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> Nobody is being protected here

Cracking down on a shadow derivatives exchange doing swaps with American institutions is bona fide CFTC enforcement.

Most securities law is written from an investor-protection perspective. Not swaps clearing. When everyone is writing bilateral swaps and nobody knows how much counterparty risk is accumulating with whom, you get a ticking time bomb. (This is what turned AIG into a systemic risk.) I imagine the next shoe to drop will be these firms' compliance departments.

> Most securities law is written from an investor-protection perspective. Not swaps clearing. When everyone is writing bilateral swaps and nobody knows how much counterparty risk is accumulating with whom, you get a ticking time bomb. (This is what turned AIG into a systemic risk.) I imagine the next shoe to drop will be these firms' compliance departments.

Certainly I agree with you that, in principle, this is legitimate enforcement. They do have the authority to regulate this as you are saying they do. But you and I both know that there are no serious concerns within the CFTC about counterparty risk here, and that has nothing to do with their motivations.

They are very clearly not trying to protect anyone - at least not from derivatives counterparty risk. And they are most definitely not trying to protect Citadel, Jump, et al, nor anyone else from them.

They don't need a smokescreen. Binance's CEO instructed his employees to teach American firms how to use a VPN to hide their Americanness, despite the fact that they can't legally offer services to American firms. (This is especially strange because it was for people using their API, and you'd assume programmers who can integrate an API to trade derivatives have heard of VPNs, so I have to assume they were simply unaware that Binance was blocking America.) He even specifically said to not put it in writing! Extra hilarious that he put that message in writing, one wonders had he done that IRL or over the phone where this case would be right now.

I suppose you could argue about whether the CFTC's relevant regulations protect anyone, but they certainly think they do, and if so it's easy to argue that Binance was skirting those protections.

> I suppose you could argue about whether the CFTC's relevant regulations protect anyone, but they certainly think they do, and if so it's easy to argue that Binance was skirting those protections.

There are two weird things here. The first is that the CFTC does have purvue to protect the American people. However, if Binance were to simply say “we now accept US citizens” — the trading cited here would be allowed. Market makers are accredited investors.

It’s rather because they offer services to investors who are not US based which, if they were offered to US investors, would only be allowed to be offered to Accredited Investors — Binance has chosen to not offer services in the US, and allowed Accredited Investors (the same group who would be permitted if they did operate in the US).

The case is interesting. Even though these traders were operating significant portions of their business from the US, the claim will be made that they were acting as their international subsidiary.

> if Binance were to simply say “we now accept US citizens” — the trading cited here would be allowed

No, it wouldn't. Derivatives exchanges and swaps settlement requires licenses, e.g. from the CFTC. Also, the swaps analog for accredited investor is eligible contract participant (ECP) [1].

[1] https://www.cftc.gov/sites/default/files/idc/groups/public/@...

Right, my point is that the allegedly “protected” parties in this case would still be able to trade with Binance if Binance were licensed.

> the allegedly “protected” parties in this case would still be able to trade with Binance if Binance were licensed

Correct. Except those parties would have their own risk disclosure obligations which the CFTC could check.

It’s easy to hide leverage in swaps. They also uniquely accumulate counterparty risk, since the standard way to close out a swap isn’t to cancel the original swap, but to enter into a new, counter-balancing one. This means even a minor party failing can lead to systemic risk as positions their counterparties assumed were hedged are now levered and open. Add in opaqueness, and any swap participant going under leads to legitimate concerns about everyone else. This happened in 2008. The rules Binance helped institutions evade are the ones that were written to prevent that form of crisis re-emerging.

This is a nice story but it's just not true. The amount of leverage built up in the derivatives market on Binance is completely transparent. The trading shops named in the CFTC suit are very unlikely to blow themselves up in anything remotely resembling the way 2008 unfolded, and the CFTC regulations are not designed to catch anything important that might realistically be going on under the surface here.

The point of this CFTC lawsuit is to attack crypto, no more, no less. If you don't like crypto, you may think that's a good thing, but I'd argue that it's always a bad thing when regulators leverage technicalities to achieve political ends. And make no mistake, that is exactly what is happening here.

Yes, I mean it would be absurd to argue that there isn’t more systemic risk in crypto markets.

The question I keep pointing at though is, why does it matter? These are not retail traders. They’re institutions that are considered experts in their field and hold no customer deposits (aside from accredited investors, who are again considered knowledgeable enough to not need government oversight to invest).

