Crypto exchange Binance is suffering from increasing regulatory pressure – could collapse "devastating" Impact on the market

• Binance faces CFTC lawsuit, SEC lawsuit and investor class action lawsuit
• French authorities investigate – withdrawal from the Netherlands • Binance collapse would have “devastating” impact on the crypto market

FTX process is running

It has now been almost a year since the troubled crypto exchange FTX had to file for bankruptcy. After doubts about its capital reserves led to customers fleeing and withdrawing billions of dollars in funds, the crypto exchange ran into payment difficulties. Competitor Binance initially announced the partial takeover of FTX, but then realized that FTX’s difficulties exceeded Binance’s ability to help and as a result called off the takeover. FTX’s demise rocked the crypto sector again, following the debacle surrounding crypto lenders Celsius and Voyager, hedge fund Three Arrow Capital and digital tokens Terra/LUNA in the spring of last year.

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A fraud case is now underway against FTX founder Sam Bankman-Fried. As the Reuters news agency reports, the authorities accuse him of billion-dollar fraud and embezzlement of customer funds. Bankman-Fried is said to have secretly moved funds in order to speculate with them and live on a large scale. But while the crypto industry’s focus is currently on the FTX process, investors should not lose sight of the world’s largest crypto exchange Binance.

Binance is suffering from increasing regulatory pressure

In March, the US regulator Commodity Futures Trading Commission (CFTC) filed a lawsuit against Binance. The crypto exchange violated rules on the US financial market, operated certain businesses and services without the necessary approval and specifically tried to circumvent CFTC regulations. At the beginning of June, a lawsuit was filed by the US Securities and Exchange Commission (SEC) for various violations of securities laws. The SEC accused the crypto exchange of, among other things, illegally operating financial transactions and providing services without the necessary licenses. SEC chief Gary Gensler accused Binance and its founder and boss Changpeng Zhao of deception, conflicts of interest, failure to disclose and calculated evasion of the law. For example, investors were misled about risk controls and trading volumes. Over the summer, there were also reports of ongoing investigations by the US Department of Justice and a possible impending lawsuit against Binance.

Some top executives, including Patrick Hillmann, chief strategy officer and Steven Christie, senior vice president of compliance, left the company. In mid-July, the Wall Street Journal also reported that the crypto exchange had laid off more than 1,000 employees in the previous weeks.

Meanwhile, Binance and Cangpeng Zhao are also facing a class action lawsuit from investors affected by the FTX scandal. The accusation: Binance and Changpeng Zhao are said to have been involved in the collapse of FTX. The crypto exchange and its CEO are said to have violated the law against unfair competition. In addition, Cangpeng Zhao’s tweets are said to have harmed FTX and “ultimately led to a precipitous and unprecedented collapse of the FTX companies,” the class action lawsuit says.

The pressure is also increasing in Europe

Regulatory pressure on Binance is also increasing in Europe. According to media reports, the French authorities have been investigating the French branch of the crypto exchange since last year on suspicion of serious money laundering. As reported in mid-June, Binance’s offices in France were searched. Shortly before, the company had announced its withdrawal from the Dutch market. Binance cited a lack of a license as a Virtual Asset Service Provider (VASP) in the Netherlands as the reason for this. Binance had also had to withdraw from the Belgian market. In June, the Belgian Financial Services and Markets Authority (FSMA) asked Binance to cease its operations in Belgium – but in September the crypto exchange announced “that new registrations for Belgian residents will be possible again from September 25, 2023” and “existing users in Belgium can regain access to certain Binance products and services “by accepting the recently updated Terms of Service.”

Meanwhile, in Germany, the Binance office in Frankfurt am Main is apparently being closed, as BTC-ECHO reported last month, citing insiders. This is in response to the fact that the Federal Financial Supervisory Authority (BaFin) denied the company a crypto custody license, which Binance had already applied for a year ago. The application was not officially rejected, but according to Finance Forward, BaFin signaled in June that it would not grant Binance the license and so Binance “voluntarily” withdrew its application. However, the company is still striving for a license in Germany. In addition, Binance is focusing on preparing for the EU regulation “Markets in Crypto Assets Regulation (MiCA)”, which is due to come into force by December 30, 2024.

Binance collapse would be a big problem for the crypto market

As the Neue Zürcher Zeitung (NZZ) reports, crypto expert Stefan Höchle assesses the situation at Binance to be less dramatic than at FTX, despite all these challenges and problems. In his opinion, Binance is likely to have larger liquidity reserves than FTX did before its collapse.

But similar to FTX, events could also take over at Binance and so even a crypto exchange as large as Binance is not immune from a loss of customer trust and an associated bank run. And so Binance could also collapse very suddenly. According to Höchle, due to the size of the crypto exchange, such a collapse would have “devastating” effects, reports the NZZ. This would depress prices on the crypto markets and lead to a serious loss of trust. Although other trading venues on the market could step in, similar to FTX, liquidity in the crypto market could decline dangerously far and possibly push prices further.

Editorial team finanzen.net