Binance is in hot water

Written by Kapronasia || June 12 2023

If you were wondering how long Binance could avoid a serious regulatory storm, you have your answer: until now. The United States’ Securities and Exchange Commission (SEC) last week announced it would file 13 charges against the world’s largest cryptocurrency exchange. Charges include operating unregistered exchanges, broker-dealers, and clearing agencies; misrepresenting trading controls and oversight on the Binance.US platform; and the unregistered offer and sale of securities. “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,” SEC Chair Gary Gensler said in a statement. Ouch.

Unsurprisingly, the crypto faithful think the SEC is unfairly targeting Binance. Among the excuses being bandied about for the SEC’s action against Binance are that the regulator is embarrassed about its failure to foresee the FTX implosion last year and is now overcompensating by suing Binance.

We reckon that while Binance may be too big to fail, it is also too big to not be regulated like other securities exchanges. Unpacking all the charges against the company will take time, and some may stick more than others. That said, Binance would be wise to cooperate with the SEC if it doesn’t want to be cut off from the U.S. market permanently.

As it stands, the company is in hot water. First of all, the inability of Binance.US to offer USD trading services could cripple the giant exchange’s access to American customers, who cannot use Binance Global. Second, U.S. banks are dropping Binance in response to the SEC’s action. That does not augur well for the giant crypto exchange. It is not clear which banking partners in the U.S. it will be able to retain. Third, Binance saw outflows of about US$3 billion in the 24 hours after the SEC filed charges against the company.

It can be argued that the SEC is out of sync with other jurisdictions. After all, the EU just passed MiCA, which aims to create a viable regulatory framework for digital assets across the bloc. And in Asia, Hong Kong has signaled an intention to revive itself as a crypto hub, while key emerging markets in Southeast Asia continue to take a permissive attitude towards crypto due to the financial inclusion benefits it promises.

That said, given the serious nature of the charges the SEC has filed against Binance, if the crypto exchange decides to set up shop in Hong Kong, that could put the city’s regulators in a tough position. Hong Kong would not want to be seen as providing refuge for an entity charged with serious offenses – even though they are all civil.

Meanwhile, even if Binance did want to apply for a virtual asset license in Hong Kong, the process could be challenging irrespective of the exchange’s battles with the U.S. SEC.  Hong Kong’s licensing regime will require crypto firms seeing a license to have a fully staffed, incorporated entity in Hong Kong, be transparent with regards to ultimate beneficial owners, and pass the "fit and proper" test for key and senior employees. Further, Binance would also be restricted from using its existing global custody infrastructure and be required to establish another one in Hong Kong – which the company may see as being more trouble than it’s worth.