CFTC Sues Binance for Offering Unregistered Derivatives Products, Hiding U.S. Crypto Trading Activity

Crypto Exchange Binance, Founder CZ Sued by CFTC Over Unregistered Derivatives Products

The U.S. Commodity Futures Trading Commission (CFTC) sued crypto exchange Binance and founder Changpeng Zhao Monday on allegations the company knowingly offered unregistered crypto derivatives products in the U.S. against federal law.

The lawsuit, filed in the U.S. District Court for the Northern District of Illinois on Monday, alleged that Binance operated a derivatives trading operation in the U.S., offering trades for cryptocurrencies including bitcoin (BTC), ether (ETH), litecoin (LTC), tether (USDT) and Binance USD (BUSD), which the suit referred to as commodities. The suit also alleged that the company, under Zhao’s leadership, directed its employees to spoof their locations through the use of virtual private networks.

Binance Is Hiding U.S. Crypto Trading Activity, Regulator Says

The C.F.T.C., in its complaint, also said Binance had sought to expand its business by soliciting U.S. customers without ever being “registered with the C.F.T.C. in any capacity.” The company “has disregarded federal laws essential to the integrity and vitality of the U.S. financial markets,” the complaint said.

The filing noted that Mr. Zhao had avoided designating a corporate headquarters for Binance and cited an internal presentation by Mr. Zhao explaining that his refusal to say where Binance was based helped it avoid scrutiny from any particular country’s legal authorities.

The lawsuit appears to be an attempt by the C.F.T.C. to assert its authority over the crypto trading world while in something of a competition with the Securities and Exchange Commission. The S.E.C. has particularly been active in bringing enforcement actions against crypto firms for not registering digital assets as investment products before offering them to sale to the public.

Binance, Coinbase Scrutiny Signify Crypto Crackdown

Also in March, the SEC sued crypto entrepreneur Justin Sun for allegedly manipulating the market—and accused celebrities, including Lindsay Lohan and Jake Paul, of promoting Sun’s tokens without disclosing they were paid to do so. The implicit message from regulators: They’re out to tame almost every corner of the crypto market, whether Americans are trading on US exchanges or offshore ones, or on platforms run by traditional companies or on apps supposedly run by code. Tron founder Justin Sun.Bloomberg

“It’s a regulatory onslaught and crackdown of epic proportions, and it’s only going to get bigger,” says John Reed Stark, a consultant who was founder and chief of the SEC’s Office of Internet Enforcement. “They didn’t hit the biggest players early on, they instead focused on the low-hanging fruit. They are beginning to focus more on the major players—that’s a major shift. These companies are running out of runway.”

Here’s why CFTC suing Binance is a bigger deal than an SEC enforcementThe CFTC lawsuit against Binance is a big deal for the crypto industry, given its general belief that the CFTC doesn’t pursue small crypto players without merit. This was evident in the Bitfinex case back in 2018, in which the crypto exchange settled with a hefty fine in 2021.

Adam Cochran, a crypto observer, reiterated a similar stance, saying the CFTC “doesn’t go after small frequent cases like the SEC,” adding that “It’s a different beast and its cases are often fatal.”

In his Twitter thread, Cochran commented that the early evidence gathered by the CFTC could prove fatal for Binance. He added that Binance could either fight the case in the U.S. or settle it outside the court, but in all likelihood, it would be forced to cease operations in the United States.

The SEC Sets Its Sights on ESG

So where does this leave us? The SEC is closely watching the rapid growth of ESG strategies and investments. The commission is concerned that market demand for ESG products has created a financial incentive for asset managers to identify products as ESG, even when the definition is not entirely fitting. The SEC is also concerned about investment advisers implementing ESG strategies for client accounts without full disclosure and approval, potentially in violation of advisers’ fiduciary duty.

***

Taking this all together, asset managers and financial advisers would be well-served to confirm that they have a good justification for labeling a strategy as ESG. Likewise, they should have a good reason to implement ESG products or strategies for particular client accounts—namely, the client has requested such a product or strategy, or approved it following full disclosure of its risk and return profile by the adviser. By taking these steps while staying conscious of the SEC’s new ESG focus, asset managers and advisers may keep themselves out of the regulatory crosshairs.

Cryptocurrencies add nothing useful to society, says chip-maker Nvidia

The US chip-maker Nvidia has said cryptocurrencies do not “bring anything useful for society” despite the company’s powerful processors selling in huge quantities to the sector.

Michael Kagan, its chief technology officer, said other uses of processing power such as the artificial intelligence chatbot ChatGPT were more worthwhile than mining crypto.