Binance deserves everything that’s coming to them
The crypto mania has enchanted investors worldwide for years.
The Biden administration’s recent crackdown on crypto exchanges, led by the Securities and Exchange Commission, is a much-needed intervention for an industry that has far too long operated in a lawless manner.
While the industry may decry this regulatory action as an affront to financial freedom, the more level-headed among us must recognize it as a necessary step toward safeguarding the interests of investors and ensuring the long-term stability of capital markets.
Financial products and technologies may change over the decades, but our markets’ basic bargain remains the same — entrepreneurs must register their offerings and provide full, fair and truthful disclosures to the investing public.
In parallel, intermediaries that make markets and provide platforms for buyers and sellers to interact must also maintain the integrity of these markets. It is imperative to remove conflicts of interest and address information asymmetries that can undermine the basic bargain.
This arrangement — enshrined in our laws after the market crash of 1929 — fosters transparency, liquidity and price discovery, allowing investors to make informed decisions and allocate capital efficiently.
This system and the continuity of the basic bargain have produced immense prosperity and the deepest capital markets, which are the envy of the world.
However, what is clear from the SEC’s latest 136-page lawsuit against Binance is that many actors in the crypto industry have a flagrant disregard for the rule of law, common decency and basic market protections. In the words of their own former head of compliance, showing a remarkable amount of self-awareness, “we are operating as a fking unlicensed securities exchange in the USA bro.”
This lawsuit against Binance hearkens back to the infamous bucket shops of the 1920s, an era that saw shadowy establishments offering speculative trading on stocks without executing the trades on the market. These establishments lured investors with promises of quick profits and easy wealth, exploiting their lack of knowledge, creating fear of missing out based on obfuscation, and constructing deeply rigged markets fraught with wash trading and manipulation.
The reality of crypto is made crystal clear by this lawsuit; crypto exchanges have arbitraged international financial regulation, exploited loopholes in our banking system, and capitalized on legislative sclerosis to create what can only be described as a series of lawless casinos run by a cabal of insiders whose explicit intent is to defraud the public and enrich themselves.
The SEC alleges that the exchange has regularly commingled its client money, embezzled funds to purchase yachts, facilitated markets in which 99% of the volume was fake, listed tens of thousands of unregistered securities offerings, and whose entire corporate operation can most aptly be described as a vertically integrated stack of conflicts of interest.
In light of this evidence, it remains hard to call what Binance provides a “market” given the sheer level of alleged fraud and manipulation, while simultaneously rooted in the inescapable fact that crypto offerings do not provide any financial intermediation function, facilitate capital formation or have any intrinsic value.
These new offshore crypto bucket shops are simply a repeat of the mistakes of financial disasters past, and their continued existence represents a direct assault on the very principles of capitalism. These bucket shops operate outside the bounds of regulatory oversight, and with blatant disregard for the rule of law; these lawless exchanges undermine the foundations of free and fair markets.
The American legal scholar Michael Barr describes crypto as a contagious economic narrative whose “[..] value proposition taps into the fears of government control with the promise that, through superior technology, a new product can yield untold riches.”
Crypto has far too long wrapped its charlatanism in the language of economic populism, tapping into a genuine desire to revolt against financial institutions and offering the illusory promises of a financial system built from a blank slate.
However, the reality of what has been built is fueled by rampant fraud, market manipulation and the creation of risk wholly detached from actual economic activity, which perpetuates an environment where deceit trumps transparency, and individual investors — often the poorest and most marginalized in our society — are left vulnerable to exploitation.
Crypto remains an affront to capitalism itself by operating in a lawless manner that is detrimental to investor confidence and market integrity, and undermines the fundamental tenets of trust in markets, accountability and the pursuit of genuine value creation.
To dismiss the nuances of regulation and the lessons of history that define our financial system is to invite a tempest that engulfs the vulnerable while empowering those who thrive on chaos. Attempting to unravel the foundations of our financial system, challenge the basic bargain and supplant markets for casinos only paves the way for opportunistic wolves to exploit the ensuing vacuum, perpetuating the very inequities that were initially denounced.
Nowhere do we hear the howl of these wolves more clearly than in crypto’s hucksterism, buffoonery and boorishness.
Stephen Diehl is a software engineer and outspoken crypto skeptic. He runs the UK-based Center for Emerging Technology Policy which advances public policy advocacy on behalf of technologists.