compliance

Breaking: Binance CEO CZ rejects allegations of market manipulation

Changpeng ‘CZ’ Zhao has refuted claims made by the Commodities Futures and Trading Commission in its March 27 complaint against Binance.

Binance CEO Changpeng “CZ” Zhao has rejected allegations from the Commodities Futures and Trading Commission, arguing that the crypto exchange “does not trade for profit or ‘manipulate’ the market under any circumstances.”

In a March 28 blog post, the chief executive responded to the CFTC’s lawsuit accusing Binance and CZ of engaging in improper compliance procedures and trading, calling the allegations “an incomplete recitation of facts.”

My Response to the CFTC Complaint | Binance Blog https://t.co/TadyotM7HN

— CZ Binance (@cz_binance) March 27, 2023

In its complaint, the CFTC alleged that Binance has traded on its own platform using 300 “house accounts” and did not make the proper disclosures to its customers that it was trading in its own market in its Terms of Use.

The CFTC has also accused Binance of keeping the information a “top secret” and alleged that the exchange refused to respond to commission-issued investigative subpoenas seeking information on its trading activity.

“On information and belief, Binance has not subjected the trading activity of Merit Peak, Sigma Chain, or its approximately 300 house accounts to any anti-fraud or anti-manipulation surveillance or controls,” the statement added.

*Excerpt from the March 27 CFTC complaint. Source: U.S. District Court*

However, CZ argued that while Binance “trades” in a number of situations, this is mainly to convert its crypto revenue to cover expenses in fiat or other cryptocurrencies.

“Personally, I have two accounts at Binance: one for Binance Card, one for my crypto holdings. I eat our own dog food and store my crypto on Binance.com. I also need to convert crypto from time to time to pay for my personal expenses or for the Card,” he added.

CZ also refuted claims that his staff engaged in “insider trading,” stating that Binance has a 90-day no-day-trading rule for employees, adding:

“This is to prevent any employees from actively trading. We also prohibit our employees from trading in Futures.”

He went further to state that employees are restricted from buying or selling coins where they’ve obtained “private information” about them.

“I observe these policies myself strictly. I also never participated in Binance Launchpad, Earn, Margin, or Futures. I know the best use of my time is to build a solid platform that services our users,” he added.

Zhao called the recent CFTC filing both “unexpected and disappointing,” as it had been working cooperatively with the regulator for over two years.

The CFTC also alleged that senior members of the firm have “actively facilitated violations of U.S. law,” including “assisting and instructing” U.S. customers on ways to evade Binance’s own compliance controls, adding that Binance’s compliance program was just “For Show.”

However, CZ denied being lax in compliance efforts. He stated that Binance.com has developed “best-in-class” technology to ensure compliance and currently has more than 750 people working to ensure the business operates within the bounds of Anti-Money Laundering (AML) and Know Your Customer (KYC) laws :

“To date, we have handled 55,000+ LE requests, and assisted US LE freeze/seize more than $125 million in funds in 2022 alone and $160 million in 2023 so far.”

CZ also pointed out that Binance.com holds 16 licenses to offer digital asset trading services, the most of any cryptocurrency trading platform.

Magazine: Crypto winter can take a toll on hodlers’ mental health

What are the Howey test and its implications for cryptocurrency?

The Howey test’s impact on cryptocurrency, explained — legal implications, compliance requirements and more.

What is the Howey test?

The Howey test is a legal test used in the United States to determine whether a transaction qualifies as an investment contract and, thus, is considered a security under federal law. The test was established by the U.S. Supreme Court in SEC v. W.J. Howey Co. (1946), and it has since been applied in numerous cases to determine whether various financial arrangements and offerings constitute securities.

According to the Howey test, a transaction must contain an investment of funds in a group venture with the expectation that all gains will come from group efforts. A transaction is deemed a security if it satisfies these requirements, in which case it is subject to federal securities laws and regulations.

Understanding the criteria for a security

The test involves three key criteria that must be met in order for a transaction to qualify as a security, as discussed below:

The first criterion is a financial investment, which means that participants in the transaction must be risking their own money. This comprises both financial and in-kind investments.

The second requirement is a shared enterprise, which denotes that the financial success of the investors is somehow connected. This can be proven by providing evidence of the investors’ resource pooling or reliance on a third party to manage their investments.

The third criterion is an expectation of profits solely from the efforts of others, which means that the investors are relying on someone else to generate a return on their investment. This could include, for example, profits generated by a third-party manager or profits generated by the efforts of a particular group or organization.

