The recent legal conviction of the founder of FTX ought to have acted as a clear signal for all individuals involved or contemplating involvement in cryptocurrency investments. Yet, as of October 2023, Binance stands as the world’s largest cryptocurrency exchange, boasting 90 million customers and managing assets totalling $72 billion.
Collapse of FTX
Since the beginning, doubts regarding the value of cryptocurrencies have been evident. During the initial phases, Bitcoin distinguished itself by presenting a compelling rationale. It promised a method to securely store and conduct wealth transactions, immune to governmental interference or exploitation by external forces.
However, with the passage of time, a troubling pattern surfaced. People became increasingly complacent, and in certain instances, negligent, entrusting their assets to centralised offshore exchanges devoid of transparency and proper oversight.
This lack of diligence created an environment conducive to exploitation by criminals such as SBF, who took advantage of this trust, persuading hundreds of thousands to deposit significant amounts, only to make off with tens of billions of dollars.
To grasp the extent of SBF’s reprehensible actions, it’s worth noting that while he was plundering “The Exchange”, he urged his own staff to invest their life savings. He went to the extent of establishing direct debits for their paychecks to be funnelled into FTX accounts.
This parallels the infamous case of Enron Senior Management, who instructed their employees to allocate their 401ks into Enron stock. It’s a stark reminder that, despite changes over time, certain patterns of exploitation persist.
Following the collapse of FTX, the realisation of its colossal fraud became swift, exposing the unsuspected nature of the scheme. Leading up to the downfall, SBF was widely regarded as a benevolent genius by both the mainstream financial press and social media.
However, with hindsight, various red flags emerged, such as the absence of a board of directors, a Chief Financial Officer, conflicts of interest involving a linked hedge fund, and a lack of clarity on how they achieved the 8% yield promised on stable coins.
At this juncture, delving deeper into the criminality at FTX is akin to flogging a deceased equine. The victims have already incurred financial losses, and their avenues for recourse are limited. A more crucial focus lies in examining the current operations of cryptocurrency companies and assessing the vulnerability of customer funds that remain at risk.
Notable parallels with FTX and Binance
Binance, overseen by its CEO CZ, shares notable parallels with FTX, revealing a disconcerting array of warning signs that surpass those observed with FTX prior to its downfall. Despite these red flags, millions globally continue to entrust substantial sums, often constituting their life savings, to the platform.
In this exploration, we will thoroughly examine the warning signs associated with the present largest cryptocurrency exchange globally.
FTX secured substantial funding from renowned Venture Capital firms and hedge funds, such as Sequoia Capital, SoftBank, Coinbase Ventures, Thoma Bravo, Third Point Capital, Tiger Global, retired hedge fund manager Paul Tutor Jones, and Kevin O’Leary.
Notably, Kevin O’Leary served as a paid spokesperson for FTX, investing solely his sponsorship fee.
This is just a select list; there were over 100 supposedly sophisticated institutions who collectively forked over billions of dollars to SBF.
They invested despite knowing that FTX had no board of directors, no Chief Financial Officer, no Chief Risk Officer, and no independent compensation committee. These are all things that any large company should have.
They also knew that SBF set up the exchange in Hong Kong because he wanted to skirt US regulations. He then moved the headquarters to the Bahamas, for the relaxed regulatory regime which allowed him to act with relative impunity.
Concerns surrounding Binance that investors should be aware of
Binance is the world’s largest crypto exchange, with over 90 million customers and $72 billion in assets. However, there are a number of red flags and regulatory concerns surrounding Binance, which investors should be aware of before using the exchange.
- Lack of transparency and governance: Binance does not have a proper Board of Directors, Chief Financial Officer, Chief Risk Officer, or independent compensation committee. This lack of transparency and governance is a major concern for investors, as it means that there is little oversight of Binance’s operations.
- Conflicts of interest: CZ, the CEO of Binance, also owns a multi-billion-dollar hedge fund, which was run by his 28-year-old girlfriend, and this hedge fund was also the single largest account trading on FTX. This clear conflict of interest is another major red flag for investors.
- Regulatory concerns: Binance has been facing increasing regulatory scrutiny in recent months. In July 2023, the UK’s Financial Conduct Authority (FCA) warned consumers that Binance was not authorised to operate in the UK. In September 2023, the US Securities and Exchange Commission (SEC) subpoenaed Binance as part of an investigation into its initial coin offering (ICO) in 2017.
