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(Kitco News) - Following yesterday’s announcement that the Commodity Futures Trading Commission (CFTC) had filed a lawsuit against Binance, the largest crypto exchange in the world, and its CEO Changpeng “CZ” Zhao for regulatory violations, the platform has experienced its own form of bank-run, similar to the mad rush to pull funds from the beleaguered Silicon Valley Bank just before its downfall.
In the 24 hours since the CFTC suit was announced, as CZ has been in damage control mode, exchange data shows that investors withdrew more than 3,800 Bitcoin from Binance as a cautionary move in case the exchange was shut down, with many of those BTC making their way to Bitfinex, based on the 30-day change.
Bitcoin balances on exchanges. Source: Coinglass
Another major beneficiary has been the options and futures-focused Bybit crypto exchange, which has seen its BTC balance increase by 1,202 over the past 30 days.
It also appears as though some traders had an inside scoop on the pending lawsuit, according to Thanefield Capital data research, which tweeted on Monday that, “A few hours before the Binance CFTC Indictment, there were large stablecoin withdrawals across centralized exchanges, totaling almost $1.5B in just 12 hours. Notably, Binance itself saw an $850M outflow.”
Exchange stablecoin outflow. Source: Thanefield Capital
Data provided by Nansen indicates that the total value of the assets held on Binance has decreased from $65.5 billion on March 21 to $63.3 billion today, a 7-day decrease of $2.2 billion.
Matters got worse for the Binance ecosystem on Tuesday when a federal judge temporarily halted the proposed deal for Binance.US to purchase the assets of distressed lender Voyager Digital until a decision is made on the Department of Justice’s appeal against the bankruptcy plan.
The extra time to review the lawsuit filed by the CFTC has brought some interesting details to light, including allegations that Binance helped U.S. customers evade compliance controls through the use of virtual private networks (VPNs) to obscure their locations and that the exchange did not disclose to its customers that it was trading in its own markets.
The CFTC said that Binance utilized 300 “house accounts,” directly or indirectly owned by CZ, as well as two individual accounts owned by Zhao, to trade against its customers. The regulator also alleged that Binance failed to implement an effective anti-money laundering program.
CZ pushes back
CZ posted a blog in response to the lawsuit and allegations contained within, saying it was an “unexpected and disappointing civil complaint, despite our working cooperatively with the CFTC for over two years.”
“Upon an initial review, the complaint appears to contain an incomplete recitation of facts, and we do not agree with the characterization of many of the issues alleged in the complaint,” CZ wrote.
To the charge of giving access to U.S. users, CZ said that Binance is “the first global (non-US) exchange to implement a mandatory KYC program, and remains today to have one of the highest standards in KYC and AML.” The exchange blocks US users based on nationality (KYC), IP address, mobile carrier, device fingerprints, bank deposits and withdrawals, blockchain deposits and withdrawals, credit card bin numbers, and more, he said.
The Binance CEO also said that the exchange “is committed to transparency and cooperation with regulators and law enforcement (LE) – in the US and globally,” and said that it “intends to continue to respect and collaborate with US and other regulators around the world.”
In regard to the charges of market manipulation, CZ stated, “Binance.com does not trade for profit or “manipulate” the market under any circumstances,” and stressed that the exchange only “trades” in certain situations, like when it needs to convert crypto to cover expenses in fiat or other cryptocurrencies.
“Personally, I have two accounts at Binance: one for Binance Card, one for my crypto holdings,” he said. “I eat our own dog food and store my crypto on Binance.com. I also need to convert crypto from time-to-time to pay for my personal expenses or for the Card.”
To prevent employees from front-running market developments, Binance enforces a 90-day no-day-trading rule for employees, which prohibits them from selling a coin within 90 days of their most recent purchase or sale. “This is to prevent any employees from actively trading,” he said. “We also prohibit our employees from trading in Futures. Further, we have strict policies for anyone with access to private information, such as details of listings, Launchpad, etc. They are not allowed to buy or sell those coins.”
The CEO wrapped up his note by saying that the exchange looks forward to finding an amicable solution to the current situation. “We are collaborative with regulators and government agencies all around the world. While we are not perfect, we hold ourselves to a high standard, often higher than what existing regulations require. And above all, we believe in doing the right thing by our users at all times.”
As part of the suit, the CFTC is seeking to have Binance and CZ banned from engaging in any of the conduct outlined in the fling, including trading on any registered entities, holding any commodity interest or directing the trading of any digital assets. The CFTC also wants Binance to pay back the trading profits, revenues, salaries, commissions, loans and fees derived from U.S. persons, and pay civil penalties for the violations.
According to Fox Business journalist and contributor Eleanor Terrett, the lawsuit against Binance was introduced without warning and may have been politically motivated, with the CFTC looking to establish that this matter is a commodity issue that falls under its purview rather than a securities issue to be handled by the Securities and Exchange Commission (SEC).
than a securities one. They also say "Vegas odds" have the @SECGov rushing out a similar lawsuit against @binance as a counter.
— Eleanor Terrett (@EleanorTerrett) March 27, 2023
In the CFTC filing, the regulator specifically refers to Bitcoin (BTC), Ether (ETH), and Litecoin (LTC) as commodities, which shows that the CFTC and SEC remain at odds with how to classify certain digital assets.
The mention of Litecoin as a commodity has also helped to reignite the digital silver narrative that the Bitcoin clone previously enjoyed.
#Litecoin is gearing up for a major wave and its biggest move since 2017.
— Tony "The Bull" (@tonythebullBTC) March 23, 2023
Digital Silver could soon become a narrative. pic.twitter.com/NXT2aZ2BSr
