The Commodity Futures Trading Commission on Monday hit out at the world’s largest cryptocurrency exchange with an explosive lawsuit alleging, among other things, that Binance knew it was facilitating trading for criminals.
“Like come on. They are here for crime,” Samuel Lim, Binance’s former chief compliance officer, wrote in a chat message, referring to customers including some from Russia.
The lawsuit, which also alleges that Lim and another associate knew Hamas, a terrorist group, was trading on the exchange, follows a long string of legal and regulatory action against Binance, headed by crypto celebrity Changpeng “CZ” Zhao. The first in the long-awaited barrage.
While the CFTC charges are clearly a blow to the crypto giant, does it present a potential opportunity for US-based competitor Coinbase?
Analysts at Moody’s, S&P Global Ratings and Oppenheimer & Co all say the CFTC lawsuit is further evidence of a volatile regulatory environment, a continuing problem for Coinbase, which derives the bulk of its revenue from transaction fees.
“We see this as a continuation of a series of regulatory failures for the crypto industry,” said Thierry Grunspan, a director at S&P Global Ratings who follows Coinbase.
Over the past three months, the Securities and Exchange Commission has targeted several well-known crypto firms, including Genesis, Gemini, Kraken, Paxos, and even Coinbase itself, which recently announced it received a Wells notice from the SEC. Has happened. The document is used by the regulator to alert companies that they are facing imminent legal action.
“My understanding is that there will be more and more enforcement action over the next few months,” said Owen Lau, a senior analyst covering Coinbase for Oppenheimer.
Will customers run away?
Analysts say that although the Binance lawsuit has made waves in the media, its impact on the places traders do business is likely to be minimal.
“In terms of reputational damage,” Lau said, “there have always been allegations and investigations against Binance.”
However, he pointed out that the CFTC lawsuit specifically mentions how traders were using VPNs – to obscure user locations – to access Binance’s international exchange. (CZ’s company has a US-specific counterpart, Binance.US, to comply with federal and state regulations.)
Lau said it is possible that US-based traders may move their business to other exchanges like Coinbase, but some are expecting a drastic change in customer behavior.
“Customers who use Binance are generally different from customers who use Coinbase,” said Fadi Masih, vice president and senior analyst at Moody’s. Luck, He added that Coinbase’s exchange has limited offerings compared to Binance, which offers more leveraged products.
“We would not expect the change to return to Coinbase,” he said, adding that CME Group, a derivatives marketplace, could see more clients, as it offers bitcoin and ethereum futures and options.
‘Crystallization’ of observation
analysts we spoke to Luck Coinbase’s current approach has not changed dramatically since the CFTC brought charges against its biggest competitor. That being said, he pointed out that the lawsuit may have one silver lining: It specifies that bitcoin, litecoin and ether, Ethereum’s native cryptocurrency, are commodities.
On the other hand, SEC Chairman Gary Gensler still insists that every non-Bitcoin digital currency is a security. This battle over semantics has wide-ranging implications, as the classification of cryptocurrencies could lead to hefty fines and penalties being imposed against companies that fail to comply with SEC regulations.
“Maybe not ‘a silver lining,’ but potentially an important one,” said Grunspan of S&P Global. “When you add up bitcoin and ethereum trading volumes, it is actually the vast majority of Coinbase spot-cash transactions in crypto.”
Moody’s analyst Masih agreed.
“It’s not a home run,” he said. “But at the same time, I think what we’re seeing is a crystallization of regulatory oversight.”