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Regulation


BINANCE USERS BRACE FOR ‘CASCADING EFFECT’ OF POTENTIAL US CRIMINAL CHARGES

Binance's Changpeng Zhao currently faces charges from the CFTC and the SEC.
Credit: Andrés Núñez/DL News

HomeRegulationBinance users brace for ‘cascading effect’ of potential US
criminal charges
Colin Wilhelm
Published on
September 30, 2023 at 8:21 AM
Share

 * If criminal charges are leveled against Binance, it could have a major impact
   on crypto markets.
 * Binance, which is already being sued by the CFTC and the SEC, is preparing
   for an extended period of legal battles.
 * A criminal case would take longer to put together because the standards
   differ from those of a civil case.

An overarching question lingers behind the steady drip of Binance legal
developments: Will the world’s largest crypto exchange, and its founder, be
criminally indicted in the US?

Even as attention turns to the trial of Sam Bankman-Fried set to open in
Manhattan next week, crypto investors are keeping watch on what the feds do next
with Binance.

Ever since US regulators sued Binance, its US affiliate and its CEO Changpeng
Zhao earlier this year for allegedly running an illegal exchange, broker-dealer,
and clearing house, legal experts and media reports have indicated that the US
Justice Department may follow suit with criminal charges.

If the fall of FTX wasn’t damaging enough, the potential poleaxing of Binance —
an exchange with 150 million customers and $76 billion in daily trading volume —
would be cataclysmic.

When FTX went sideways in November, Bitcoin shed a quarter of its value in three
days.

Now read
Why 150m Binance customers ignore regulatory woes and pile in anyway


Binance represents a substantially larger share of the crypto trading market
than Bankman-Fried’s failed crypto empire.

There would undoubtedly be major carnage, said Yiannis Giokas, senior director
of product innovation for Moody’s Analytics.

While Bitcoin, Ether, and stablecoins would probably survive a Binance
indictment, other less widely held digital assets could be wiped out, Giokas
said.

> ‘If anything was to happen to an entity of that size, most likely that would
> have a cascading effect on tokens or crypto and not necessarily on other
> products that are used for more straightforward use cases.’
> 
> —  Moody's Analytics' Yiannis Giokas

“If anything was to happen to an entity of that size, most likely that would
have a cascading effect on tokens or crypto and not necessarily on other
products that are used for more straightforward use cases,” Giokas told DL News.


PREPARING FOR BATTLE

While charges may or may not not be handed down by a federal grand jury, Binance
appears to be girding for a prolonged period of legal combat.

The company has hired a slew of former officials from the US Treasury
Department, the Internal Revenue Service, and other agencies to beef up its
legal compliance operations.

And on Thursday, Binance agreed to sell its Russian unit to a new centralised
crypto exchange called CommEX. In a news release, Binance said that over the
next several months, it plans to end all business services in Russia.

“Operating in Russia is not compatible with Binance’s compliance strategy,” said
Noah Perlman, Binance’s chief compliance officer and former global head of
Morgan Stanley’s financial crimes unit, in the statement.

Zhao, who is known as CZ, and the rest of Binance’s top brass may be worried
that a grand jury is examining whether it violated sanctions in its dealings
with Russia and other pariah states.

> ‘Sanctioned entities using company systems to move monies or make payments is
> certainly a top enforcement priority.’
> 
> —  Former federal prosecutor Luke Cass

“Sanctioned entities using company systems to move monies or make payments is
certainly a top enforcement priority,” Luke Cass, a former federal prosecutor
who specialised in white collar criminal cases, told DL News. “It’s on the radar
more than it ever has been.”

In its complaint filed against the company and Zhao in March, the Commodity
Futures Trading Commission alleges that Binance directors and employees
“acknowledged potentially illegal activities” involving Hamas, the Palestinian
group that is designated a terrorist organisation by the US State Department and
is the subject of sanctions.

The CFTC suggests that Binance and its officers looked the other way on activity
involving sanctioned entities.

