avoid registering as a securities exchange even if it loses the SEC lawsuit.
Instead, it would continue its practice of delisting tokens that are proven to be securities, as it has done since a former Coinbase executive was involved in insider trading.
Willkie Farr & Gallagher’s Michael Lewis also echoes this sentiment, stating that it is unlikely for the current situation to result in laws or regulations that effectively ban cryptocurrencies in the United States.
Similarly, Binance may have to delist certain tokens, which would impact its revenue, and it might lose its founder/CEO as a prominent figurehead and trusted voice of the exchange (although CZ would likely remain a majority shareholder).
The exchange might be compelled to implement costly controls that could deter potential users. Binance.US could face an uncertain future (although it appears to have had low usage anyway).
It is even possible that the combined fines from the SEC and CFTC could lead to the bankruptcy of the company, and U.S. Senators like Liz Warren may push the DOJ to intervene.
In a way, Binance has surpassed its original scope. If its worst offense was manipulating the trading volume of virtual currencies, users might be willing to forgive it.
However, this depends on various factors. Binance is now a target of the SEC’s ire, as the regulatory body attempted to enforce U.S. laws on an exchange without a physical headquarters within the country’s jurisdiction.
This situation may force the company to comply with regulations it should have followed from the beginning. Nevertheless, there is a dedicated community that shares CZ’s perspective and is willing to ‘ignore fake news, uncertainty, and doubt.’ So, here’s another four words to consider: you can’t kill an idea.”
In conclusion, the allegations and legal challenges faced by Binance have put the exchange’s future and reputation at stake.
While there may be concerns about the actions and practices of Binance, it is clear that trust in the crypto industry operates on a different level compared to traditional finance.
The outcome of the SEC lawsuit and potential regulatory actions will significantly impact Binance’s operations and could lead to the delisting of tokens, financial penalties, and potential bankruptcy.
However, Binance still enjoys a large and loyal user base, and the resiliency of the crypto community should not be underestimated. The ultimate fate of Binance will depend on how it addresses the allegations, implements necessary controls, and rebuilds trust among its users.
Samridhi holds a Bachelor’s degree in Economics. Her research interests lie in examining the intersection of the social sector with poverty and inequality,
Along with this she is keen in understanding the systemic and structural issues that governs growth and development with an interdisciplinary focus.