The world’s largest crypto exchange Binance’s stairway down: from an investigation to a lawsuit

Acmecryptocorp
6 min readMar 31, 2023

One of the largest cryptocurrency exchanges in the world, Binance, has recently paused deposits and withdrawals “for a small subset of users.” One of the latest posts on the company’s official Twitter page explains that it was done “due to recent banking developments” and will remain paused “out of an abundance of caution”. This measure followed the Binance Smart Chain (BEP20) network update. The exchange added that it expects to restore withdrawals for all users soon. Binance users were generally unhappy with this explanation. Many demanded to return their money immediately and expressed their disappointment at Binance’s social media. Others advised Binance users to transfer their crypto to a different exchange and withdraw it from there. Before this pause, Binance had experienced problems twice in the past week.

But all the above fades in comparison to what the company is currently going through. The crypto exchange saw enormous outflows after being sued by the US regulator–the Commodities Futures Trading Commission. Investors instantly withdrew as much as $2.2 billion worth of cryptocurrencies of Ethereum alone over the past seven days. In addition, the platform has seen withdrawals made on other networks, including popular blockchains like Bitcoin, Tron, and Binance’s own BNB Chain. The substantial outflow comes from the exchange’s total holdings in publicly known wallets, which at the time was worth around $63.2 billion.

It is possible that another reason behind both the withdrawals and generally lower trading volumes seen on Binance lately was that the crypto exchange has recently brought back the trading fees on Bitcoin trading pairs. The platform had previously offered fee-free trading on all bitcoin pairs, which inevitably led to a huge increase in trading volume. But now that the trading fees are back, some traders, including algorithmic traders that are mostly responsible for huge trading volumes, have started to turn to more fee-friendly exchanges, adding to the withdrawals. It’s a common knowledge that fees is an extremely important factor in the crypto space. Generally, an average trader makes a decision to trade on an exchange first and foremost based on its custodial aspect; and the second is the fees without a doubt.

Nevertheless, the lawsuit played a crucial part in triggering massive withdrawals as many investors and traders expressed their concern over the integrity of the exchange in this way. The United States Commodity Futures Trading Commission (CFTC) has filed suit against Binance and its founder and CEO Changpeng Zhao for the violation of trading and derivatives rules on March 27. The exchange allegedly failed to meet its regulatory obligations by not properly registering with the derivatives regulator. In addition to the CFTC, Binance has been under investigation by the Internal Revenue Service and federal prosecutors since 2021, who have been examining the exchange’s compliance with the Anti-Money Laundering rules.

Before filing legal action against Binance, SEC Chair Gary Gensler frequently accused digital assets companies of running multiple businesses that, in his opinion, must be run by separate entities with their distinct specification. Gensler encouraged such companies to divide into several parts and register each of their different operations separately. The SEC has been stepping up enforcement against the biggest industry players. Thus, he recently notified Coinbase of the Commission’s plan to sue over unregistered digital asset offerings and other issues. Besides, more action towards crypto regulation is coming. It has been confirmed that SEC Chair Gary Gensler will face Congress on April 18th regarding his agency’s plans on the handling of digital assets. As he commented it, “This will be about his rulemaking and his approach to digital assets. It’ll be a large focus on general oversight of the Securities and Exchange and Commission, but in terms of policy, a serious approach or us laying down what I hope to spend the next couple of months on, which is a regulatory sphere for digital assets.”

Binance is the biggest cryptocurrency exchange with over $8.5 billion trading volume daily, so it was only natural that the news about the lawsuit against it sent Bitcoin one thousand lower in just one hour. The cryptocurrency had been on a two-week tear amid a banking crisis in the United States, but it fell sharply after the CFTC’s lawsuit against Binance became public. This was not surprising: CFTC vs. Binance is now an important driver of price action.

According to the lawsuit, Binance conducted transactions in Bitcoin, Ethereum and Litecoin for the residents of the United States since at least 2019 despite a policy of blocking or restricting U.S. customers. Thus, the company and its executives intentionally violated U.S. law, being aware that “Binance’s solicitation of customers located in the United States subjected Binance to registration and regulatory requirements under U.S. law.” These are allegations that have yet to be proven in a court of law. In his statement made a couple days ago, Changpeng Zhao said the allegations are “an incomplete recitation of facts.” At the same time, there is information that the early evidence gathered by the CFTC could appear to be fatal for Binance. A crypto observer commented that Binance could either fight the case in the United States or settle it outside the court, but in all likelihood, it would be at least forced to cease operations in the country.

It is logical to assume that the allegations in the CFTC’s complaint have strong implications for criminal and sanctions-related issues. Some of the claims in the lawsuit go far beyond just violating the U.S. law. For example, such as allegations that the exchange was well-informed that persons from sanctioned entities such as Hamas, a Palestinian militant group, were trading on the platform which wasn’t seen as a big deal by the Binance staff, would probably trigger both Department of Justice and the Treasury Department’s Office of Foreign Asset Control laws. In a February 2020 chat a Binance’s money laundering reporting officer acknowledged that terrorists usually would send “small sums” as large amounts are more likely to be seen as money laundering, by this confirming that were aware of the situation but turned a blind eye to it. The CFTC complaint emphasized that Binance used the U.S. services to operate, pointing to such tech giants as Google Suite, Webex, WeWork and Amazon Web Services as examples.

Binance has recently frozen over $2 million in assets linked to an alleged insider trading scandal. The exchange’s action was prompted by a tweet from Fat Man Terra, a popular crypto trader and influencer, who accused Binance of allowing insider trading to take place on its platform. According to him, several large transactions were made on Binance shortly before the exchange listed a new token called ADAMO. These transactions were made from several addresses that were linked to Binance employees, raising suspicions of insider trading. The allegations have not been proven, but Binance took swift action to freeze the assets in question to prevent any further trading activity. Binance has also released a statement on the matter, denying any wrongdoing on its part and stating that it has a zero-tolerance policy toward insider trading. The exchange has promised to fully cooperate with any investigations into the matter and has pledged to take appropriate action against any employees found to be involved in insider trading.

Amidst this legal scandal the world’s largest crypto exchange by daily trading volume, has opened a new blockchain hub in Georgia, the small crypto-friendly nation in the South Caucasus. In an announcement on its website, the trading platform noted that it already employs 25 people on its Georgia team but hopes to add dozens more jobs in the coming months. Besides expanding its workforce in the country, it also intends to improve blockchain education and accelerate the adoption of cryptocurrencies in the region.

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