In February 2019, Samuel Lim, Binance’s then-chief compliance officer, received
information “regarding Hamas transactions,” according to the complaint. In
response, Lim told a colleague that terrorists usually send “small sums,” as
“large sums constitute money laundering.”

The following year, Lim, who is named as a defendant in the CFTC suit, allegedly
told compliance colleagues Russian customers “are here for crime.”

Another Binance employee agreed that “we see the bad, but we close 2 eyes,” the
complaint says.

Binance, Zhao, and Lim have denied the allegations made by the CFTC and asked a
court to dismiss the suit.

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The US Securities and Exchange Commission filed its own lawsuit in June,
alleging Binance and Zhao raked in $11.6 billion in revenue from US customers
even though it was unlicensed, and that the company and its US affiliate
redirected billions of customer assets to investment funds controlled by Zhao.

Now read
Binance is leaning on a legal meme to battle the SEC. Here’s why it probably
won’t work in court


Those charges echoed accusations made against FTX and Bankman-Fried.

Binance and Zhao have denied the allegations in that suit as well.

Binance did not respond to a request for comment about whether it was concerned
about a possible criminal indictment.


A POTENTIAL CRIMINAL CASE

Meanwhile, the crypto community is waiting for the next shoe to drop.

According to multiple media reports, US prosecutors have been investigating
Binance for some time.

Legal experts say there’s a raft of reasons why it may be taking awhile for
prosecutors to either end their case or ask a grand jury for an indictment.

For starters, cases can slow to a crawl when there are multiple agencies
involved. As regulators, the SEC and CFTC do not have the authority to pursue
criminal cases, so they file civil actions against their targets.

In instances when the wrongdoing may rise to a criminal level, the agencies
refer cases to their colleagues at the Justice Department, and they tend to take
control by tapping the FBI to gather evidence and presenting it to a grand jury.

Now read
Investors yank almost $1bn from Binance as exchange ends zero-fee trading


Britt Biles, a former assistant chief litigation counsel at the SEC, said
prosecutors may be keen to work more in tandem with the agency on crypto cases.

In the past, the SEC would “take a back seat” to criminal investigations, Biles,
now a partner at the law firm Womble Bond Dickinson, told DL News.

“But they’re increasingly letting the SEC get ahead of or work in parallel with
criminal cases,” she said.

Another reason criminal cases may take longer to develop is the burden of proof
prosecutors must meet to win a verdict.

In civil cases, the government must prove its case with a “preponderance of
evidence,” meaning there’s enough to tip the scales against the defendant, Cass
said.

In criminal matters, a jury must unanimously find the defendant guilty “beyond a
reasonable doubt.”

The upshot: Prosecutors may take extra time to amass as much evidence as
possible to improve their chances of clearing that hurdle.

“The standards are very different,” said Cass, an adjunct professor at
Georgetown University’s Law Center.

Now read
How crypto lawyers plan to counterattack the SEC after Grayscale and Ripple
court wins


Criminal indictments are “unpredictable,” said John Reed Stark, a former SEC
enforcement lawyer and cybercrime specialist.

“I don’t think there’s any standard analysis for when the criminal folks are
going to prosecute,” said Stark, citing reasons including whether prosecutors
think there’s enough evidence and how time-consuming cross-agency and
cross-border investigations can be.

As Bankman-Fried takes his place at the defendant’s table in the federal
courthouse on Foley Square in Lower Manhattan on Tuesday, a jury and the rest of
the world will get to comb through every scrap of evidence mustered by the
government.

Even so, crypto investors are likely to keep one eye cocked on a potential
sequel, starring Zhao.

Comments, queries, feedback?



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Related articles
Regulation
Binance is leaning on a legal meme to battle the SEC. Here’s why it probably
won’t work in court
Regulation
Joanna Wright
September 26, 2023
People & Culture
Will Binance’s fleeing execs become witnesses against the crypto exchange?
People & Culture
Colin Wilhelm
September 20, 2023




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