China-Linked Crypto Exchange Binance in Trouble

Binance CEO Changpeng Zhao looks on at the SS Lazio Radio during the visit at Formello Sport center, in Rome, Italy, on May 12, 2022. Paolo Bruno/Getty Images

Commentary

Binance is the world’s biggest cryptocurrency exchange. It facilitates almost $6 billion in daily trades of 388 different cryptocurrencies, according to the latest data. The company reportedly makes billions of dollars in transaction fees.

But Binance is hitting rough waters around the world.

“Binance’s options in Europe seem to be narrowing as evidenced by a recent string of withdrawals and rejections from local regulators,” according to an Aug. 10 report from CoinDesk.

On Aug. 2, the China-linked company refuted a Wall Street Journal report that it operates in China despite a ban. The report states that customers in China can access the exchange through a virtual private network (VPN) that masks their locations.

In May, according to the Journal, Binance facilitated $90 billion of trade for China-based customers. This made China the largest market for Binance in the month of May. South Korea, Turkey, Vietnam, and the British Virgin Islands are the company’s next biggest markets.

U.S. banks stopped working with Binance.US, the company’s American branch, in response to Securities and Exchange Commission (SEC) charges in June. Binance.US had to announce it would stop allowing exchanges in dollars, which is a major blow to its investors and, therefore, to the platform.

Binance is banned in the United States, but the platform is available using a VPN. According to Reuters, which reported on an internal Binance presentation last year, “Binance would restrict U.S. customers’ access to the main platform, the presentation said. But Binance would enable ‘strategic’ use of virtual private networks, which obscure the location of internet users, to ‘minimize economic impact’ of the changes.”

Binance logo in an illustration taken on March 31, 2023. Dado Ruvic/Reuters

Reuters reported that this would allow a “loophole” through which “U.S.-based traders would still be able to access the main exchange, with its greater liquidity and broader range of products, by using a VPN connection.”

Binance encouraged a culture of secrecy among its employees, according to Reuters, including routine use of disappearing messages and a ban on their telling others for whom they work. Employees were reportedly told not to wear Binance-branded clothing.

The shadowy practices of Binance raise questions about whether the company is engaged in questionable activities.

The U.S. Justice Department is considering whether to charge Binance with fraud, according to an Aug. 2 Semafor report. Other options include fines or non-prosecution agreements.

Last month, the SEC sued Binance, founder Changpeng Zhao (called CZ for short), and the company’s U.S. exchange. U.S. legal proceedings are reportedly the biggest threat to Binance’s business and could precipitate a liquidity crisis and panic selling of the company’s own branded cryptocurrency, valued at tens of billions of dollars.

“Through thirteen charges, 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,” said SEC Chair Gary Gensler in a statement. “As alleged, Zhao and Binance misled investors about their risk controls and corrupted trading volumes while actively concealing who was operating the platform, the manipulative trading of its affiliated market maker, and even where and with whom investor funds and crypto assets were custodied. They attempted to evade U.S. securities laws by announcing sham controls that they disregarded behind the scenes so that they could keep high-value U.S. customers on their platforms.”

According to the SEC, “In one instance, the Binance chief compliance officer messaged a colleague that, ‘[w]e are operating as a fking unlicensed securities exchange in the USA bro.’”

Mr. Zhao lives in Dubai, which has not agreed to a U.S. extradition treaty.

The FTX logo and mobile app adverts are displayed on screens in London on Nov. 10, 2022. Leon Neal/Getty Images

Unusually, U.S. cases against Binance have been limited to civil suits without accompanying criminal charges. According to Semafor, the Justice Department is wary of bringing criminal charges against Binance over concerns that they could hurt consumers.

When criminal charges were leveled against FTX recently, customers fled, the company went bankrupt, and many customers lost money.

However, free markets depend upon investors having skin in the game by being responsible for not only their good but also their bad investments.

Crypto has always been a risky and questionable investment that competes with the global predominance of what should be considered a “democratic currency,” the U.S. dollar. The ability of the United States to defend democracy globally depends upon a vibrant U.S. economy, which in turn depends upon a strong dollar.

Supporting America’s currency, stocks, and bonds has always been pro-democracy and pro-market. Conversely, investing in dictator-backed currencies, or those backed by shadowy crypto-technologies, has ignored the negative externalities of their competition with democratic currencies.

The global market capitalization for cryptocurrencies, at the time of writing, is a volatile $1.18 trillion. The four biggest crypto market caps are Bitcoin’s $573 billion, Ethereum’s $222 billion, Tether’s $83 billion, and Binance coin’s $37 billion. The main Binance coin is called the BNB.

These are just the top four cryptocurrencies by market capitalization. The total crypto market is a wild West of about 23,000 currencies, which some have called a “horse race” between the United States and China’s digital currency that will ultimately yield a single winner.

This first-past-the-post race may explain why some companies like Binance are putting so much effort into crypto.

On Aug. 4, Binance opened trading of a relatively new U.S. dollar-pegged “stablecoin” from Hong Kong. In two days, the coin’s market capitalization surged 10 times to $260 million. Binance recently removed the most popular stablecoin, Tether, from its platform. Tether is owned by a company headquartered in Hong Kong.

The United States and our allies should respond to the shadowy nature of China-linked cryptocurrencies and trading platforms with bans and enforcement.

Meanwhile, the Justice Department should do its job and charge Binance with fraud if it has the evidence to do so. Investors who lose money from betting against democratic currencies like the U.S. dollar by investing through a China-linked crypto exchange should have known the risks.

Caveat emptor.

Views expressed in this article are opinions of the author and do not necessarily reflect the views of The Epoch Times.