Binance’s counterattack against the SEC’s allegations, is it tenable?

After news broke that the U.S. Securities and Exchange Commission ( SEC ) was suing Binance , the world’s largest crypto exchange, CEO Changpeng Zhao (CZ) used a familiar strategy to fight back: tweet. The first text in CZ’s response was the number “4,” which was probably at the same time that SEC Chairman Gary Gensler was busy giving media interviews.

For most of us, this might be a head-scratching question. But for many of CZ’s 8 million followers, the tweet was a message, a joke, and a familiar balm.

In CZ’s own words, “4” means “Ignore FUD, Fake News, Attacks, etc.” FUD (fear, uncertainty, and doubt) is a popular acronym in the crypto space. It’s telling that regulatory enforcement attacks on cryptocurrencies have become so prevalent that one of the most influential players in the industry has used it as a simple and crude response. Furthermore, CZ’s tweet suggests that the company’s regulatory strategy will remain largely unchanged, even now that it has been sued by two of the top financial regulators in the United States.

In fact, that’s basically what happened. In the days following the lawsuit (during which the SEC also sued rival U.S. exchange Coinbase ), Binance has been sticking to its long-standing arguments: the SEC was wrong to regulate through enforcement; customer funds were always safe; and the exchange’s previous “compliance” practices were very hard work and the SEC was just unilaterally uncooperative.

Binance said: "While we take the SEC's allegations seriously, they should not be the subject of an SEC enforcement action, let alone in an emergency. We intend to vigorously defend the platform."

Of course, some things are different this time. First, the company appointed a new "regional market head," Richard Teng, to oversee operations in Asia, Europe, the Middle East, and all regional markets except the United States. Several crypto strategists said that strategically, this was a good PR move because it may have helped Binance offset some of the "deafening" blows from the U.S. Securities and Exchange Commission.

Second, Binance US , the exchange’s nominally separate U.S. operation, is facing very severe strain in its ability to operate due to the SEC’s request to “temporarily restrict” its assets, and it is already delisting tokens en masse, likely reducing trading volumes that haven’t been faked.

The question, therefore, is whether Binance can continue business as usual, and whether it can actually remain a going concern – in the long run?

This is somewhat of a strange question, at least from my limited perspective, given the severity of the allegations in the SEC lawsuit. In addition to facing the same "failure to obtain proper operating licenses" charge as Coinbase, Binance and CZ are also accused of misusing customer funds, surreptitiously facilitating wash trading on Binance.US, improperly transferring customer funds without consent, and a host of other issues. In other words, Binance's legal problems far exceed Coinbase's, with the charges focusing not only on the question of whether its listings were unregistered securities, but also on whether it mishandled customer funds and whether it surreptitiously encouraged US citizens to trade on non-US platforms.

Of course, Binance’s reputation has fallen. Two months ago, the U.S. Commodity Futures Trading Commission ( CFTC ) filed a lawsuit against the exchange for improper licensing and offering the wrong financial products to American consumers. Some internal documents and communications were exposed, suggesting that Binance is sometimes a company that is almost laughable for not doing anything, and sometimes an unfair competitor that puts customer funds at risk in order to expand.

Industry experts are now very skeptical that Binance can continue to survive. It is worth mentioning that the worst is not over yet. Binance is currently facing two civil lawsuits, but it is also facing pressure from the US Department of Justice (DOJ), which may launch a criminal investigation, which, if successful, could lead to one or two Binance executives going to jail.

When asked by CoinDesk whether the SEC lawsuit could lead to Binance shutting down, securities attorney Brian Frye said “it’s a very real possibility.”

If the SEC prevails, as Gensler’s term is widely expected to expire, it could impose a significant fine on the exchange; disable or curtail Binance’s key operations, such as the internal BNB token and subject it to strict oversight; and permanently ban CZ from operating his exchange or running a financial company. Given the SEC’s claim that Binance.US put $2.2 billion in customer funds at “significant risk,” those funds could be seized if found to be linked to illegal activity.

The SEC has considerable latitude to require companies to “cease and desist” from certain activities and prevent them from conducting securities business, as Gensler believes that all cryptocurrencies (except Bitcoin ) are securities.

Worse still, as Willkie Farr & Gallagher partner Michael Lewis suggested, the SEC Enforcement Division appears to agree with Gensler. In its recent court filing, it explicitly named all of the top 10 tokens except Bitcoin (BTC) and Ethereum (ETH), which is bad news for any exchange looking to offer trading in anything other than Bitcoin to U.S. customers.

However, the purpose of this article is not to spread negative energy. It is worth noting that a lot of funds have been withdrawn from Binance, and at least for now it is clear that we are not experiencing something similar to FTX . Binance's auditors may have warned the company not to commingle funds as early as 2019, but even if the SEC is throwing mud, the funds seem to be at least safe. Binance has publicly denied commingling customer deposits and company funds, and it is unclear what exactly Binance shell companies associated with CZ (such as Merit Park and Key Vision Development Limited) did with these funds.

In the "Unchained" podcast, Gauntlet CEO Tarun Chitra said that outflows have been greatly reduced because global users, like ordinary retail investors in Chile or Abu Dhabi, don't care what happens with Binance and the SEC. As far as cryptocurrency exchanges are concerned, Binance is the most trusted option, which is why it has grown to be the largest cryptocurrency exchange and is far ahead. Yes, the SEC's charges against Binance and its CEO look serious, but this does not mean that users will suddenly turn to trust some small crypto platforms.

Do regular crypto users care that Binance uses underhanded tactics to attract “crypto whales,” or that it recommends high-net-worth clients use VPNs to bypass firewalls to trade on the exchange? No, they probably think it’s funny. (Although the CFTC found evidence that a significant amount of Binance’s revenue came from U.S. customers they shouldn’t be serving, the company still has a large global user base.)

I think a boycott would be justified if the allegations against Binance are true. CZ has been accused of enriching himself at the expense of his users (at the height of the recent bull run, it was argued with strong evidence that CZ’s net worth had surpassed Elon Musk’s ). But trust is measured differently in crypto than in other areas of finance, and if banks have to build sturdy, lavishly decorated headquarters to signal to potential clients that “business is here to stay,” in crypto, trust is “ephemeral.” Binance is strong because it has tokens that people want to trade and it seems to be resistant to hackers.

Blockchain Association CEO Jake Chervinsky said that even if Coinbase loses the SEC lawsuit, it still has ways to not have to register as a securities exchange, and it could just delist tokens that are marked as securities. Willkie Farr & Gallagher’s Michael Lewis agreed, saying that “the current legal or regulatory situation is unlikely to effectively ban all crypto assets in the United States.”

Binance could also end up delisting its tokens, slashing revenue, and potentially losing its founder/CEO as a figurehead and trusted face of the exchange (though he may remain a majority shareholder). The exchange could be forced to implement costly controls while also cleaning out some potential users. Binance.US could be doomed (though no one seems to be using it). A combined SEC and CFTC fine could bankrupt the company, and U.S. Senators like Liz Warren (D.-MA) will call on the Department of Justice to step in.

To some extent, if the worst crime Binance committed was just faking trading volume, then I guess users would forgive it. Of course, it all depends on the users themselves. But Binance is now the scapegoat for the SEC's wrath, and the SEC's arrogant attempt to crack down on an exchange without a headquarters within the scope of US law may force the company to have to "bend" to some laws.

There is a large group of fans who embrace CZ's response, willing to "ignore the fake news, uncertainty and doubt", and I have another thing to say: You can kill a body, but you can't destroy an idea.