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Binance’s U.S. Partners Involved in CFTC Lawsuit Acted Legally, Crypto Traders Insist 

3 mins
Updated by Ryan James

In Brief

  • Binance did not err when it gave big companies VIP access to high-frequency trading, argue traders.
  • One U.S. firm Radix Trading said it legally used a Cayman Islands entity to access Binance's derivatives trading desk.
  • Recently, reports surfaced, revealing that crypto companies used shell companies and shadow banks to survive and grow during periods of exclusion from the financial sector.
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Crypto traders have said that Binance favoring U.S. VIP high-frequency traders is standard practice, despite the activity bearing an eerie resemblance to FTX and Alameda.

Traders responded to a lawsuit by the U.S. Commodity Futures Trading Commission filed against Binance on March 26, 2023.

Binance Can Assign VIP Privileges at Its Discretion, Traders Say

In the lawsuit, the CFTC alleged that Binance gave certain market makers privileged access to its core systems. It also allegedly gave large U.S. market makers access to its derivatives platform. This allowance was made despite Binance publicly banning their access to the facility.

Binance allegedly gave a New-York based trading firm a five-to-ten millisecond advantage, which one critic says discriminates between clients.

“…This isn’t a discount, it’s an advantage. They can use it to make more revenue. If I was one of their other clients, I’d be a bit upset,” said Joe Saluzzi of Themis Trading.

But crypto traders argue that giving certain clients privileges is part and parcel of how an exchange operates. High-frequency traders use algorithms to profit from the difference between the ask and bid prices. They can earn trading revenue for an exchange.

While favoring certain traders is a tightly-regulated activity in TradFi, giving preference to certain entities in the crypto world is often done at the exchange’s discretion. But, as was seen with collapsed Bahamian exchange FTX and Alameda, which had Sam Bankman-Fried as a common owner, such choices could prove concerning for customers of the exchange. Bankman-Fried allegedly misappropriated FTX customer funds to prop up Alameda, which acted as the exchange’s primary liquidity provider.

Last week, former TradFi executives Brandon Mulvihill and Anthony Mazzarese launched an institutionally-targeted high-frequency trading platform CROSSx in London. It offers institutions fast matching of buy and sell orders.

Crypto Firms Turn to Shell Companies and Shadow Banks to Launch and Grow

Another topic of concern in the CFTC suit was that U.S. companies accessed Binance’s derivatives trading desk using shell companies.

Notably, one of the companies, Radix Trading, believed its interaction with Binance through a Cayman Islands company was above board.

“We got legal vetting on anything we did in terms of crypto connectivity,” the firm’s co-founder told the Wall Street Journal.

According to a former CFTC commissioner, regulators will likely scrutinize the shell companies to determine whether their owners had a valid reason for structuring transactions with Binance in a specific way or whether they existed to avoid U.S. sanctions.

Using shell companies for market-making and generating revenue reveals a trend by crypto firms to bypass traditional structures to succeed.

The Wall Street Journal reported recently that in 2018, USDT stablecoin issuer Tether opened bank accounts through corporate entities whose executives had slightly different corporate names than Tether’s executives. This activity allegedly came after Wells Fargo stopped processing transactions for the stablecoin issuer in 2017.

One firm, Crypto Capital, allegedly had its assets seized by U.S. authorities after opening accounts for Tether and its sister firm Bitfinex using the names of shell companies.

In Feb. 2023, U.S. prosecutors charged FTX’s former CEO, Sam Bankman-Fried, for opening a bank account in the name of an unrelated business. FTX was a crypto exchange based in the Bahamas.

For years, bankrupt crypto lender Genesis Global Capital provided banking services to the crypto industry without a traditional banking license. It often accepted cryptocurrencies as collateral for loans to firms like Alameda Research and Three Arrows Capital. However, the 2022 market downturn that saw crypto collateral fall dramatically stung Genesis. The firm filed for bankruptcy on Jan. 20, 2023.

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