Binance likely ‘to get hit with a fine’ amid CFTC lawsuit, reporter says

Axios Crypto Reporter Brady Dale and The Wolf Of All Streets Podcast Host Scott Melker join Yahoo Finance Live to discuss the Commodity Futures Trading Commission’s (CFTC) lawsuit against Binance, U.S. regulation, and the outlook for crypto.

Video Transcript

KEVIN O'LEARY: The two pioneers that created this nascent industry and made it global, Sam Bankman-Fried and CZ. Then they went to war against each other, just like in Greek mythology. And one of them won. CZ definitely bankrupt Sam Bankman-Fried by using the FTT token in the last stroke on that November 6th, $550 million right into his heart, and he had to declare bankruptcy. Then, of course, all the allegations and all the charges.

RACHELLE AKUFFO: But now Binance CEO CZ in some trouble of his own as the Commodity Futures Trading Commission hits crypto exchange Binance with a lawsuit, a civil lawsuit there. The CFTC's claims against Binance include operating an illegal digital asset derivatives exchange in the US and willful evasion of federal laws. US regulators allege Binance instructed employees and customers to circumvent compliance controls in order to maximize profits.

Well, how will this all trickle down into the crypto landscape? Here to discuss is [INAUDIBLE] host of the "Wolf of All Streets" podcast, along with Brady Dale, Axios crypto reporter, and he's also the author of forthcoming book "SBF, How the FTX Bankruptcy Unwound Crypto's Very Bad Good Guy," and also joining us, Yahoo Finance's David Hollerith with us for this discussion. So first, Brady, I want to start with you. What are the most likely scenarios for Binance at this point?

BRADY DALE: Well, I think the most likely scenario is that Binance gets hit with a fine and just kind of moves away from doing business in the US. But the thing about this case, as you rightly pointed out, Rachelle, is, it's a civil case. But it hints at a lot of other darker activities at Binance, which seem to suggest that there could be some kind of criminal procedure underway.

And to me, either the government is waiting to make an arrest of CZ or someone high up. Or if they can't do that, you know, I wonder, as Nik De at Coindesk pointed out yesterday in his newsletter, if they're going to make a move on the various Western cloud companies that Binance relies on to operate. And if that were to happen, that would really hurt Binance badly. But if it stays just a CFTC action, that really probably won't be that big of a deal to Binance.

DAVID HOLLERITH: Yeah, and to that point, you know, it is kind of interesting that it's a pretty simple lawsuit in a way, but there are all these details that are sort of not a part of the charges that are being unearthed. And we do know that, just based on what Binance has even said, is that Binance and the justice department have been looking to settle charges for some time. And we don't know whether or not this adds to it or what that could look like.

But I mean, it does call into question a lot of red flags. But, you know, I do want to point out the charges so far have not included anything that implies, at least in this suit, that Binance has been doing the same thing as FTX, and that's obviously the primary concern, so.

BRADY DALE: Yeah. It's very unlikely that there is a giant hole in Binance's balance sheet like there was at FTX. It just would be very surprising.

RACHELLE AKUFFO: And Scott, I want to bring you in here because, obviously, we've had this conversation about regulation by enforcement. We already knew Gary Gensler was already gearing up, but then combined with the CFTC and then not really having a consistent definition when it comes to all cryptocurrencies, what is this doing to the crypto landscape right now?

SCOTT MELKER: Well, I think what you just described is the quiet turf battle between the CFTC and the SEC that's been ongoing for quite a while. And no mistake that the CFTC specifically listed Bitcoin, Ethereum, Litecoin, and surprisingly a few stablecoins as commodities in this action against Binance when the SEC and Gary Gensler have made it extremely clear that anything not named Binance is likely a security.

So when you talk about what it's done for the landscape, I think, A, it's important to note that this is a global industry, so it's done very little to affect the landscape, I would say, outside of the United States, as regulators in other countries and jurisdictions have seemingly moved on and started to give some sensible ideas as to how to handle this asset class. But in the United States, it's put a massive pause in general on innovation and people wanting to be entrepreneurs in this space in this country, and basically, just a massive amount of confusion and people looking for clarity as to what these assets are and what that means for the future.

It's a broken system that we have. We have absolutely no clarity. And you can make the argument that regulators when the only-- obviously, the only tool you have is a hammer, everything looks like a nail. And that's how they're approaching it. So maybe it comes down to needing some legislation to give these regulators more of a direction.

DAVID HOLLERITH: Yeah, to Scott's point, like, I mean, the issue here is that there aren't clear laws. And a lot of people don't actually-- you know, a lot of average investors do not care whether or not a cryptocurrency is a security or a commodity. But that's a big deal, obviously, in the US for how they're regulated and how companies that sell or offer them are regulated. And so it's become-- it's created this whole dynamic where there's not perfect alignment, at least between the agencies, the CFTC and the SEC, about what they are.

