Binance: basis for CFTC’s inquiry could be damning, says top lawyer

Rick Steves

Mr. Stankiewicz pointed to Binance’s mixed reputation in the industry especially with regards to its compliance efforts. According to Forbes, an internal whistleblower denounced the exchange’s practices of aiding US customers in circumventing its own internal controls, to help funnel these customers – and their associated revenues – to the main Binance exchange.

CFTC wants $660,000 fines to prove 3red Oystacher’s spoofing

The Commodity Futures Trading Commission has opened an inquiry into Binance to investigate allegations that the venue, which is not registered with the CFTC, allowed US citizens to trade in cryptocurrency derivatives, according to a Bloomberg report.

Binance has not been formally accused of any wrongdoing and may not face enforcement action. “However, where there is smoke, there may be fire”, said Matt Stankiewicz, Managing Counsel at The Volkov Law Group, on the law firm’s blog.

Mr. Stankiewicz notices some parallels with the CFTC’s investigation of BitMEX, though it does not yet appear to rise to the same level as Binance tried to keep US citizens away from its derivatives trading platform.

Measures taken by Binance include segregating US customers and force them to a US-based platform, headquartered in San Francisco, which restricted certain coin offerings and financial instruments, such as derivatives and options trading.

The compliance team restricted access based on a user’s IP address, but simply restricting IP addresses is not enough. VPNs or the TOR browser are a few tools at the disposal of anyone who wishes to circumvent such controls.

“This inquiry, depending on the outcome, could begin to provide guidance on this compliance challenge associated with operating a virtual-based exchange”, said Mr. Stankiewicz.

Binance’s KYC program seems to be outdated as unverified users who have not undergone a KYC review are restricted to withdrawing no more than two Bitcoin per day. With Bitcoin hovering just over $57,000, this means unverified users can transfer over $110,000 per day off the exchange.

“These restrictions were very likely created at a time when Bitcoin’s price was much lower. At this point, a $110,000 daily withdrawal limit may not be quite as strong a barrier as it needs to be”, Mr. Stankiewicz continued.

“Many exchanges take a similar approach, that they can provide “limited” services prior to conducting a KYC review, though do so at their own risk. US-based exchanges, in particular, can be extremely susceptible to money laundering and sanctions risks with such a high threshold.

“The CFTC will now review Binance’s overall KYC program to determine whether the program is effective and that the platform is doing all it can to ensure US citizens are not trading on the unlicensed platform”, said the Managing Counsel at Volkov Law Group.

Mr. Stankiewicz pointed to Binance’s mixed reputation in the industry especially with regards to its compliance efforts. According to Forbes, an internal whistleblower denounced the exchange’s practices of aiding US customers in circumventing its own internal controls, to help funnel these customers – and their associated revenues – to the main Binance exchange.

“This information may form the basis of the CFTC’s inquiry and could certainly be damning for Binance”, he continued, adding that it is the CFTC that oversees much of the space despite the SEC getting most of the attention.

“Many cryptocurrencies, if not most, are considered commodities for regulatory purposes within the US, which falls under the ambit of the CFTC”.

Bitcoin and Ether, the two largest and most popular cryptocurrencies, are considered commodities and regulated as such by the CFTC. The lawsuit that opposes the SEC vs Ripple is precisely based on the matter of what is the XRP, a commodity or a security?

While the SEC claims XRP is a security and its sale should have been registered with the financial watchdog, Ripple responded that it never held an ICO. Wherever the case may take us, it is likely to establish a meaningful precedent.

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