US Department Of Justice Mulling Fraud Charges Against Binance

Table of Contents

• DOJ Sets Its Sights On Binance
• A Compromise?
• A Potential Black Swan

In a nightmare scenario, a report has claimed that United States Department of Justice officials are contemplating bringing fraud charges against Binance, the world’s largest cryptocurrency exchange.

The Department of Justice has concerns about potential market instability and consumer fallout of such action.

DOJ Sets Its Sights On Binance

According to the report, while officials are mulling action, they are also concerned about the drastic domino effect it could have on the larger crypto market, leading to considerable market instability. According to sources familiar with the matter, Department of Justice officials are concerned that action against Binance could trigger a bank run similar to the one seen with bankrupt exchange FTX. The bank run in the wake of the FTX situation caused thousands of customers to lose their funds, triggering panic in the crypto markets.

Reacting to the news, the crypto markets came under some selling pressure, with Bitcoin (BTC) and Ethereum (ETH) witnessing drops. BNB also saw a drop of over 3% following the reports but has since recovered, rising by 2%.

A Compromise?

Given the concerns surrounding action against Binance, the Department of Justice is contemplating compromise options such as non-deferred prosecution agreements and large fines. According to sources, such action would minimize harm to consumers while still holding the exchange accountable for its actions. Reports of the Department of Justice contemplating action against Binance gathered steam after the United States Securities and Exchange Commission (SEC) sued the cryptocurrency exchange and its billionaire founder Changpeng Zhao.

The Securities and Exchange Commission brought 13 charges against the exchange, which included operating as an unregulated securities exchange in the United States and commingling investor funds. It has also charged Binance with misleading customers by using a secret market-making firm called Sigma Chain and manipulating trades on Binance’s US platform. Additionally, the United States Commodity Futures Trading Commission (CFTC) has also brought similar charges against the exchange.

A Potential Black Swan

According to the Q1 2023 crypto industry report, FTX held a 5% market share of the spot crypto trading volumes across the top ten crypto exchanges. The exchange’s collapse decimated the crypto markets, with Bitcoin dropping by almost 25% in 2 days. Data from the Block has revealed that in July 2023, Binance held a market share of 47% in spot crypto trading activity. Given that Binance holds a far more dominant position than FTX did, the ramifications for the market in the event of Binance meeting the same fate as FTX would be catastrophic.

FTX collapsed largely due to a bank run due to fears about its balance sheet’s strength, which were well-founded in the end as FTX eventually had to halt withdrawals. This is because the exchange did not have enough assets to process withdrawal requests. But is the concern surrounding Binance legitimate? Binance has stated on a number of occasions that it is possible to verify that the exchange holds its user assets in a 1:1 ratio apart from its reserves.

According to its website, the exchange claims that the ratio of bits Bitcoin holdings with respect to customer net balances stands at around 104%. This means that as things stand, even if the Department of Justice brought fraud charges against Binance, the exchange would be able to fulfill all withdrawal requests without any issues. Despite the developments, Changpeng Zhao remained defiant, highlighting the fact that Binance Coin (BNB) was the fourth largest cryptocurrency by market capitalization.

Disclaimer: This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.