Everyone here ostensibly knows the risks and their crash won’t tank i.e. the housing market or pension funds.

> “No significant terrorist financing is being stopped.”

How do you know? When Binance’s own Chief Compliance Officer was primarily in the business of helping customers avoid compliance, it doesn’t seem like they would know very much about what ultimately went down on the platform. The complaint quotes an internal email that read: “We close our eyes.”

Binance was a major counterparty of Bitzlato, a crypto exchange that existed primarily for Russian money laundering: https://www.reuters.com/business/finance/binance-moved-346-m...

That’s probably the tip of the iceberg.

The CFTC’s complaint naturally focuses on the stuff that’s easiest for them to prove. Getting evidence from hedge funds based in Chicago is obviously a lot easier for a civil agency that doesn’t have enormous resources.

> How do you know? When Binance’s own Chief Compliance Officer was primarily in the business of helping customers avoid compliance, it doesn’t seem like they would know very much about what ultimately went down on the platform. The complaint quotes an internal email that read: “We close our eyes.”

I don't, but obviously the CFTC doesn't either, otherwise they'd have spelled it out. So, considering the party investigating is ignorant of any significant terrorist financing activity, I see no reason to think otherwise.

> Binance was a major counterparty of Bitzlato, a crypto exchange that existed primarily for Russian money laundering: https://www.reuters.com/business/finance/binance-moved-346-m...

There is nothing in the complaint stating that Binance knowingly facilitated any criminal activity of Bitzlato, afaik. The fact that criminal actors had an account at a financial institution is not prima facie evidence of any crime on the part of the financial institution, especially not for one that isn't registered in the US. Even for US registered entities, plenty of criminals have bank accounts. It's the bank's job to perform a certain level of diligence to stop them, not an infinite level of diligence.

If the CFTC believed Binancing knowing facilitated criminal activity on the part of Bitzlato, that'd be in the complaint. It's not, therefore, they don't. Or at the very least, they have insufficient evidence for it.

So any suggestion that significant terrorist financing is being stopped here is pure speculation, unsupported by anything in the document itself.

> I don’t, but obviously the CFTC doesn’t either, otherwise they’d have spelled it out.

Or, they do know and more detail wasn’t relevant at the complaint stage of the civil case, whereas it might be to the actual trial and to the parallel criminal referral that it has been reported that DoJ is investigating.

A civil complaint is not required to be, and generally is not, a catalogy of every piece of relevant information the filing party has. And it especially isn't a catalog of everything they know where a civil lawsuit isn't the venue for addressing it.

> If the CFTC believed Binancing knowing facilitated criminal activity on the part of Bitzlato, that’d be in the complaint.

No, if the CFTC believed that, it would be in the criminal referral to DoJ, and, if DoJ could support it to the required level to move forward, it would be in the criminal indictment DoJ would seek from an appropriate grand jury. Those typically lag considerably behind civil action from the same regulatory-body investigation (sometimes with indictments issued after the civil complaint is settled or otherwise resolved.)

> Or, they do know and more detail wasn’t relevant at the complaint stage of the civil case, whereas it might be to the actual trial and to the parallel criminal referral that it has been reported that DoJ is investigating.

> A civil complaint is not required to be, and generally is not, a catalogy of every piece of relevant information the filing party has. And it especially isn't a catalog of everything they know where a civil lawsuit isn't the venue for addressing it.

Cool, so we're back at zero evidence of any of this happening. We agree then.

>Cool, so we're back at zero evidence of any of this happening. We agree then.

Yeah, we have no idea whether or not CFTC is looking into this or has any evidence, which means...

>I don't [know], but obviously the CFTC doesn't either, otherwise they'd have spelled it out.

... that that statement is not so obvious.

The complaint as it directly relates that they (1) knew of patterns of criminal activity (including patterns of terrorist financing) and specific criminal actors on the platform, and (2) took specific steps to actively counsel specific customers involved in illicit activity on steps to evade detection of that activity.

Now, its not “evidence” because a complaint isn’t a submission of evidence. But, taking the complaint at face value, it directly alleges that that is what has been happening, and that it is a consistent pattern (paras. 104-106). Now, this doesn’t go into much detail in this area, because its not a criminal complaint or indictment where this conduct is the central behavior being addressed, but it is very much in the complaint.

This is a misrepresentation of Levine’s article. He explains that it’s illegal to operate a derivatives exchange without being registered at the very least.

