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What will be the consequences of the lawsuit against Binance?

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As we have reported recently, the Commodity Futures Trading Commission, or CFTC, of the US has filed a lawsuit against Binance, the largest cryptocurrency exchange in the world, leaving it in a very unclear situation. It’s the most recent illustration of the greater federal scrutiny the sector has been subject to as a result of a spate of scandals in recent years. These recent actions of the US government against the crypto sector have been nicknamed “Operation Choke Point 2.0“, to decry what appears to be a systematic effort at attacking the industry.

In the case, which was brought on Monday, Binance is accused of deliberately evading US rules, including neglecting to register there and allowing Americans to trade cryptocurrency derivatives, which are not permitted for regular investors.

The CFTC complaint also alleges that through 300 “house accounts” directly or indirectly held by CZ and connected companies, the exchange was giving special treatment not only to VIP clients but also to itself. Binance declined to respond when the CFTC asked it how its accounts carried out their own private trading on the exchange.

The CFTC refrains from labeling this insider trading, but it does point out that none of the house accounts were monitored or subject to safeguards designed to prevent fraud or manipulation. The allegation also suggests that Binance staff members might not adhere by the “relatively new” insider trading regulation of the exchange.

In response, Changpeng Zhao, CEO of Binance, labeled the complaint “unexpected and disappointing” and an “incomplete recitation of facts.” He also refuted the claim that the exchange engages in profitable trading against its own clients. CZ mentioned that Binance worked cooperatively with the CFTC for more than two years.

Since then, platform users have withdrew $1.6 billion, a huge increase in withdrawals, and some experts point out that Binance’s reserves may be at risk.

What could this mean for Binance, as an entity, and for the crypto market overall? According to the popular YouTuber TechLead, this last action by the U.S. government likely spells eventual total disaster for the exchange and its founder. He compares CZ’s position to other crypto founders targeted by the authorities, such as TerraLuna’s Do Kwon or Three Arrow Capital’s co-founder Kyle Davies. In TechLead’s view, CZ is likely to become a fugitive as well, and the business would lose all of its customers and will eventually be forced to close down.

In Binance’s defense, TechLead thinks the actions of the U.S. government are unjustified, since they most of their accusations are aiming at the early years of the exchange, when there were no proper regulations nor guidelines. He notes that, in fact, Binance was one of the first exchanges to implement KYC verification, and that most of the allegations in CFTC’s lawsuit are based on spurious conclusions based on ambiguous intercepted internal communication, instead of clear evidence of intention to break the law.

He also notes that the U.S. is becoming draconian in its attempt to squash crypto firms, and that its government is trying to introduce a Bill, S.686, an overarching attempt which would greatly increase government surveillance and control in all areas of communication. The most likely consequence, if such measures are adopted, will be to drive the crypto sector outside of the U.S.

Other viewpoints on Binance’s prospects paint a rosier picture

Not everyone thinks CFTC’s recent actions spell doom for Binance and its founder.

For one thing, its founder CZ seems so far undeterred and it dismissed the entire action as “FUD”. In a seemingly nonchalant way, he posted “4” on his Twitter, which he mentioned previously that would be an abbreviation for “ignore FUD” (fear, uncertainty, and doubt)

Secondly, as company, Binance appears (at least from the outside) to be firmly established, with very strong finances and a good track record of honesty that never showed an indication that they have ever misappropriated customer’s funds.

Binance is, indeed, the biggest crypto exchange in the world and it facilitated over $23 million trades in 2022. Its strong financial footing made it able to consider bailing the failing cryptocurrency exchange FTX in 2022, in the midst of its trouble and bankruptcy.

Impacts on the overall crypto market

Similarly, there are experts out there that argue that such governmental steps are unlikely to have a negative overall impact on the crypto market. For instance, despite the Binance news this week, the price of bitcoin has held steady.

Although Binance has had significant withdrawals, they seem to have the reserves to handle it and aren’t experiencing a bank run like Silicon Valley Bank. According to Duke University finance professor Campbell Harvey,

We don’t know the kind of money in their war chest. It’s unclear whether this has a significant effect on their bottom line.

William Johnson, a professor of finance at the University of Massachusetts Lowell says that

Regulators would simply depart if they were pressed too hard. In my view, it would not be a good thing since the US would no longer have a seat at the table.

How things will play out in the cryptocurrency sector in the U.S. and other countries will remain to be seen. If history is any indication, the world of crypto is full of surprises and often unpredictable. And yet, looking at that history also shows us that, while there have been so many booms and busts during the 14+ years since cryptocurrency has been around, bad times were always followed by good times and the overall trajectory of the market has been ultimately upwards, with increased adoption and increased market capitalization. There is good hope, therefore, that once again things will sort themselves out at better times are ahead.


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