Coincidence? On the same day as the Ethereum Merge, SEC chair Gary Gensler says proof-of-stake cryptocurrencies could be seen as a security under the Howey test. https://t.co/D24G9edoc7

— Cointelegraph (@Cointelegraph) September 16, 2022

The implications of the Howey test for cryptocurrency: Is it a security or not?

The implications of the Howey test for cryptocurrency are significant, as the test provides a framework for determining whether a particular cryptocurrency offering should be classified as a security under U.S. law. If a cryptocurrency offering meets the criteria outlined in the Howey test, it may be considered a security and subject to federal securities laws.

This has important ramifications for crypto businesses and investors since breaking federal securities laws can result in penalties, legal action and reputational harm to the business. To make sure they are in compliance with federal securities laws, cryptocurrency companies should carefully consider the Howey test before creating their offerings.

Tokens that do not pass the Howey test are considered utility tokens that provide investors with access to a future product or service or can be redeemed for discounted fees. While utility tokens are typically not considered securities, the SEC has suggested that the presence of a utility token framework does not necessarily mean that a project is exempt from being classified as a security.

Ultimately, the implications of the Howey test for cryptocurrency will depend on how regulators choose to apply the test in practice and how cryptocurrency companies choose to structure their offerings to comply with federal securities law.

Compliance with federal securities laws: What cryptocurrency companies need to know

Cryptocurrency companies need to be aware of the federal securities laws in the United States to ensure compliance with them. Here are some key things to keep in mind:

Securities laws apply to cryptocurrencies: Several cryptocurrencies are seen as securities by the Securities and Exchange Commission. This implies that cryptocurrency businesses must abide by federal securities laws, including the requirements for registration and disclosure.
Token offerings may be subject to securities laws: It can count as a securities offering if a cryptocurrency company sells tokens to the general public in return for cash or other assets. As a result, the business would have to adhere to securities rules, which would include registering the offering with the SEC.
The use of funds must be disclosed: A cryptocurrency company must state its financial goals when raising money through a securities offering. The business must also keep investors informed about how the money is being used.
Trading platforms may be subject to securities laws: Exchanges for securities may include cryptocurrency trading platforms that let users purchase and sell tokens. If so, the platform would have to file an SEC registration form and adhere to other securities regulations.
Penalties for non-compliance can be severe: Significant penalties may be imposed for non-compliance: A cryptocurrency corporation might incur severe consequences, such as fines and legal action if it violates federal securities regulations.

Therefore, cryptocurrency companies need to be aware of and comply with federal securities laws in the United States. This includes understanding whether their tokens are considered securities, disclosing the use of funds, and complying with registration and disclosure requirements.

Crypto exchange Kraken faces probe over possible securities violations: Report

The probe is reportedly looking at certain offerings that Kraken has made to its United States customers that could be in breach of securities laws.

Cryptocurrency exchange Kraken is reportedly being probed by the United States Securities and Exchange Commission over whether it breached rules around the offering of securities.

According to a Feb. 8 Bloomberg report, the probe relates to certain offerings that Kraken has made to U.S. clients. A person with knowledge of the matter said the probe is at an advanced stage and could reach a settlement in the coming days.

However, at this stage, it is not clear which offerings are being scrutinized by the securities regulator.

When asked about the alleged probe, an SEC spokesperson told Cointelegraph, “The SEC does not comment on the existence or nonexistence of a possible investigation.”

Kraken did not immediately respond to a request for comment.

*The SEC’s Washington headquarters. Source:* *Wikipedia*

Gensler said in December that his main goal for regulating crypto throughout 2023 was to make crypto exchanges and lending platforms come into compliance, which he said could occur through firms registering with the SEC or through enforcement actions.

Kraken CEO Dave Ripley argued in September that he didn’t see a need to register Kraken as an exchange with the SEC because it does not offer securities, adding “There are not any tokens out there that are securities that we’re interested in listing.”

SEC Chairman Gary Gensler has repeatedly said, however, that he considers most cryptocurrencies other than Bitcoin (BTC) to be securities.

The SEC however recently conceded during a Jan. 30 appeal hearing in the LBRY v SEC case that the sale of LBRY Credits (LBC) in the secondary market doesn’t constitute a security, after the judge was persuaded by an argument from attorney John Deaton highlighting that the courts had never deemed the underlying asset to be a security in similar cases.

