The exchange has attracted the attention of regulators looking to impose some control over the crypto sector. Earlier this year, the Commodities and Futures Trading Commission (CFTC) and Securities and Exchange Commission (SEC), two US regulatory bodies, filed civil lawsuits accusing Binance of a laundry list of improprieties, including commingling customer assets, anti-money laundering violations, and artificially inflating trading volumes.
Staff at Binance have been braced for criminal charges against the firm, according to one former employee, who asked to remain anonymous for fear of retaliation. The apparent confirmation that the DOJ is preparing criminal charges will do nothing to dampen the “concern and anxiety” inside the company, which began in the summer when it started to conduct large-scale layoffs and eliminate various perks and benefits, says the former employee, who departed the company earlier this year. Even though there are no signs that the company is in any immediate financial danger, there is a “general sense of doom” at Binance, the ex-employee says.
If the US were to impose criminal sanctions on Binance, says Jacob Silverman, author of Easy Money: Cryptocurrency, Casino Capitalism, and the Golden Age of Fraud, it would “cause banks to retreat,” effectively choking the exchange by impeding its ability to accept regular currency from customers. “For all crypto companies, banking access and access to dollars is a perpetual challenge—and an imperative.”
Even offshore banks would have to fall in line, says Stephen Diehl, a crypto skeptic commentator. “The US dollar is the world’s reserve currency … Banks are highly reliant on [dollar] flows from the US,” he says. “If it comes down to jettisoning Binance as a client or continuing to do business with the US, it won’t be a difficult decision to make. Even the Bank of China is reliant on foreign dollar reserves.”
If Binance were to fall as a result of criminal proceedings brought against it, it would deal extensive damage, says Silverman, particularly to regular people’s appetite for dealing in cryptocurrencies. “If FTX wasn’t the end of consumer crypto as we know it, the collapse of Binance definitely would be,” he says. “It’s one of several pillars holding up the consumer crypto market—and certainly the most important one.”
The vacuum left behind by Binance, given its centrality to services provided across all quarters of the crypto industry, could be of an even greater magnitude than that created by FTX, whose failure sent the price of crypto tokens into a tailspin, led to the collapse of other crypto firms, triggered a regulatory crackdown in the US, and in a roundabout way led to the fall of two crypto-friendly banks. “Like FTX, Binance has a lot of investments and works with a lot of its peers, and a lot of crypto hedge funds trade on Binance. [A collapse] would be catastrophic and a lot of regular people would lose their money,” says Silverman.
Not everyone subscribes to the idea that trouble at Binance would bring down the industry. The company isn’t too big to fail, says Cory Klippsten, CEO of bitcoin financial services company Swan Bitcoin, nor is it a given that the DOJ would lose sleep over potential damage to investors—particularly those based outside its jurisdiction. Fewer than a million people used Binance’s US-facing service before it suspended dollar deposits in June in the wake of the SEC lawsuit, though the firm has been accused by regulators of allowing US citizens to access its international exchange, which offers a type of riskier debt-based trading that requires special licensing in the US. However, it would take multiple years for the crypto industry to recover from the “shuttering or crippling of Binance,” says Klippsten, and for new players to “fill the void.”
Neither the specifics of the potential criminal charges to be brought against Binance nor the requirements the firm would have to meet under an agreement with the DOJ have yet been confirmed.
Multiple Binance insiders say the firm could comfortably absorb a $4 billion hit, but whether the exchange would be capable of bringing itself in line with whatever requirements the DOJ intends to impose under a deferred prosecution agreement is another question. Nor is it clear that the company would sign any such agreement, which may run, Diehl says, against “the libertarian, anti-statist principles at the heart of crypto.”
