Binance 'could be in big trouble' as the CFTC lawsuit alleges the crypto behemoth dodged regulators and breached laws

• Binance is being blow-torched from all angles as US regulators close in on the world's largest crypto exchange.
• The CFTC sued the exchange this week for violating US financial laws, whilst some reports suggest Binance has engaged in secret fund transfers.

Binance, the world's largest cryptocurrency exchange, is braving one of the roughest patches since it was founded by Changpeng Zhao and He Yi in 2017.

Fighting on multiple fronts at the same time, the digital-asset giant is facing a raft of US regulatory probes while also trying to shore up investor confidence damaged by the so-called crypto winter and a string of high-profile bankruptcies and scandals in the industry.

On Monday, the Commodities Futures and Trading Commission (CFTC) sued Binance and Zhao himself, for allegedly breaching US financial laws. The regulator's 74-page complaint contains some staggering allegations about how the exchange tried to dodge US regulators, and claims that Binance staff knew its compliance efforts were just "for show".

"This lawsuit from the CFTC shouldn't be taken lightly. The CFTC takes less cases against crypto than the SEC but when they do they come in with force," Marcus Sotiriou, an analyst at digital asset brokerage GlobalBlock, told Insider.

Binance has denied the allegations. A spokesperson for the exchange told Insider on Tuesday that it has hired 650 compliance staff and spent $80 million to help with transaction monitoring, "know your customer" rules, and other compliance programs over the past two years, pointing to efforts to block US residents from trading on the exchange.

Following the shocking implosion of Sam-Bankman Fried's FTX exchange late last year, concerns have risen whether Binance faces similar risks. Type 'Binance' into search analytics tools such as AnswerThePublic and they throw up a raft of queries including "will binance collapse like FTX" and "can binance be trusted", or even "binance is next".

John Reed Stark, a former attorney of the US Securities and Exchange Commission, tweeted earlier in March that Binance is "FTX redux and an epic bank run seems inevitable".

'Binance could be in big trouble'

The company is now dealing with a raft of legal and regulatory probes over potential breaches of anti-money-laundering rules, and questions about whether it properly registered some crypto derivatives. The grilling comes as US regulators tighten their grip on the crypto industry following FTX's collapse.

The CFTC report "refers to 300 'house accounts' owned by CZ, Merit Peak and Sigma chain used in proprietary trading, suggesting that Binance was counterfeiting its customers. The damning part is that the CFTC has chat records and other documentation from CZ directly on these matters to prove this," GlobalBlock's Sotiriou said.

"Settlement could be the best case here for Binance, but that could still be billions in fines to cover making whole, disgorgement and civil penalty payments but may allow CZ et al to avoid admission of guilt. This lawsuit doesn't seem to be FUD this time, and Binance could be in big trouble here," he added.

FUD is short for fear, uncertainty, and doubt — a popular acronym in the digital assets space.

'Gauntlet of regulatory inspection'

While the exchange may not face the sort of existential threats that FTX had to contend with, it will likely remain under pressure from regulators and customers seeking greater transparency, Robert Le, a crypto analyst at data and software firm PitchBook, told Insider.

"We believe that post-FTX, the regulatory environment will be much less favorable for Binance and that they will face significant regulatory pressure across multiple jurisdictions. What this means is that the company will not only face substantial financial penalties but also the possibility of being forced to exit certain markets, restructure, or entirely segregate its various businesses," Le said.

Ed Moya, senior analyst at OANDA, holds a similar view.

"Binance is about to go through an intense gauntlet of regulatory inspection over their finances, operations, and compliance. The scrutiny will be relentless and potentially crippling for Binance. It appears that Binance will not have an easy path to operate in the US," he told Insider.

Here are six instances where the crypto giant has come under fire from regulators or lawmakers.

CFTC lawsuit

On Monday, the CFTC filed a complaint against Binance and its founder, listing eight provisions of the Commodity Exchange Act that the regulator claims were breached by the exchange.

Zhao and Binance's former chief compliance officer Samuel Lim solicited US customers, especially "lucrative and commercially important 'VIP'" ones, while ignoring rules to register under US law, it said.

By not registering with the CFTC, Binance "disregarded federal laws essential to the integrity and vitality of the U.S. financial markets, including laws that require the implementation of controls designed to prevent and detect money laundering and terrorism financing," the complaint said.

The CFTC has requested the court to place financial costs onto Binance, as well as trading and registration bans.

A botched plan to dodge US regulators

A recent Wall Street Journal investigation revealed that Binance crafted a plan years ago to evade scrutiny from US watchdogs as authorities hinted their intention to clamp down on crypto businesses based overseas.

The strategy sought to create a US entity that was wholly independent of Binance's global operations – so it set up Binance.US in 2019. Founded in 2017, Binance.com had largely operated in a free-floating way out of hubs in China and Japan – putting it at a distance from regulatory checks.

But the plan proved to be flawed given the two platforms were more entwined than publicly disclosed, per the WSJ. They both mixed staff and finances, and even shared an entity that dealt with cryptocurrencies.

If US authorities decide the links meant the crypto exchange had control over the US platform, it could expose the company to enforcement action.

Customer funds

Binance is also fending off concerns about its handling of customer funds, following some reports that it used customer assets for its own purposes like FTX. The exchange transferred $1.8 billion in stablecoin collateral to hedge funds, leaving its investors exposed, according to Forbes, which reviewed on-chain data from August 17 to early December.

While the shift in funds may not be illegal, it could pose risk to Binance's investors. For example, Sam Bankman-Fried lost more than $8 billion in customer funds after allegedly transferring FTX deposits for operations at its sister trading firm Alameda.

The exchange has never invested or "otherwise deployed" customer funds without their consent, a Binance spokesperson told Insider in emailed comments earlier this month.

"Binance holds all of its clients' assets in segregated accounts which are identified separately from any accounts used to hold assets belonging to Binance. It's important to note that our users are able to withdraw their funds whenever they wish - as has been demonstrated time and time again," the spokesperson added.

Secret transfers

Binance secretly moved $400 million from its US partner to a company managed by the crypto giant's boss Zhao, called Merit Peak, Reuters reported last month.

Binance claims that Merit Peak and Binance's US partner Binance.US operate independently from the exchange.

Binance US's former CEO Catherine Coley called the transfers "unexpected," per Reuters.

Unregistered securities

Binance's American affiliate has also come under pressure after an SEC official said the company is operating unregistered securities in the US, per CoinDesk.

The accusations have raised hurdles for a $1.3 billion deal between Binance.US and embattled crypto firm Voyager, in which the former planned to snap up the latter's assets. On Monday, a federal judge temporarily halted the sale after a request by the United States government to pause Voyager's bankruptcy plan.

The SEC have clamped down on large crypto firms, including Gemini, Genesis and Kraken for operating assets that's not been rubber stamped by regulators.

BUSD

In another intervention by the SEC, crypto firm Paxos was ordered to stop minting Binance's dollar-pegged token BUSD because it was deemed an unregistered security.

That came after the regulator launched a lawsuit against Paxos for offering BUSD to its customers.

BUSD is the world's third largest stablecoin behind Tether and USD coin, with a market cap of more than $8.2 billion, according to CoinMarketCap.

"There is many unknown unknowns to jump to conclusion on Binance's; however, the coming months will be crucial to gain more transparency and clarity on Binance's overall financial health in light of the recent regulatory headwinds," 21Shares's Wan told Insider.