The largest cryptocurrency exchange in the world, Binance, as well as its CEO and founder, Changpeng Zhao, were sued by the U.S. Commodity Futures Trading Commission (CFTC) on Monday. The agency said that Binance ran a “illegal” exchange and a “sham” compliance program.
While engaged in a deliberate strategy of regulatory arbitrage to their financial profit, the CFTC accused Binance, Zhao, and its former top compliance employee of “willful evasion” of U.S. law.
The CFTC’s complaint was deemed “unexpected and disappointing” by Zhao, a billionaire who was born in China and immigrated to Canada when he was 12 years old.
Zhao said in a statement that upon initial assessment, the complaint appears to have an insufficient recital of facts, and they disagree with the categorization of many of the problems raised in the complaint.
The case is filed against a backdrop of a wider and more prominent campaign against cryptocurrency businesses. U.S. prosecutors and civil investigators have been focusing their attention on cryptocurrency organizations for years because of their illegal offerings and violations of laws intended to stop illegal activities. Yet lately, the rate of this government activity has accelerated.
In its lawsuit on Monday, the CFTC claimed that Binance had violated American laws from at least July 2019 until the present by offering and executing commodity derivatives transactions on behalf of U.S. individuals.
The CFTC stated, citing a variety of practices first disclosed by Reuters in a series of investigations into the exchange last year, that Binance’s compliance program has been “ineffective” and the company, under Zhao’s guidance, has instructed workers and users to bypass compliance controls.
Samuel Lim, the former chief compliance officer at Binance, was charged by the CFTC with “aiding and abetting” the company’s violations. Calls and mails from Reuters went unanswered by Lim.
The company would continue to “collaborate” with regulators, according to a representative for Binance, which dominates the international digital asset market.
According to the spokesman, Binance has made “substantial investments” to make sure that U.S. users are not allowed on its platform.
Binance management knew they were breaking CFTC laws, acting deliberately to both keep the money flowing and evade compliance, according to CFTC Chairman Rostin Behnam, in a statement.
The CFTC is in charge of regulating the markets for Bitcoin and other commodities and derivatives. Companies like brokers who make it easier for US customers to trade these goods must register with the agency.
In December, Reuters revealed that Binance had been under investigation by the US Justice Department since 2018 for alleged money-laundering and sanctions violations. According to Reuters, Binance has handled at least $10 billion in payments for criminals and businesses trying to avoid American sanctions.
The fourth-largest cryptocurrency in the world by market cap, BNB from Binance, fell about 4% in response to the news.
On Monday, Zhao tweeted “4” in reference to an earlier post in which he listed his “Do’s and Don’ts” for 2023. “Ignore FUD, fake news, assaults,” the fourth item on the list, uses the abbreviation for “fear, uncertainty, and doubt,” which is frequently used in the cryptocurrency community in reference to news that is viewed negatively.
THE “PIRATE SHIP”
Binance was established in Shanghai in 2017 and dominates the global cryptocurrency market. According to statistics, its primary Binance.com exchange handled trades totaling roughly $23 trillion last year. Zhao stated last year that trading volumes would reach $34 trillion in 2021.
Binance has never disclosed the location of its primary exchange despite having a parent company domiciled in the Cayman Islands. The holding company and two other Binance units were charged by the CFTC.
The CFTC said that Binance failed to execute fundamental compliance processes required to prevent and detect terrorist financing and money laundering and that Binance did not require consumers to submit information authenticating their identities prior to trading.
The CFTC’s complaint described Binance’s efforts to keep American customers even after the business built a U.S. exchange in 2019 to serve American clients in accordance with U.S. regulations in collaboration with a supposedly independent American firm.
According to Reuters, Zhao actually controls this American company, BAM Trading, and Binance effectively manages it as a de facto subsidiary. According to the CFTC, Zhao described Binance as a pirate ship and said that he aspired for Binance.US to be a naval boat when he hired BAM’s first CEO.
VIP CLIENTS
While publicly stating that it was prohibiting U.S. consumers from trading on its platform, Binance’s worldwide business allegedly instructed its economically valuable U.S.-based “VIP customers” on how to get around its compliance measures, according to the CFTC.
According to the CFTC, Zhao withheld information about Binance’s U.S. customer base from some senior managers. According to the statement, Zhao gave orders to Binance staff in October 2020 to enter “UNKWN” in place of “US” for several data fields in the company’s internal database.
Although the exchange had not disclosed this conduct in its public terms of use or elsewhere, the CFTC claims that Binance traded on its own platform using 300 “house accounts” that were either directly or indirectly owned by Zhao. The CFTC claimed that Binance’s “insider trading” policy did not apply to the house accounts.
In February, a senior executive from Binance told the Wall Street Journal that the business anticipated paying fines to end the U.S. investigations.
The CFTC declared that it is pursuing financial penalties, the return of illegally obtained gains, and long-term trading and registration prohibitions.
