After FTX Collapses, Feds Go After Binance

Sam Bankman-Fried demonstrated what happens when you combine unfathomable amounts of money and no regulation. It isn’t pretty.

Binance moves $12 billion a day and has no physical office.

What could possibly go wrong?

Since the SEC was asleep at the wheel when FTX collapsed, leaving a lot of customers high and dry – since they are all considered unsecured creditors in a bankruptcy, the SEC decided not to do the same thing with Binance.

Today the SEC filed charges against Binance in the DC District Court. Among the 13 [alleged] violations of securities laws are:

• Binance and the company’s CEO had the freedom to divert customer assets as they please to
• Among the companies they diverted money to is Sigma Chain, a classic pump and dump scheme that “engages in manipulative trading that artificially inflated the [Binance] trading volume”.
• The SEC also claims that Binance and Zhao (the founder and CEO) concealed the comingling of billions of dollars of customer assets which were delivered to yet another third party, Merit Peak Limited, also owned by Zhao.

If this looks like a shell game and quacks like a shell game …

SEC chair Gary Gensler said “We allege that Zhao and Binance entities engaged in an extensive web of deception, conflicts of interest, lack of disclosure, and calculated evasion of the law,”.

Binance, as a defense, basically said that since the SEC didn’t tell them that they couldn’t do all these things, it is not against the law and therefore they didn’t do anything wrong. Their defense is not that they aren’t doing all of these things, just that they think these things are legal.

In fairness, Congress has also been asleep – which is pretty much their normal state – and has not implemented any regulation of crypto, even after the FTX collapse.

This is just the beginning of the charges.

What may happen now is a classic “run on the bank”. If “investors” – and I use that term very loosely – maybe speculators – get nervous and start pulling large amounts of crypto out of their accounts, fearing an FTX style meltdown, that could become a self fulfilling prophecy.

If the SEC wins their case – and that is a big if – Binance may be forced to stop operating in the U.S. That does not mean that U.S. persons won’t give Binance their money – it just means that they are doing so understanding that their money is completely unprotected and they do so understanding that they might lose everything that they have invested in it.

While this “complaint” as it is legally called is a civil matter, criminal charges may follow, according to attorney John Stark, who used to work at the agency.

Assuming current and former employees are concerned that they, too, may be charged criminally, they may suddenly become “very cooperative”. Do not be surprised if this happens, says Stark.

They are not alone. The SEC already hit Coinbase with a notice of intent to sue in March (I assume this requires them to preserve records and if they don’t that failure alone could cause the judge to throw the book at them).

Basically, as is often the case in the US, the government has stood around on the sidelines for a while and allows companies to step in their own doo-doo. Then it comes in and prosecutes them. It looks like this time is no different.

Look for more regulation.

But the problem is that, like is the case with FTX, the big investors run for the hills and get out while the getting is good while the small ones believe the bullshit that the company is spouting and get the short end of the deal (I was going to use a different word, but I want to keep this PG).

If you have money in any crypto exchange, make sure that it is money that you can afford to lose. You might not lose it – but you might. Credit: Wired

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