Is Binance Guilty of Fraud?

Over the years crypto investors and traders accepted wild market swings because prices always headed higher. The crypto world resisted regulation because it meant government interference in this brave new world. Crypto leaders like Sam Bankman-Fried became heroes. Two aspects of crypto winter eroded trust in crypto and changed all of this. Massive losses that never turned around made many question the whole rationale of cryptocurrencies. Then it became clear that crypto heroes like Bankman-Fried were committing fraud as they played fast and loose with customer assets. Now we see that Binance is in trouble with the SEC. Is Binance guilty of fraud too?

Market Risk Versus Con Games in the Crypto World

At the heart of the crypto story has always been the assertion that this is a way to save people from governmental overreach as well as the meddling of middlemen in people’s financial affairs. Largely because prices kept going up, investors were willing to accept financial setbacks as Bitcoin and the rest fluctuated up and down. The continued losses as crypto fell were compounded by the collapse of large crypto exchanges and DeFi businesses. People who lost money in crypto were not happy with their losses but could accept them because that is what markets do, go up and down. What made folks disillusioned with crypto, and frankly angry, were reports of being lied to by the likes of FTX. Crypto was supposed to save us from the con games of governments and financial entities that controlled the flow of our money. Now we saw that the crypto and DeFi solution was as bad, or worse than, the traditional financial problem. Binance now seems to be just one more example of skullduggery in the crypto world.

What Hanky-Panky Has Binance Been Up To?

The New York Times reports SEC charges against Binance. According to the SEC, the largest crypto exchange in the world has been diverting billions of dollars of customer assets to a company (Merit Peak Limited) controlled by its founder, Changpeng Zhao. Binance is charged with improperly mixing customer funds with their own and hiding that fact from both customers and from regulators. Thirteen charges in all have been filed against Binance and Mr. Zhao. A key part of the complaint against Binance is that the company not only did such things but that they intentionally misled their investors and customers as to their control over things like manipulative crypto trading.

Second Time in Trouble with the Law for Binance

This is the second time that a government agency has gone after Binance. The Commodity Futures Trading Commission filed charges against Binance in March 2023 for willful evasion of Federal law and operating an illegal digital asset business in the US. The CFTC says that Binance tried to skirt parts of the Commodity Exchange Act as well as several CFTC rules. Binance is the biggest crypto exchange in the world and has the vast majority of its business outside of the USA where SEC and CFTC rules do not apply. They set up a US arm of the business that was supposed to comply with US laws and was supposed to be run independently from the rest of the company. Charges by both the CFTC and SEC indicate that, in reality, Binance and its founder directed the US operation and broke numerous laws by allowing US traders to use their international services in violation of US law.

Last Straw for Crypto Investors with Binance

Many crypto true believers will forgive Binance for dancing around US regulations. They will say that crypto is all about financial freedom and avoidance of heavy handed and unnecessary regulations. But even those folks will not be happy if the SEC proves that Binance insiders siphoned off customer assets, mixed them with their own, and then effectively hid them in an outside company. This smacks of the same kind of fraudulent activity that occurred in FTX when they moved assets around to cover their financial problems. In the case of Binance it does not appear (yet) that the company has any financial problems. Rather it appears to be driven into fraudulent activity by boundless greed with no overriding moral principles to keep it honest.

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