Specific red flags
- Lack of professional headshot for CEO and CFO: Binance’s CEO, CZ, does not have a professional headshot on the company’s website. This is a strange and concerning detail, as it is common for CEOs of large companies to have professional headshots on their company’s websites. The lack of a professional headshot for CZ suggests that he may not be as professional or experienced as he claims to be.
- Lack of Chief Risk Officer: Binance does not have a Chief Risk Officer. This is a major concern, as a Chief Risk Officer is responsible for identifying and managing risks to a company. The lack of a Chief Risk Officer at Binance suggests that the company does not take risk management seriously.
- Lack of compensation committee: Binance does not have a compensation committee. This is also a major concern, as a compensation committee is responsible for setting the compensation of the company’s executives. The lack of a compensation committee at Binance suggests that CZ has unchecked power over how much he and other executives are paid.
- Binance’s history of regulatory scrutiny and action: Binance has faced regulatory scrutiny and action in multiple jurisdictions. This suggests that Binance may not be in compliance with all applicable regulations. Investors should carefully consider the regulatory risks associated with using Binance.
- Binance’s decentralised claim: Binance has repeatedly claimed that it operates in a decentralised manner, with no single headquarters or jurisdiction. However, this decentralisation claim is contradicted by the fact that Binance has a clear corporate structure, with CZ and Hui as the main figures, and it has a registered office in the Cayman Islands.
- Lack of transparency regarding operations and financials: Unlike traditional financial institutions, Binance does not release regular financial statements or undergo independent audits. This lack of transparency raises concerns about the security and integrity of customer funds on the platform.
- Binance’s involvement in the creation and promotion of various cryptocurrencies and tokens: Binance Launchpad, the platform’s token launch platform, has been criticised for its role in promoting and listing tokens with questionable legitimacy and utility. The lack of stringent criteria for token listings raises the risk of fraud and market manipulation on the Binance platform.
Even though Binance has not been directly fined by the SEC as of October 26, 2023. However, they have been embroiled in several legal and regulatory issues with the SEC and other government agencies around the world. Here’s a breakdown of the key points:
Ongoing SEC investigation
- In June 2023, the SEC filed charges against Binance and its CEO, Changpeng Zhao, alleging they violated U.S. securities laws by offering unregistered securities and operating an unlicensed money services business.
- The SEC is seeking injunctive relief, disgorgement, and civil penalties against Binance and Zhao.
- The case is still ongoing, and no final decision has been reached.
Other regulatory actions
- Binance has also faced regulatory scrutiny from other agencies, including the US Department of Justice (DOJ), the Commodity Futures Trading Commission (CFTC), and the Financial Crimes Enforcement Network (FinCEN).
- In February 2022, Binance reached a settlement with the DOJ and CFTC, agreeing to pay a $10 million penalty and cooperate with further investigations.
- In September 2022, Binance settled with FinCEN, agreeing to pay a $200 million penalty for violating anti-money laundering laws.
Potential fine in the future
- It is possible that Binance could face a fine from the SEC if they are found guilty of the charges against them.
- The amount of the fine would depend on the severity of the violations and the outcome of the legal proceedings.
It’s important to note that the legal and regulatory landscape surrounding cryptocurrency is constantly evolving. The charges against Binance and the potential for a fine are based on the current regulations and interpretations of the law. As the laws and regulations change, the outcome of the case and the potential for a fine could also change.
The red flags and regulatory concerns surrounding Binance are significant. Investors should carefully consider these risks before using the exchange. Binance’s lack of transparency and governance, conflicts of interest, regulatory concerns, and history of regulatory scrutiny and action are particularly concerning.
Investors should also be aware of Binance’s decentralised claim, lack of transparency regarding operations and financials, and involvement in the creation and promotion of various cryptocurrencies and tokens.
Investors and users should carefully consider these red flags and conduct thorough due diligence before engaging with Binance or any other cryptocurrency platform. The crypto industry is evolving rapidly, and regulatory scrutiny is increasing, emphasising the importance of responsible and transparent business practices.
- SEC Press Release on Charges Against Binance: https://www.sec.gov/Archives/edgar/data/1991088/000119312523251567/0001193125-23-251567-index.htm
- Binance Blog Post on SEC Charges: https://www.sec.gov/news/press-release/2023-101
- Coindesk Article on Binance’s Legal and Regulatory Issues: https://www.theguardian.com/business/live/2023/jun/05/sec-sues-binance-crypto-cftc-changpeng-zhao-live-updates
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