Forensic Risk Alliance Appointed to Monitor Binance for Next 3 Years

Law firm Sullivan & Cromwell was first considered for the contract, but their previous involvement with FTX changed the DOJ's decision.

The U.S. Department of Justice has appointed Forensic Risk Alliance to monitor Binance's compliance after the crypto exchange agreed to it as part of a plea deal for money laundering and other charges. Binance is also facing bribery allegations in Nigeria, which could start impacting foreign investment in the country. As this is happening, crypto regulation is still a very hot topic. Mark Cuban is pushing for the CFTC to take a leading role in crypto regulation due to the ongoing frustrations with the SEC's approach, which was once again evident in the SEC’s case against Coinbase.

Binance's New Watchdog

The United States Department of Justice (DOJ) selected Forensic Risk Alliance (FRA), an international consultancy firm, to oversee compliance measures at crypto exchange Binance. This comes after Binance's November 2023 plea deal that included a guilty plea to charges of money laundering among other federal crimes, resulting in a very hefty $4.3 billion fine. The agreement also requires third-party oversight of Binance's operations for three years.

FRA will get access to Binance's internal records, premises, and employees to monitor and report back to the DOJ on the exchange's adherence to regulations. Law firm Sullivan & Cromwell was first considered for the contract, but their previous involvement with the now-bankrupt crypto exchange FTX, and allegations against them of participating in FTX's fraud, influenced the DOJ's decision to opt for FRA instead.

Despite this, Sullivan & Cromwell might still play a big role in the regulatory landscape of crypto exchanges, as they are expected to be appointed by the Treasury Department’s Financial Crimes Enforcement Network to monitor Binance for a separate five-year term.

The news comes shortly after the imprisonment of Binance’s former CEO, Changpeng “CZ” Zhao, who was sentenced on Apr. 30 to four months in prison. The sentence was lighter than the three years prosecutors were fighting for, but the judge pointed out a lack of direct evidence of Zhao's knowledge of specific illegal activities at Binance.

Allegations Against Binance Could Deter Investment in Nigeria

Meanwhile, things are not looking good for Binance in Nigeria. SBM Intelligence, an Africa-focused risk consultancy firm, issued a warning that recent bribery allegations involving Binance CEO Richard Teng and Nigerian government officials could negatively impact foreign investment in Nigeria.

According to a report, the firm analyzed the economic implications of the detention of Binance officials. It seems like the report found that it sends a negative signal to potential investors and could damage confidence in Nigeria's investment climate.

The controversy began when Binance executives Tigran Gambaryan and Nadeem Anjarwalla were allegedly asked for a cryptocurrency bribe before their detention on Feb. 28, 2024.

SBM also pointed out that there is a major disconnect between the Nigerian government's opposition to cryptocurrencies and the growing popularity and acceptance of these digital assets among the Nigerian people. The government has made it clear that it sees cryptocurrencies as a threat to its control over financial transactions and the economy, while citizens see them as providing new investment and transaction opportunities.

Furthermore, SBM Intelligence criticized the prolonged detention of the Binance executives. In fact, it has been more than two months since their arrest. This situation, coupled with President Bola Tinubu's efforts to attract foreign investment, might paradoxically push away investors who fear corruption and arbitrary detention.

The ongoing issues with Binance could serve as a cautionary tale for other foreign businesses who are considering investments in Nigeria. The firm advised that resolving the situation quickly, fairly, and diplomatically would not only benefit the Tinubu administration but also improve Nigeria's image as a reliable investment destination.

Mark Cuban Advocates for CFTC Regulation of Crypto

Billionaire investor Mark Cuban has his own ideas on how to regulate the crypto space to make sure what happened to Binance does not happen again. Cuban recently urged the United States Commodity Futures Trading Commission (CFTC) to take over regulating the entire crypto sector. He also appealed to the U.S. Congress to provide very clear, industry-specific guidelines before the 2024 presidential election.

According to Cuban, this regulatory clarity could boost President Joe Biden’s chances for reelection. In a recent X post, Cuban argued that the lack of clear crypto regulations could be detrimental to Biden’s campaign. He even went as far as to suggest that the U.S. Securities and Exchange Commission (SEC) and its Chair, Gary Gensler, could be to blame if Biden is not reelected.

Cuban’s comments are certainly nothing new for the crypto community, as it reflects the broader sentiments in the crypto community when it comes to Gensler’s enforcement-heavy approach. Data from Cornerstone Research indicated that in 2023 alone, the SEC took 46 enforcement actions against crypto firms. Additionally, CFTC Chair Rostin Behnam believes the SEC’s enforcement spree is very likely to continue over the next few months.

The upcoming U.S. elections on Nov. 5 have pushed crypto into the spotlight, even more so than in previous years. A poll performed in April showed a strong voter belief in the inclusivity and fairness of cryptocurrency compared to traditional financial systems. However, the Biden administration has faced criticism from well known people in the crypto industry like Charles Hoskinson, founder of Cardano, who accuses it of actively trying to undermine the U.S. crypto industry.

What is the CFTC and What is it Responsible For?

The CFTC is an independent agency of the U.S. government that is responsible for regulating the derivatives markets in the United States, including futures, options, and swaps. The CFTC's mission is to ensure the integrity, resilience, and vibrancy of these markets by enforcing regulations. This includes overseeing a variety of market participants like designated contract markets, swap execution facilities, and derivatives clearing organizations, among others.

The derivatives markets have a lot of influence on the U.S. economy and daily pricing for a wide range of goods and services, helping businesses manage risks related to prices, currencies, and borrowing costs.

The CFTC’s Division of Enforcement plays a very important role when it comes to maintaining market integrity by investigating and prosecuting violations of the Commodity Exchange Act (CEA) and CFTC Regulations. Violations can include fraud, market manipulation, and trade practice violations like wash sales and fictitious sales.

The agency also works with other state, federal, and international authorities to execute its enforcement duties and relies on tips from the public, information from other divisions in the CFTC, and self-regulatory organizations to initiate investigations.

Coinbase vs. SEC

The crypto industry’s frustration with the SEC is evident in the regulator’s ongoing case against Coinbase. The SEC recently contested Coinbase’s request for an interlocutory appeal in a filing on May 10, arguing that the crypto exchange is trying to manipulate the legal questioning.

In its appeal filed on Apr. 12, Coinbase claimed that the nature of an investment contract hinges on the existence of a post-sale obligation, which the SEC disputes. Coinbase insists this is a controlling question—a legal issue critical to the outcome of the case—but the SEC does not agree with this, and suggested that Coinbase cannot clearly define what constitutes a "contractual undertaking" and is only trying to introduce a new legal standard that is different from long-established precedents.

The SEC's opposition points out that no court in the past 80 years has required post-sale contractual undertakings. The regulator even accused Coinbase of disliking the Howey test, which is the standard method to determine if an arrangement constitutes a security. According to the SEC, Coinbase’s challenge to this framework is more about its reluctance to comply with the law rather than any valid legal grievance.

The lawsuit was started by the SEC in June of 2023, alleging that Coinbase violated federal securities laws by listing 13 tokens it claims are securities. Coinbase, however, argues that the transactions on its platform do not meet the definition of securities under SEC regulations.

The SEC holds firm that several transactions through Coinbase's services meet the criteria of investment contracts and therefore should be regulated as securities.