Can Binance Survive the SEC’s Charges?

After news broke that the U.S. Securities and Exchange Commission (SEC) is suing Binance, the Chief Executive of the world’s largest crypto exchange, Changpeng Zhao (aka CZ), took to a familiar strategy: tweeting. CZ’s first Twitter communiqué was just the number “4,” posted around the same time SEC Chair Gary Gensler was likely cleaning up for the first of several TV interviews.

That might be a head scratcher to most of us. But to many of CZ’s 8 million followers, the tweet was a message, a joke and an attempt at reassurance they’ve heard before.

This is an excerpt from The Node newsletter, a daily roundup of the most pivotal crypto news on CoinDesk and beyond. You can subscribe to get the full newsletter here.

In CZ’s own words, “4” means “ignore FUD, fake news, attacks, etc.” FUD is short for fear, uncertainty and doubt – a popular acronym in the cryptocurrency scene. It’s telling that regulatory attacks on crypto have become so common that one of the industry’s most influential players can give a rote response. Further, CZ’s tweet suggested that the firm’s strategy towards regulation will largely stay the same, even now that it is being sued by two of the top U.S. finance watchdogs.

And indeed, that has largely been the case. In the days since the lawsuit was announced (during which the SEC also sued rival U.S.-based exchange Coinbase), Binance has stuck to its long-held talking points: the SEC is wrong for regulating by enforcement; customer funds are and always have been safe; and the exchange’s previous attempts of “coming into compliance” were thwarted by an uncooperative SEC.

“While we take the SEC’s allegations seriously, they should not be the subject of an SEC enforcement action, let alone on an emergency basis. We intend to defend our platform vigorously,” Binance said.

Of course, some things are different this time around. First, the company named a new “head of regional markets” – the former top regulator in Singapore, Richard Teng – to run the exchange in Asia, Europe, the Middle East and everywhere else it operates except in the U.S. Several crypto strategists have said this was a good public relations move, strategically, as it may have helped the exchange dampen an otherwise deafening blow by the SEC that would have dominated “the discourse.”

Second, Binance.US, the exchange’s nominally independent U.S. operation, is facing a very live concern about its ability to function, as the SEC has requested to “temporarily restrain” its assets. It’s already mass-delisting tokens, too, likely cutting into trading volumes that weren’t being faked.

And so, the question is whether Binance can continue business as usual, and whether it can really be – in the long term – a going concern.

It’s an odd question, in a way, at least in my limited perspective, given the seriousness of the allegations in the SEC’s suit. Over-and-above the bog-standard “you didn’t get the appropriate license to operate, sir” complaints that Coinbase also faces, Binance and CZ have been accused of endangering customer funds, enabling if not facilitating wash trading on Binance.US, improperly moving customer funds without consent and a host of other issues.

In other words, Binance’s legal troubles are in a category above Coinbase’s. The charges focus not just on the question of whether its listings are unregistered securities, but also around whether it misled customers about how their funds were deployed, and whether it was implicitly encouraging U.S. citizens to trade on a non-U.S.-based platform to which they were not supposed to have access.

Of course, Binance’s reputation was already down. Two months ago, the U.S. Commodities Futures Trading Commission (CFTC) filed suit against the exchange for improper licensure and offering U.S. consumers the wrong financial products. It disclosed some leaked documents and internal conversations that showed Binance to be an almost comically inept company at some times and a cut-throat competitor that put customer funds at risk for the sake of growth at other times.

Experts are now seriously wondering whether Binance will survive as a brand. Here, it’s worth mentioning the worst isn’t even over yet. Binance currently faces two civil lawsuits, but is also under pressure from the U.S. Department of Justice (DOJ), which could launch a criminal investigation that, if successful, could potentially put a Binance executive or two behind bars. Asked by CoinDesk whether just the SEC’s lawsuit will lead to Binance shutting down, securities lawyer and conceptual artist Brian Frye said “it’s a very real possibility.”

