U.S. Department of Justice officials are considering fraud charges against crypto exchange Binance, but are concerned about the cost to consumers, according to people familiar with the matter.
Federal prosecutors worry that if they indict Binance, it could cause a run on the exchange similar to the one that befell now bankrupt platform FTX, causing consumers to lose their money and potentially spurring a panic in the crypto markets, the people said.
Prosecutors are considering other options, such as fines and deferred or non-prosecution agreements, according to the people. That outcome would be a compromise, holding Binance responsible for alleged criminal behavior while reducing consumer harm.
The debate highlights the complicated and rapidly evolving nature of crypto enforcement and regulation in the U.S., where firms operate in a legal gray area and consumers enjoy none of the protections of the traditional banking system.
The DOJ declined to comment. Binance didn’t respond to a request for comment.
Binance and its founder, Changpeng Zhao, are already facing charges brought by the Securities and Exchange Commission, in addition to the Commodity Futures Trading Commission. The SEC’s complaint accuses Zhao and his firm of operating an unregistered exchange in the U.S. and knowingly allowing its citizens to participate in Binance’s offshore exchange.
The SEC also alleged Binance misled customers and investors by using a secret market-making firm called Sigma Chain to manipulate trades on Binance’s U.S. platform.
Legal experts have said that the SEC’s case resembles a criminal indictment because of the seriousness of the charges, raising the possibility that criminal charges could follow.
It’s unusual for the SEC to bring a civil suit ahead of federal prosecutors, especially in high profile cases. The agency typically works with the DOJ to bring civil and criminal charges at the same time.
The DOJ often weighs the effects on innocent consumers, employees, and shareholders when considering whether to bring indictments against big entities. That’s been the case since Arthur Andersen two decades ago.
The question is whether those factors should play a role when it comes to a crypto exchange that operates in a legal gray area.
People who trade crypto on Bianance and were allegedly defrauded by the company’s tactics should’ve known they were taking a bigger risk than they would have on regulated exchanges.
In order to access Binance.com, U.S. citizens need to use a VPN or some other tool to circumvent restrictions.
But that hardly makes Binance’s customers complicit in the company’s alleged misdeeds. Crypto is a mainstream part of the financial system now.
The fact that the DOJ is debating the effects an indictment could have on consumers is, in a way, a nod to the legitimacy of crypto.
Room for Disagreement
A failure to indict Binance, assuming there is enough evidence to warrant charges, may only be delaying the inevitable collapse of the exchange. And it ultimately may invite more bad behavior in the future by sending a signal that the U.S. is soft on crypto exchanges.
Economist Nouriel Roubini, well known for predicting the real estate crash of 2007-2008, argued that we should essentially throw the baby out with the bathwater, calling the entire crypto ecosystem corrupt. “These people should be out of here,” he said.
U.S. Senator Elizabeth Warren has also called for an additional criminal investigation into Binance for allegedly lying to Congress. “These actions by Binance and Binance.US represent a potential violation of federal law that may subject company officials to fines and imprisonment,” she wrote.
The View From Offshore
The U.S. played a part in this by creating a nebulous and shaky regulatory environment for crypto companies operating within its borders.
That drove many in the crypto industry into the arms of countries willing to look the other way in an effort to court crypto businesses.
The SEC, with another lawsuit against crypto exchange Coinbase, seems bent on trying to further push digital assets out of the U.S. Lawmakers, on the other hand, could protect consumers by creating new rules governing the industry, making the U.S. a more inviting place and giving consumers safer alternatives to exchanges like Binance and FTX, which went offshore.