The regulator often refers to the “Howey test” to determine what constitutes a security. The name comes from the SEC v Howey case from 1946, which set a precedent in the U.S. for what transactions are considered securities.

It held that a transaction qualifies as an investment contract — and therefore is considered a security — where there is an investment in a common enterprise with profits earned exclusively through the work of others.

CrossTower eyeing further crypto acquisitions outside of Voyager bid

CrossTower’s president said they would place extra emphasis on highly transparent and compliance-focused companies in light of the FTX collapse.

Crypto exchange CrossTower Inc., which is currently bidding for the assets of Voyager Digital, is reportedly window shopping for other crypto company acquisitions.

In a Nov. 24 Bloomberg report, CrossTower CEO Kapil Rathi revealed that the company is looking to pick up firms with a “good set of customers” and a “good balance sheet” despite the current bear market, stating:

“We’re in a great place to either acquire entities who have a good set of customers with them and a good balance sheet […] so we are openly looking at different types of companies from an organic growth perspective.”

In September, CrossTower was one of the companies reported to be competing to acquire the assets of bankrupt crypto lender Voyager Digital, along with FTX and Binance.

FTX Trading eventually became the winner of the Voyager bid on Sept. 27 with the sale valued at $1.4 billion.

However, with the exchange filing for bankruptcy filing on Nov. 11, Voyager reopened the bidding process and a new revised offer came from CrossTower on the same day.

“We are working on a revised offer that we feel will benefit the Voyager customers and the wider Crypto community. CrossTower has always been, and will continue to be, very community-focussed,” a spokesperson told Cointelegraph at the time, without specifying an amount.

While CrossTower has still yet to disclose any details on its latest bid for Voyager, CrossTower president Kristin Boggiano stated that Voyager’s small $3 million FTX investment wouldn’t play a factor in a potential sale for the lending platform.

CrossTower also stated that it has “minimal exposure” to FTX-related investments.

Other companies back in line to buy out Voyager’s assets include Binance and blockchain-focused venture capital firm Wave Financial, who had also expressed interest in the initial auction for Voyager’s assets in September.

In light of recent events with FTX, Boggiano stated that the firm has now placed an extra emphasis on companies that are highly transparent and compliance-focused:

“There’s an opportunity in this market to provide a compliance focused platform and to bring the transparency and trust that people have been hoping for.”

However, Rathi said the trading platform’s risk appetite to buy out companies has leveled off with the firm looking to adopt a slightly more cautious approach over the short to mid-term.

CrossTower is a United States crypto asset exchange that was founded in 2019. It’s a relatively small exchange with only $103,816 in trading volume over the last 24 hours with 13 spot markets, according to CoinMarketCap.

Huobi to delist Monero and other privacy coins, citing regulatory pressures

The exchange cited its own token management policy and compliance efforts as primary reasons for delisting seven privacy coins.

Cryptocurrency exchange Huobi will delist seven different privacy coins from its platform as regulatory pressure mounts on anonymity-enhanced currencies (AECs).

The exchange announced that it had terminated the trading service of a number of privacy tokens including Dash (DSH), Decred (DCR), Firo (FIRO), Monero (XMR), Verge (XVG), Zcash (ZEC) and Horizen (ZEN).

These tokens will begin to be delisted on Sept. 19, while deposit services ceased on Monday in conjunctio with the announcement. Users were urged to cancel open orders for the privacy coins, while the exchange will cancel any existing orders at the delisting time and credit users’ spot accounts.

Huobi noted that it made efforts to meet compliance policies of more than 100 countries in which its services are available. The announcement cited efforts to comply with the latest financial regulations, as well as the company’s Token Management Rules.

Article 17(16) of its rules list addresses “trading concealment or suspension,” which gives Huobi Global the right to conceal or suspend token trading in the following circumstances. Clause 16 is directed at privacy coins in particular:

“The token is a privacy token, does not support offline signatures, or its node source codes are not open-sourced.”

The exchange also confirmed that it had ended trading services on its futures, margin, ETP, OTC and trading bot services. Cointelegraph has reached out to Huobi Global to ascertain the driving force behind the move and whether regulators in specific countries have necessitated the delisting of the respective privacy coins.

Huobi is eyeing a move into the United States market after acquiring a Money Services Business (MSB) license from the U.S. Financial Crimes Enforcement Network (FinCEN) in July 2022.

As Cointelegraph previously reported, privacy tokens have come under intense scrutiny in different jurisdictions around the world, with the likes of Japanese, South Korean and Australian regulators outlawing their use in recent years.