I read the whole thing. I don't think it's a misrepresentation at all. You're free to quote the sections you think contradict it.

OP suggests that the point of the article is that CFTC is doing that just to exert control onto Binance and finds tenuous reasons to do so. That's not the case as I've said in my previous comment.

For those interested, he's mostly talking about Jump. Jane Street and Cumberland DRW too possibly.

I had originally misread that as a New Jersey company, and it makes more sense now that I realize it must mean the Channel island.

> The "terrorist financing" and retail stuff is a smokescreen to seem worthy of the CFTC's attention. Nobody is being protected here. No significant terrorist financing is being stopped.

So enlighten me, what is the actual $$$ threshold where "terrorist financing" can be deemed a legitimate complaint?

Crypto space is chock-full of scammers, hustlers, bad actors, and organized crime. Which of the crimes are worth paying attention to and which aren't? Has the bar slipped that low that some crimes are "small" and aren't worth going after?

Seems like a stones throw away from whataboutism.

> So enlighten me, what is the actual $$$ threshold where "terrorist financing" can be deemed a legitimate complaint?

I don't know, more than the percentage of your average multinational bank? No large financial institution is going to have literally zero unsavory characters using its services.

> Crypto space is chock-full of scammers, hustlers, bad actors, and organized crime. Which of the crimes are worth paying attention to and which aren't? Has the bar slipped that low that some crimes are "small" and aren't worth going after?

The point of my comment and Matt Levine's article is that they are not going after these things. They are superficial artifice on top of the real thing they are going after them for: allowing US HFT firms to trade there.

> So enlighten me, what is the actual $$$ threshold where "terrorist financing" can be deemed a legitimate complaint?

It seems reasonable to at least set the lower bound above Deutsche Bank who are frequently in the spotlight for AML and terrorist financing for amounts far greater than $600 and operating today.

Come on. Further down in the op-ed you linked, he cites evidence in the complaint about Binance being used to launder funds for Hamas and Russia. The feds happened to get Capone on mail fraud; if they see that they can pinch off such laundering with the help of some ostensibly consumer-focused CFTC authorities, that's what's going to happen.

You mean the $600 ex-post identified Hamas transaction? That one? He cites it grudgingly, because it's total bullshit. He very clearly articulates what he thinks the substance of the complaint is, and it is not terrorist financing.

Here is the actual lead in to him quoting that part:

> Anyway I said that there are only a few accusations of financing crimes or secretly trading against customers in the CFTC complaint, but there are not none, and I should quote them. Here’s this:

Judge for yourself if I am misrepresenting his view.

It does not say that there was only one $600 transaction, only that a $600 transaction can barely buy a particular weapon. It says that they're structuring the payments to be small to avoid money laundering notice.

'Lim explained to a colleague that terrorists usually send “small sums” as “large sums constitute money laundering.” Lim’s colleague replied: “can barely buy an AK47 with 600 bucks.” And with regard to certain Binance customers, including customers from Russia, Lim acknowledged in a February 2020 chat: “Like come on. They are here for crime.'

We have no idea from this what sort of money laundering Hamas was doing on Binance, or if it was found ex-post, but we do know that at least one Binance employee thought they were using it for crime.

We do not know that. All we know is that a Binance employee knew about a $600 transaction, and made a general statement about the behavior of groups like this. We know nothing beyond that.

> a Binance employee knew about a $600 transaction

Said employee being the then chief compliance officer.

Your broad point is correct: Binance is not being dinged by the CFTC for money laundering or terrorist financing. But the allegations they hung out are far from trivial. (The core charge is also nontrivial, but for technical reasons.)

If the core charge is that Binance allowed some of the most sophisticated firms in the world to trade on it derivatives exchange without oversight from US regulators, we're just going to have to agree to disagree about that being trivial.

It does not say that there actually was a $600 Hamas transaction at all, you just invented that in your head. It just said that one couldn’t purchase an AK with one. It was a hypothetical example of a small sum because he was saying that’s how terrorists do it to avoid notice.

Isn't it more the other way around here?

The CFTC want to prosecute Binance for violating restrictions on allowing US persons to buy and sell derivatives, but they are aware that this is somewhat weak sauce, because the people buying and selling are all sophisticated institutional players, and Binance themselves are only very dubiously subject to US jurisdiction.

So they make it into a case about 'funding terrorism' based on a casual remark from a chat log.

Tax evasion, not mail fraud.