The feds sued Binance on Monday, and the lawsuit is a doozy. In a 74-page complaint, the Commodities and Futures Trading Commission accused the world's biggest cryptocurrency exchanges of creating huge loopholes to let American customers—who are not supposed to trade crypto derivatives—onto its platform. And, boy, does it have receipts.
The CFTC complaint cites numerous private messages from Binance's CEO and its former chief compliance officer to show the company had a deliberate strategy to subvert regulators—by, for example, nudging American customers to use VPNs to mask their locations and throwing a bash in Las Vegas for big U.S. clients. It also includes damning texts from Binance execs that say things like, "We see the bad but close 2 eyes" and—of Russian customers—"Like come on. They're here for crime." And for good measure, it shows Binance knew Hamas terrorists used its platform for small transactions but that they "can barely buy an AK47 with 600 bucks.” Not good.
But while the Hamas and Russia messages make Binance look shady, the gist of the lawsuit isn't about criminal behavior. Yes, Binance turned a blind eye to bad guys here and there (again not good!), but what the CFTC is really worked up about is those American clients—particularly big trading firms in New York and Chicago that were some of Binance's biggest customers. As Matt Levine has noted, the complaint "is mostly about cutting off a big international crypto exchange from big sophisticated proprietary market-making firms in the US."
The CFTC's focus on those big trading firms makes clear that the agency is not really about protecting retail investors but trying to cripple Binance by starving it of revenue. This is in turn part of a broader attempt by the Biden administration to use various regulatory agencies—particularly ones that oversee the banking industry—to snuff out the crypto industry altogether. The motives are not entirely clear, but most likely it's because the feds view the crypto industry as a shadow financial system that operates outside its control and that poses a threat to the U.S. dollar's position as the world's dominant currency. It doesn't help that influential politicians like Sen. Elizabeth Warren (D-Mass.)—who has President Joe Biden's ear on financial matters—seem to abhor crypto as a matter of principle.
The question is what happens now? Binance, which last month was hinting that it was on the cusp of a sweeping settlement with U.S. regulators, appears to have been taken by surprise by the CFTC complaint based on a blog post response by its CEO. Does this mean that the planned settlement is off the table? And if so, what other shoes are going to drop?
A surprising element of Monday's news is that it is the CFTC, which is a relatively pint-sized agency, fired the first major shot against Binance. If the Justice Department—which is much bigger and has been investigating Binance for years—and the Securities and Exchange Commission follow suit, the company and its executives could face a world of trouble, including criminal jeopardy. This is especially the case given that the CFTC complaint suggests the feds have informants in the company, and that its evidence includes texts from senior Binance executives lifted from the disappearing messaging app Signal.
As for what happens next, there are two big things to watch. The first is how well Binance can absorb the financial blow unleashed by the feds. The news of the CFTC complaint caused broader crypto markets to stumble and adds to the growing pressure on Binance, which recently lost much of its lucrative stablecoin business as a result of U.S. regulatory pressure. If the company now loses some of its biggest futures market clients, it could face real strain—though on the other hand, Binance's market share has grown since the fall of FTX, and Bitcoin trading near $30,000 once again would help it weather the storm.
The other big thing to watch is how U.S. courts react to the Biden administration's broad onslaught against the crypto industry. A growing number of people say the federal agencies are proceeding on shaky legal ground—including the ongoing failure to classify digital assets as commodities or securities—and that it's a matter of time till a federal judge slaps them down. If that happens, all bets are off.
Jeff John Roberts
jeff.roberts@fortune.com
@jeffjohnroberts