And then also to Brady's point, I think it is good to point out, too, just in a realistic worst case scenario for Binance, if the worst were to happen, you know, we would definitely see a mid-term to-- short-term to mid-term impact on the cryptocurrency market. I mean, if we look back at the FTX collapse, you know, Binance kind of arose as an unexpected lender of last resort for the industry.

RACHELLE AKUFFO: And Brady, to that point--

BRADY DALE: But-- oh, sorry, go ahead.

RACHELLE AKUFFO: Well, I was going to say then. So if obviously we first had FTX here, sort of white knight, saving some of these smaller exchanges, then comes Binance. What is next, then, in terms of the potential white knight or where some of these inflows are going to be headed, if not to Binance?

BRADY DALE: Well, they'll just go to other exchanges, they'll go to defi. You know, there is the cryptocurrency world is extremely resilient. And I think, you know, if you ask, like, what is the real danger for that market, you know, Bitcoin price is doing pretty good. Ethereum price is doing pretty good. Global markets are not in a panic about this, though, obviously, if, for example, Binance went down, that would be terrible in the short to medium-term. That would really hurt. There would be companies wiped out. But, you know, crypto would survive. There's nothing in the cryptocurrency world that's too big to fail, except for the Bitcoin network and the ethereum network themselves.

That said, in the United States, I think it's worth broadening this out from the CFTC. I think, honestly, it's clear now that the Biden administration itself, not just the agencies, is on a, you know, a full-on attack on the cryptocurrency market. They kind of want to run it out of the US, and other countries are going to have to pick it up. And obviously, that's not going to be good. It's the biggest economy in the world. So this is about-- this is about much more than the CFTC and the SEC. It's the whole-- it's all of DC.

DAVID HOLLERITH: Yeah, that's a good point. I mean, if we look at just the, you know, Custodia, which obviously was trying to get a banking license from the Federal Reserve to, you know, sell cryptocurrencies and to be a crypto bank essentially, that's the same issue. And banking access has sort of changed the market in a lot of ways. So to that point, it is definitely become a thing that's much more overarching with US regulators being skeptical of crypto regulation at all, which has been kind of odd, as it's, you know, for the last year, it's been sort of a flip around sort of what the dialogue has been between industry and the US public sector.

RACHELLE AKUFFO: And Scott, I do want to ask you about Chokepoint 2.0 that you noted. Explain that because a lot of people might be wondering what's next for the industry.

SCOTT MELKER: I think he gave some good context with Custodia Bank. I speak with Caitlin Long, who's the CEO, quite often. That was going to be a fully backed bank and possible to have a bank run like we saw with Silicone Valley or Silvergate. And their master license was rejected simply because they were likely to service crypto clients.

And now we're seeing even with the sale of Signature Bank, that $4 billion of deposits were bought, but they've told crypto companies that they will not be serviced any longer. They need to find a new bank within the next week. And if they don't, they're going to receive a check in the mail to their last address on file. There's a very, very clear war right now of the entire United States government, but definitely bank regulators against the crypto industry, trying to cut off any access of the industry.

As we've heard before, you can't kill Bitcoin. You can't kill Ethereum. These assets will exist forever. They are definitely too big to fail. But what they can do is attempt to cut off the onramps and offramps for American companies and for American retail to access it. Imagine if you can use Bitcoin, Ethereum, as much as you want, but you can't get in and out of the dollar. That is a huge point of failure that they're trying to exploit.

And this is where the war is really being fought. I mean, they even had chairman of the FDIC Gruenberg in Congress yesterday, and he completely contradicted himself multiple times with Tom Emmer and other congresspeople questioning him about this. What's happening with Signet? Oh, Signet was sold. Another one asked him, what's happening with Signet, which, by the way, is how the crypto industry, through Signature, settles 24/7. Oh, we're still looking into that. I mean, literally contradicting himself within 10 minutes directly. There's a clear directive right now to crush the banking access for the crypto industry. And that is Operation Chokepoint 2.0.

RACHELLE AKUFFO: We'll continue to--

BRADY DALE: If I could jump in there, one thing I think a conclusion people jump to when it comes to exchanges, which I think confuses them, is they think if a lot of people were withdrawing from an exchange, then that's a, quote unquote, "bank run." And so the exchange is in danger. But the truth is, exchanges just aren't like banks. Banks take in deposits, and then lend the money out, so no bank can survive a bank run if lots of people want to withdraw quickly.

But if an exchange is functioning properly, every single deposit anyone has made, it's all just there. So if lots of people withdraw the money, it'll hurt them. It hurts business. But unless they're doing something wrong, like FTX was and misusing customer funds, it's all there, and the business just winds down gradually in an orderly fashion, but nobody comes up short, right? And my guess is Binance is so big at this point that probably all the money is there because it's not even been worth it to screw around with it in some other way.

RACHELLE AKUFFO: And definitely an important distinction then when people try to compare sort of runs on exchanges versus bank runs. Great having you all here, Axios crypto reporter Brady Dale and Scott Melker, the host of the "Wolf of All Streets" podcast. Thank you for joining us today, along with our very own David Hollerith.