Semafor: US Department of Justice considers filing fraud charges against Binance

U.S. Justice Department officials are considering filing fraud charges against cryptocurrency exchange Binance but are concerned about a "stampede effect" in the market, according to people familiar with the matter.

Federal prosecutors are concerned that if they prosecute Binance, it could cause a run on the exchange similar to the now-bankrupt FTX platform, causing consumers to lose funds and sparking panic in cryptocurrency markets, people familiar with the matter said.

Prosecutors are considering other options, such as fines and deferred or non-prosecution agreements, the people said. Such an outcome would be a compromise that would hold Binance accountable for the alleged criminal conduct while limiting consumer harm.

The debate highlights the complex and fast-evolving nature of cryptocurrency enforcement and regulation in the U.S., where companies operate in a legal gray area and consumers don’t enjoy any of the protections of the traditional banking system.

The Justice Department declined to comment. Binance did not respond to a request for comment.

Some thoughts

In addition to the Commodity Futures Trading Commission ( CFTC ), Binance and its founder Changpeng Zhao are already facing charges from the U.S. Securities and Exchange Commission ( SEC ). The SEC accused Zhao and his company of operating an unregistered exchange in the United States and knowingly allowing its citizens to participate in Binance's offshore exchange. The SEC also accused Binance of misleading customers and investors by using a secret market-making firm called Sigma Chain to manipulate trading on the Binance US platform.

Legal experts say the SEC case is akin to a criminal indictment because of the severity of the allegations, thus increasing the likelihood of criminal charges.

It is unusual for the SEC to file civil lawsuits before federal prosecutors, especially in high-profile cases. The agency typically works with the Justice Department to bring both civil and criminal charges.

Reuters reported extensively on how Binance circumvented U.S. laws and regulations, leading the U.S. Attorney's Office in Seattle to launch a criminal investigation in 2018.

When considering whether to prosecute large entities, the Justice Department often needs to weigh the impact on consumers, employees and shareholders. This has been the case since the Andersen bankruptcy two decades ago.

The question is, should these factors be taken into account when it comes to cryptocurrency exchanges that operate in a legal gray area? People who traded on Bianance and were allegedly deceived by the company’s strategy should know that they were taking on greater risks than they would on a regulated exchange.

To access Binance.com, U.S. citizens need to use a VPN or other tools to circumvent the restrictions, but this hardly makes Binance’s customers complicit in the company’s alleged misconduct. Cryptocurrencies are now a mainstream part of the financial system.

The fact that the DOJ is discussing the impact the indictment could have on consumers is, in a way, a nod to the legitimacy of cryptocurrencies.

Weighing the benefits

Assuming there is enough evidence to support the charges, failing to prosecute Binance may only delay the exchange’s inevitable collapse. It could ultimately signal that the U.S. is soft on crypto exchanges, inviting more bad behavior in the future.

Economist Nouriel Roubini , who is famous for predicting the 2007-2008 real estate crash, believes that the baby should be thrown out with the bathwater, calling the entire crypto ecosystem corrupt. “These players should leave,” he said.

U.S. Senator Elizabeth Warren also called for further criminal investigation of Binance for allegedly lying to Congress. She wrote an open letter to Attorney General Merrick Garland: "These actions by Binance and Binance.US may violate federal law and may subject company officials to fines and imprisonment."

U.S. regulators should also be held accountable for creating an ambiguous and unstable regulatory environment for cryptocurrency companies operating within their borders, which has prompted many in the crypto industry to embrace countries that are welcoming to crypto businesses.

From another perspective, lawmakers can protect consumers by enacting new industry management rules to make the United States a more attractive place for consumers to trade, providing a safer option than offshore exchanges such as Binance and FTX.