The biggest threats to Binance: US CFTC and US SEC

Wu Shuo Author | Tan Shu

Editor of this issue | Colin Wu

With an annual profit of 1 billion US dollars and a valuation of hundreds of billions of US dollars, BNB has become the third largest cryptocurrency. If there is anyone who can threaten Binance, the "largest exchange in the universe", it may only be the two US government departments mentioned in the title.

On the evening of March 12, according to a report by Bloomberg, the U.S. Commodity Futures Trading Commission (CFTC) is investigating Binance to see if it allowed U.S. users to trade commodity futures on the platform without being regulated by the U.S. government. The report also pointed out that the CFTC is only investigating Binance and has not accused Binance of any wrongdoing. As soon as the news was released, Binance's platform currency BNB fell by 6%, and then fell by as much as 20%.

The United States has many regulatory agencies, such as the SEC, which is responsible for securities regulation, and the CFTC, which is responsible for commodity futures regulation. As a commodity, Bitcoin futures naturally fall under the regulatory scope of the CFTC, and the CFTC's regulation of Bitcoin futures is not without precedent. In October last year, the CFTC filed criminal charges against four senior executives of Bitmex, including founder Arthur Hayes, accusing their Bitmex platform of providing Bitcoin futures trading services to users in the United States.

To date, Bitmex's four executives have not yet appeared in court, but according to media reports, CEO Arthur Hayes will surrender next month, and two other executives are also preparing to appear in court in the near future.

Why is the CFTC investigating Binance? Obviously, Binance has similar Bitcoin futures contracts as Bitmex. If any US user has used the service, it will naturally fall under the CFTC’s regulatory scope.

Although Bitmex and Binance have since strengthened KYC/AML-related audits and blocked U.S. users from accessing their websites, and Binance has also created the compliant Binance.us specifically for U.S. users, both Bitmex and Binance’s main website have long allowed users to use their services without KYC since their inception (for Binance, the daily withdrawal limit for users who have not completed KYC is 2 BTC, see [Binance official website](1) for details). It can be seen that both Binance and Bitmex have inevitably provided services to U.S. users, and therefore the CFTC’s investigation is reasonable.

The CFTC investigation isn’t Binance’s only trouble

As a non-compliant exchange, Binance is not unaware of the regulatory issues from the United States. Last October, [Forbes](2) magazine obtained an internal report from Binance. The report was drafted in 2018. Its main purpose was to help Binance avoid regulation from the United States as much as possible. The report was named "Tai Chi", and the meaning of the name also shows what it wanted to achieve.

The establishment of Binance.us was based on this report, and the purpose of setting up Binance.us was to divert the attention of US regulators. Binance.us has been a fully compliant exchange from head to toe since its inception. However, this report also mentioned that Binance.us can be used as a "bait" to attract US users to use VPN to use Binance International Station.

There is no doubt that such reports are very unfavorable to Binance. Therefore, after Forbes published this article, Binance’s founder Zhao Changpeng posted several tweets accusing the article of being untrue. Subsequently, Binance even filed a lawsuit against Forbes, claiming that Forbes had defamed it. However, according to reports, Binance had quietly dropped the lawsuit in February this year.

The Tai Chi plan also formulated a plan to avoid SEC supervision. As we all know, Binance will take out 20% of its profits every quarter to buy back its own platform coins and destroy them until only 50% of the initial issuance of BNB is left. In April 2019, Binance quietly revised the BNB white paper, changing the part of the white paper that "took out 20% of the profits of the quarter to buy back its own platform coins and destroy them" to "destroy BNB equivalent to 20% of the profits of the quarter."

The difference is that the original statement is to buy back BNB from the market, while the latter statement means that Binance can destroy the corresponding amount of BNB from the BNB retained by the destruction company instead of buying back. The reason for this change is that "buyback" is a concept in the stock market, and such a statement obviously falls within the scope of SEC supervision.

What impact will SEC regulation have on Binance and BNB?

Binance’s precautions are not without reason. In the latest listing application submitted by Coinbase, it was specifically mentioned that Coinbase is also competing with some "less regulated exchanges" on the market, and Binance's name was specifically mentioned, which obviously attracted the attention of the SEC again.

As for Binance, the SEC has already taken corresponding actions. In July last year, the SEC hired blockchain analysis company CipherTrace to conduct research and analysis on Binance. CipherTrace is said to be the only company that can analyze and study all assets on Binance (including BNB and all other tokens). According to Forbes' speculation, the SEC's move is for a more important investigation, that is, to study whether BNB is a real security.

If the SEC determines that BNB is a security, it may file a lawsuit against Binance. This is obviously not the first time for the SEC. There have been many cases before. The most famous ones are the lawsuits against Block One, which issued EOS, and Ripple.

In the end, Block One, the issuer of EOS, settled with the SEC and paid a fine of $24 million. The SEC accused Ripple of issuing unregistered securities and required its two executives to pay a fine of $1.3 billion. In the absence of a settlement, Ripple has chosen to defend itself against the SEC.

If the SEC identifies BNB as an unregistered security and files a lawsuit against Binance, what impact will it have on Binance and even BNB?

One possibility is settlement. If a settlement can be reached with the SEC, then the company can still operate normally after paying a fine. Referring to EOS, settlement is equivalent to eliminating regulatory risks at the SEC level.

Another case is Ripple. In December last year, when the news of SEC suing Ripple came out, the price of XRP fell by 25% on the same day. Some compliant exchanges, including binance.us, also removed XRP as soon as possible for safety reasons.

In the United States, lawsuits are often a long process. For example, the New York prosecutor's office sued Bitfinex/Tether, which took nearly two years to come to a conclusion. For Ripple's lawsuit, it may take a long time to come to a conclusion. In this bull market, the price of XRP has also risen back. The specific situation will probably have to wait until the lawsuit is concluded, which may take several years.

For Binance, if it really encounters a lawsuit from the SEC regarding the issuance of unregistered securities, it can be judged that it will definitely cause a drop in the price of BNB at that time. As a compliant exchange, Binance.us may even delist its parent company's platform currency BNB like it did with XRP. However, since the legal process takes a long time, the impact of compliant exchanges such as Binance.us is limited. Before the long lawsuit is concluded, the price of BNB is more related to the performance of Binance itself.