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Binance and the Labyrinth of Regulation

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Written by   13
1 month ago

Regulation is one of the biggest topics in cryptocurrency these days. Governments and regulators had for years ignored crypto and related industries. Perhaps they thought crypto would simply vanish into the ether as quickly it had come. But the ongoing bull market has turned Bitcoin and other cryptocurrencies from fringe assets into a multi-trillion dollar asset class.

Regulators have chosen to no longer ignore crypto and this year has provided ample evidence of their about-face. China has been one of the largest antagonists towards the space, banning cryptocurrency mining outright earlier this year, which was a significant contributor to the long-term dip out of which the market is still digging itself. Not to be left in the dust by its rival in the East, the United States has shown quite an adversarial streak as well, with federal regulators threatening lawsuits against the cryptocurrency exchange Coinbase, and state regulators issuing injunctions against the crypto bank BlockFi. However, perhaps no company has seen more aggression from regulators around the world than Binance, the world’s largest cryptocurrency exchange.

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Binance: From Zero To Sixty

Binance was founded by Changpeng Zhao (also known as “CZ”), a Chinese-Canadian developer. CZ had significant experience in both traditional and crypto markets prior to founding Binance, having helped to develop blockchain.info and having served as CTO at OKCoin, a different cryptocurrency exchange. CZ serves as Binance’s CEO and is a vocal member of the cryptocurrency community, participating quite frequently in industry events and boasting several million followers across Twitter and other social media platforms.

By all accounts, Binance’s growth is astounding. The company was founded in 2017, but had already become the largest cryptocurrency exchange in the world by market cap by early January of the following year. Binance is also the largest exchange by daily trading volume, often boasting a billion dollars or more in daily settled value. Lastly, it’s estimated that more people actively use Binance’s services than even its next largest competitor, Coinbase.

Binance and a Labyrinth of Regulation

Binance’s size has done little to protect it from the advances of regulators around the world, and by many accounts has made it more of a target. Regulators also expect to have a centralized organization with which to interact, and Binance has for years sought to become as decentralized as it can be while still operating as a global business. That reality, coupled with a fair amount of behavior that governments have found distasteful, has led Binance into murky waters in several of its largest areas of operations:

Japan

Japan’s Financial Services Agency issued a warning in late June 2021 that Binance was operating without permission in the country and had not registered to do business. The regulator had issued a nearly identical warning in early 2018.

Thailand

Thailand’s Securities and Exchange Commission filed a criminal complaint against Binance in early July 2021 asserting that the exchange had solicited Thai citizens to use its services even though it had not filed for appropriate licensing in the country.

United Kingdom

Britain’s Financial Conduct Authority indicated in late  June 2021 that an affiliate of the cryptocurrency exchange, Binance Markets Ltd., was not permitted to operate in the U.K. and would require written approva from the regulatorl before being allowed to resume operations.

Germany

Germany’s Federal Financial Supervisory Authority stated in late April 2021 that it believed Binance was violating the country’s securities laws by offering tokenized stocks (for companies like Tesla and Apple, for example) on its exchange. Binance stopped offering the token service just a few months later.

The Netherlands

The Dutch central bank, De Nederlandsche Bank, stated in mid-August 2021 that it believes Binance is illegally offering custodial wallets and that it does not comply with the country’s Anti-Money Laundering and Anti-Terrorist Financing Act.

United States

The U.S. Commodity Futures Trading Commission (CFTC) announced a few days ago that it has launched an investigation into whether the exchange or its employees participated in insider trading to the detriment of customers. The Internal Revenue Service (IRS) also launched an investigation earlier in the year regarding potential money laundering through Binance.

The list of actions against Binance actually goes on, with other countries like Hong Kong, Malaysia, and Italy having also acted against the company.

Regulation is a Mixed Bag

Regulators and their supporters will claim that the laws and standards that they help enforce are necessary to protect retail investors and public interests. Those claims certainly have some merit. After all, there are many examples of Ponzi schemes, hacks, and more that have been foiled by concerted efforts of regulators and law enforcement agencies over the decades.

That said, the core ethos of cryptocurrency and blockchain is based on an absolute level of decentralization in operation. The idea that a centralized entity, like a regulator, should have the ability to interject its own rules and enforcements onto a blockchain is in many respects antithetical to what the industry has and will continue to achieve.

This is not to say that cryptocurrency and blockchain eschew regulation. Quite the contrary actually. Decentralized blockchains are designed to be highly regulated, by software code on the base layer and by the worldwide network of machines and individuals participating in the blockchain and, as a result of that participation, in the blockchain’s governance. To summarize, cryptocurrency and blockchain don’t eschew regulation, just regulators.


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This is not financial advice. This newsletter and related content are for informational purposes only. Cryptocurrencies, stocks, and similar assets can be risky. Always do your own research before making any sort of investment.

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