Binance In A Bind?
Binance appears poised to evade an asset freeze that could have severely impeded its operations in the United States. However, it now faces an arduous legal battle with the Securities and Exchange Commission (SEC) over allegations of disregarding U.S. financial regulations. The company also faces the potential risk of criminal penalties if the Department of Justice (DOJ) decides to bring its own charges.
In a recent development, a federal judge encouraged Binance and the SEC to find a compromise that would enable Binance to continue its U.S. operations while contesting the civil lawsuit filed by the regulator. An update on the ongoing negotiations is expected today.
According to securities lawyer James Murphy, both parties submitted filings before the hearing indicating that Binance had “offered to give the SEC about 90% of what they were asking for.” Murphy believes this proposal is a generous and reasonable offer that serves two purposes. Firstly, it aims to assure the SEC and the judge that U.S. customer assets are not in jeopardy, distinguishing it from the FTX scenario. Secondly, it would facilitate the orderly functioning of Binance.US during what could potentially be a protracted litigation process.
While Binance might avoid an asset freeze, blockchain expert Austin Campbell suggests that given the fraud allegations from both the SEC and the Commodity Futures Trading Commission (CFTC), it is likely that the DOJ will become involved at some point. The question is simply a matter of timing.
In response to the legal challenges, Binance.US has enlisted the services of George Canellos from the Milbank law firm to represent them. Canellos, with his experience working for both the SEC and the DOJ, has been retained for the case.
The actions taken by Binance indicate that they are actively preparing for a potential criminal prosecution, as suggested by former SEC internet enforcement chief John Reed Stark in a tweet. Stark believes that if convicted or pleading guilty to Binance-related crimes, individuals would likely face prison time given the seriousness of the fraud allegations from the CFTC and SEC.
The SEC recently filed a 13-count complaint against Binance, its CEO Changpeng Zhao, and its U.S. affiliates. The charges include operating unregistered exchanges, broker-dealers, and clearing agencies, misrepresenting trading controls and oversight on the Binance.US platform, and engaging in the unregistered offer and sale of securities. The SEC also sought to freeze Binance’s U.S. assets, a move that Binance claimed would effectively terminate its business operations in the country.
Following the SEC’s charges, Binance.US announced the suspension of trading in U.S. dollars due to indications from banking partners that conventional currency services would be paused. According to the agency, Binance.US oversees approximately $2.2 billion in cryptocurrency holdings.
Recent data from DefiLlama indicates that crypto traders have withdrawn approximately $1.41 billion from Binance’s global exchange in the past week. Additionally, Binance’s BNBBNB 0.0% token has experienced a 22.4% decrease in value since the announcement of the SEC’s lawsuit, dropping from $301 to $233.67, according to CoinGecko.
The SEC’s lawsuit follows a complaint from the CFTC in March against Binance, Changpeng Zhao, and former Chief Compliance Officer Samuel Lim. The CFTC alleged that Binance prioritized profit over compliance and committed numerous violations of the Commodity Exchange Act (CEA) and CFTC regulations.
According to Mike Selig, counsel at New York-based law firm Willkie Farr & Gallagher, Binance will need to defend against various issues raised in the case. These encompass securities-related matters concerning the offering and sale of unregistered securities, the requirement to register with the SEC as an intermediary, and multiple fraud allegations that depend heavily on the SEC’s investigative findings. Selig predicts that this case may take longer to resolve than the Ripple case, which has already endured a protracted timeline.
Although the SEC’s lawsuit against Ripple is currently in its third year, a resolution to that case, which involves a single cryptocurrency, is expected shortly.