An important US regulator’s probe into Binance Holdings Ltd. has scared US companies who worked with the exchange to trade cryptocurrency. The impact has spread well beyond Changpeng Zhao’s business.
Commodities Futures Trade Commission’s inquiry into three trading firms’ contracts with the exchange has already sparked conflict in a market where the operation of securities exchanges is dependent on US licenses. In the CFTC’s case, the firms were not named.
While many have experimented with cryptocurrencies, American trading firms still rely heavily on equities and other traditional assets. So their risks are incredibly high. A significant regulatory error could impact their overall capacity to conduct business.
How the case against Binance, a cryptocurrency exchange with a global footprint but no US headquarters, will pan out is still up in the air. Nonetheless, numerous US trading firms are registered as brokerages with the Financial Industry Regulatory Authority. They are subject to the regulation of various US authorities.
Cayman Islands and Binance Holdings Ltd
The CFTC claims that one unnamed US Company traded on Binance using a Cayman Islands subsidiary. Another traded on Binance after concluding a “services agreement” with a purportedly unconnected organization governed by Jersey law, a British dependency. According to the accusation submitted on Monday in federal court, one-third began trading through a Singapore subsidiary before switching to a company also incorporated in the Cayman Islands.
According to the CFTC, Binance allegedly advised some US customers to utilize virtual private networks, or VPNs, to hide their location and advised some “VIP customers” with strong US connections to use shell companies. The CFTC said that such VIPs included US-based trading companies.
According to the CFTC, Binance purportedly used a formal process known as “VIP Handling” to facilitate deals with trading companies.
The CFTC’s action was “unexpected and disappointing,” according to Binance. The exchange stated that it had been collaborating with the regulator for over two years. It had increased the size of its compliance team and would keep doing so with the US and international authorities.
According to Hayden Hughes, co-founder of the social trading platform Alpha Impact, the CFTC action significantly increased the risk of trading firms leaving Binance.
Expected Reduced Liquidity in the Digital Asset Market
According to Bloomberg News, the lawsuit would reduce liquidity in the digital asset market. As per Cumberland, a significant crypto trading firm and a subsidiary of the Chicago-based DRW. However, Cumberland advised traders to pause and consider the action’s consequences.
The firm stated in a statement released on Twitter on Monday that there is a chance the industry would emerge from the lawsuit with “confidence-bolstering regulation and fairer industry standards.” In addition to declining to speak further, Cumberland is not there in the CFTC’s complaint against Binance.