If the SEC wins, in a case widely expected to run past Gensler’s tenure, it could levy major fines against the exchange; disable or diminish key parts of Binance’s operation, like labeling its in-house BNB token and subjecting it to strict oversight; and permanently ban CZ from operating his exchange or running a financial firm. And given that the SEC is claiming Binance.US is putting $2.2 billion of presumably U.S.-based clients’ funds “at significant risk,” those funds could be disgorged if they’re found to be connected to illicit activity.

The SEC has pretty wide latitude to ask firms to “cease and desist” certain activities and prevent them from dealing with securities, which would be bad news considering Gensler thinks all cryptocurrencies, bar Bitcoin, are securities. Worse still, as Willkie Farr & Gallagher’s Michael Lewis suggested, it seems like the SEC Enforcement Division agrees with Gensler. In its recent court filings, it has willing to call out all the top 10 tokens except for bitcoin (BTC) and ether (ETH) – which spells bad news for any exchange with U.S. customers that wants to offer more than bitcoin for trading.

But, dear reader, you don’t come to The Node just for doom and gloom. Sure, a lot of money has been withdrawn from Binance, but at least at this point it’s clear we’re not dealing with FTX redux, where the money simply wasn’t there. Binance’s auditor may have warned the firm against commingling funds as far back as 2019, but it seems the money was at least kept safe even if mislabelled. Binance has publicly denied mixing customer deposits and company funds, and it’s still unclear exactly what Binance shell companies connected to CZ like Merit Park and Key Vision Development Limited were doing with the funds.

Speaking on the “Unchained” podcast, Tarun Chitra, the CEO of Gauntlet, suggested that outflows have been slow because users globally, like your average hodler in Chile or Abu Dhabi, simply are not concerned about what’s happening with Binance and the U.S. For many, Binance is the most trustworthy option when it comes to crypto exchanges, which is why it has grown to be the largest crypto exchange, and by a longshot. The accusations against the company and its chief executive are gross, but that doesn’t mean you suddenly trust your small-time, domestic crypto exchange any more.

Does the average crypto user care that Binance used underhanded tactics to attract “Crypto Whales” or that it recommended that high-net worth clients use VPNs to bypass firewalls to trade on the exchange? No, they probably think it’s funny. (And even though the CFTC found evidence that a significant amount of Binance’ revenues were coming from U.S. customers they weren’t supposed to serve, the company still has a massive global user base.)

I’d argue that if the allegations against Binance are true, a boycott would be justified. CZ is accused of personally enriching himself at the expense of his users (at the height of the recent bull market, it was credibly proposed the CZ had become worth more than Elon Musk). But trust in the crypto industry is based on a different metric than elsewhere in finance. If banks used to have to build stolid, cathedral-like headquarters to show prospective clients the institution was there for the long-haul, in crypto, trust is more ephemeral. Binance became big because it had the tokens people wanted to trade and seemed resistant to hacks.

Jake Chervinsky, the CEO of the Blockchain Association, said that there’s a pathway for Coinbase where, even if it loses the SEC suit, it still won’t have to register as a securities exchange. Instead, it would do what it’s been doing since a former Coinbase executive was booked for insider trading, and delist only the tokens proven demonstrably to be securities. It’s a point echoed by Willkie Farr & Gallagher’s Michael Lewis, who said it’s “unlikely that the current situation will result in laws or regulations that effectively ban crypto assets within the U.S.”

Binance, too, may end up delisting tokens cutting into revenues and it might lose its founder/CEO as a figurehead and trusted voice of the exchange (though he’d likely hang around as majority shareholder). The exchange might be forced to institute expensive controls that also sweep out a number of potential users. Binance.US may be doomed (though it seems like no one was using it anyway). It’s within the realm of possibility that the combined fines from the SEC and CFTC bankrupt the firm, and that U.S. Senators like Liz Warren (D.-MA) compel the DOJ to get involved.

In a way, Binance has transcended. If the worst crimes it committed was faking the trading volume of fake internet money, then I think users will forgive it. It all depends, of course. Binance is now a whipping boy for the SEC’s wrath, which in its hubris tried to bring an exchange with no headquarters within the bounds of U.S. law. And it may actually bend the company into following laws it always should have.

But there’s an army of people speaking CZ’s language, willing to “ignore fake news, uncertainty and doubt.” So here’s another four words: can’t kill an idea.