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Toe the line or face a fine: CFTC warns crypto world amid $4.3bn Binance victory lap

Toe the line or face a fine: CFTC warns crypto world amid $4.3bn Binance victory lap
Former Binance CEO Changpeng Zhao faces up to 10 years in prison for anti-money laundering failures at the exchange. Credit: Rita Fortunato/DL News
  • The CFTC is doing a victory lap after the successful resolution of its lawsuit against Binance.
  • The case highlights the CFTC’s ability to police its beat, Commissioner Johnson told a conference in London.

After the US government’s record settlement with Binance exchange, the message from the US commodities markets regulator is clear: toe the line, or face a fine.

As the Commodity Futures Trading Commission basks in the successful resolution of its lawsuit against the Binance crypto exchange, one of its commissioners, Kristin Johnson, addressed a conference in London on Tuesday.

The Binance resolution marks “a new chapter in the conversation and engagement” between crypto market participants and regulators, Johnson said on stage at the event, which was hosted by the Financial Times.

Johnson warned crypto market players that regulators will send more enforcement actions their way.

But, she added, “My hope is that we’ve seen a spike, and what we’ll see going forward is that these early cases are a cautionary tale.

“For those firms that want to successfully operate in this space, there’s an increasingly clear template for how to operate.”

The CFTC, along with the US Treasury Department, inked a $4.3 billion settlement with Binance in November.

As part of the deal, Binance pleaded guilty to anti-money laundering failures. The exchange is now also subject to ongoing monitoring.

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Its co-founder, Changpeng Zhao, pleaded guilty to willfully violating the Bank Secrecy Act, stepped down as CEO, and now faces a prison sentence of up to 10 years.

The CFTC also fined former Binance chief compliance officer Samuel Lim $1.5 million.

Regulatory triple threat

Johnson seemed at pains to emphasise that while the Binance settlement grabbed headlines because of its record penalty and high-profile CEO, it’s also noteworthy for what it says about the CFTC’s capabilities.

The agency has more range as a regulator than just weeding out what she called “garden variety” fraudsters — it can also effectively police its designated beat, she said.

Sure, the CFTC has brought some 134 enforcement actions against crypto market participants, and a significant majority of those allege fraud or similar misconduct, according to Johnson.

But the CFTC’s charges against Binance had nothing to do with fraud.

Rather, the regulator charged the exchange with offering derivatives trading to US customers while failing to register with the CFTC.

The failure of Binance, as far as the CFTC was concerned, hinged on failing to put in place proper risk management structures, and commingling functions — such as trading and the safekeeping of assets — that in CFTC-regulated firms are kept separate.

And it’s not just Binance, Johnson said. The CFTC has also sued Celsius, Voyager Digital, and FTX in cases that, while they involved fraud allegations, were also about alleged registration failures or the commingling of customer and proprietary assets.

Risk management and the separation of functions are bread and butter for the CFTC, which was a sleepy agriculture-focused agency until it was granted authority over the derivatives markets in the wake of the financial crisis.

“It shouldn’t be overlooked that the CFTC is focused not merely on policing markets for fraud, but bringing order and structure that is needed for every market to the crypto services ecosystem,” Johnson said.

Calling for regulation

In prepared remarks, Johnson called for legislators and regulators to develop a comprehensive regulatory regime encompassing digital assets.

While enforcement is one way to establish regulatory guardrails, she said, “the guardrails I’m thoughtful about here are not simply the standard ‘no lying, no cheating, no stealing.’

“More importantly, they are increasing the likelihood that corporate governance and market structure reforms will order crypto markets.”

A well-defined rulemaking process would impose a far tighter grip on crypto firms than regulators can hope to achieve through enforcement actions alone, she said.

“It’s useful for us to hear from Congress directly regarding the direction of travel, and to begin to take up that charge,” Johnson said.

That’s in stark contrast to the stance taken by Gary Gensler. The Securities and Exchange Commission chair is firm that most crypto assets are securities, falling under the aegis of his agency, and that existing securities laws are sufficient to regulate the industry.

The CFTC wants more direct authority over crypto — though Chair Rostin Behnam has denied charges of a turf war between the two watchdogs.

The industry has generally assumed it has a more sympathetic regulator in the CFTC, and has lobbied for lawmakers to give the smaller agency more powers.

While the CFTC has enforcement power over spot markets, it doesn’t make rules in this space.

That lobbying has borne fruit. The Financial Innovations and Technology for the 21st Centuray Act, backed by House Financial Services Committee chair Patrick McHenry, passed out of committee earlier this year.

The FIT Act, as it is known, would create market structure and registration process for crypto firms, hand more power over spot markets to the CFTC.

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