A US lawsuit charging Binance and co-founder Zhao Changpeng with selling unregistered securities, alleging that the world’s largest cryptocurrency exchange had a pattern of flouting regulations in pursuit of growth, is the latest sign of how regulators’ more muscular approach to policing virtual assets continues to affect the global market.
In the absence of cryptocurrency-specific legislation, regulation of virtual assets in the US has largely been left to financial watchdogs like the Securities and Exchange Commission (SEC) – which also charged Coinbase Global on Tuesday with operating an unregistered securities exchange – while markets as far-flung as Hong Kong and the European Union have rolled out specific rules requiring licences for exchanges. The result is that selling cryptocurrency without a licence is getting a lot harder in many parts of the world, and that is exactly what the SEC alleges Binance was doing.
On Monday, the SEC filed 13 charges against Binance entities, including Binance.com and its US-facing platform Binance.US, and Zhao, who is widely known as “CZ”. The agency alleged the platforms did not operate independently from one another as advertised, and failed to protect investors, promoted unregistered securities, and mishandled customer funds.
Do you have questions about the biggest topics and trends from around the world? Get the answers with SCMP Knowledge, our new platform of curated content with explainers, FAQs, analyses and infographics brought to you by our award-winning team.
“The result will likely be billions of dollars in fines and Binance no longer serving US customers,” said Markus Thielen, head of research and strategy at cryptocurrency financial services firm Matrixport, adding that it would be an “unfortunate but expected development”.
“The industry will be very different in a year. Trading volumes will likely drop further and pressure market makers’ revenue projections,” he said.
The market has been in what traders refer to as a “cryptocurrency winter” since a series of company failures last year, most notably the bankruptcy of Binance rival FTX in November.
Excitement around a new regulatory regime in Hong Kong, which aims to turn the city into a virtual asset hub, has led to some hopes that it might contribute to a market rebound, but there has been little sign of that happening.
The cryptocurrency market tumbled by about 4 per cent the day after the SEC charged Binance, according to CoinMarketCap, while Binance Coin (BNB) dropped more than 7 per cent.
Binance had roots in mainland China when it was founded in 2017, but it fled later that year during one of Beijing’s earlier crackdowns on cryptocurrency, which is now strictly banned in the country. While some rival exchanges that also left China have been wooed back to Hong Kong to apply for licences under the city’s new rules, Binance has made no such commitment.
A Binance spokeswoman declined to comment on whether the company would apply for a Hong Kong virtual asset licence.
“We welcome more regulatory clarity for the industry and we are reviewing the rules carefully and considering our options to best encourage adoption of cryptocurrencies, to support Hong Kong becoming a virtual-assets hub whilst prioritising protecting our users,” she said. “We regularly review and update our compliance policies and procedures to ensure that we comply with the laws, regulations and compliance requirements of each jurisdiction.”
Some industry insiders who spoke on the condition of anonymity said Binance is unlikely to pursue a licence at this point, as the exchange may be deterred by high regulatory requirements that include limiting the trading of cryptocurrency to retail investors to tokens with large capitalisations, and excluding products like derivatives and stablecoins.
Binance recently said it would exit the Canadian market due to increased regulatory scrutiny there, and it lost its derivatives business licence in Australia.
The company has said it will defend itself “vigorously” from the SEC charges, which come on top of charges from the Commodity Futures Trading Commission (CFTC) in March.
The SEC and CFTC both accused Binance of offering illegal services to Americans. The SEC court filing detailed how Binance allowed users to continue trading on its “unregistered” international exchanges by changing their internet protocol addresses and removing US-related personal information. Other markets, including Hong Kong under its virtual asset rules and the European Union with its Markets in Crypto-Assets (MiCA) regulation, have moved to ensure only licensed exchanges can operate within their jurisdictions.
The SEC complaint includes accounts of internal communications and insider testimony. In one example provided by the SEC, a Binance chief compliance officer messaged a colleague, “We are operating as a f**king unlicensed securities exchange in the USA bro.”
“Traders are reacting accordingly and see the event as extremely bearish, shaking up the recently tame volatility of the cryptocurrency space,” said Justin d’Anethan, head of business development for the APAC region at the digital asset-focused investment management firm Keyrock.
“I’m sure a number of institutional and retail clients – and most probably the US-based ones – will have concerns about the lawsuit and maybe reduce any allocation/activity on the platform,” he added.
Binance has already lost some of its market dominance as a cryptocurrency exchange in recent months, after eliminating its zero-fee bitcoin trading in March. For the month of May, Binance’s market share was 57 per cent, below a February peak of around 70 per cent, according to data from cryptocurrency market data provider Kaiko. Binance US fell to 1.72 per cent.
Meanwhile, the smaller exchanges Huobi and OKX, which have said they would be applying for Hong Kong licences, have benefited, growing to about 4 per cent and 8 per cent of the market in May, respectively.
More from South China Morning Post: