The world’s biggest crypto exchange Binance and its CEO and founder Changpeng Zhao were sued by the U.S. Commodity Futures Trading Commission (CFTC) on Monday for operating what the regulator alleged were a “illegal” exchange and a “sham” compliance program.
The CFTC sued Binance, Zhao and its former top compliance executive with “willful evasion” of U.S. law, “while engaging in a calculated strategy of regulatory arbitrage to their commercial benefit.”
The CFTC’s complaint, according to billionaire Zhao, who was born in China and moved to Canada when he was 12 years old, was “unexpected and disappointing.”
“Upon an initial review, the complaint appears to contain an incomplete recitation of facts, and we do not agree with the characterization of many of the issues alleged in the complaint,” Zhao said in a statement.
The lawsuit comes amid a broader and increasingly high-profile crackdown on crypto companies. For years, U.S. prosecutors and civil investigators have targeted crypto firms for illegal offerings and failures to comply with rules designed to prevent illicit activity. But the rate of such government activities has grown recently.
The CFTC said in its complaint on Monday that from at least July 2019 to the present, Binance “offered and executed commodity derivatives transactions on behalf of U.S. persons” in violation of U.S. laws.
The CFTC stated, citing a number of practises first reported by Reuters in a series of investigations into the exchange last year, that Binance’s compliance programme has been “ineffective” and the company, under Zhao’s direction, has instructed employees and customers 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 crimes. Lim did not immediately reply to calls and texts from Reuters.
The company will continue to “collaborate” with regulators, according to a spokesperson for Binance, which dominates the international digital asset market.
Binance has made “significant investments” to ensure it does not have U.S. users on its platform, the spokesperson said.
CFTC Chairman Rostin Behnam said in a statement that Binance executives knew for years “they were violating CFTC rules, working actively to both keep the money flowing and avoid compliance.”
The CFTC is responsible for oversight of commodities and derivatives markets, including for Bitcoin. Firms such as brokers that facilitate U.S. customers’ trading of such products are required to register with the agency.
Reuters reported in December that the U.S. Justice Department had been examining Binance since 2018 for alleged money-laundering and sanctions violations. Binance has processed at least $10 billion in payments for criminals and companies seeking to evade U.S. sanctions, Reuters has found.
Binance’s cryptocurrency BNB, the world’s fourth largest by market cap, plummeted roughly 4% on the announcement.
In a tweet on Monday afternoon, Zhao wrote “4” – a reference to a previous post listing his “Do’s and Don’ts” for 2023. The fourth item on the list was “Ignore FUD, fake news, assaults,” employing an acronym for “fear, uncertainty and doubt” widely used in crypto in regard to news perceived as bad.
‘PIRATE SHIP’
Binance was established in Shanghai in 2017 and dominates the global cryptocurrency market. Its basic Binance.com exchange conducted trades worth approximately $23 trillion last year, according to data provider CryptoCompare. Trading volumes hit $34 trillion in 2021, Zhao said last year.
With a holding company based in the Cayman Islands, Binance has never revealed the location of its core exchange. The CFTC charged the holding company and two other Binance subsidiaries.
Binance did not require customers to submit information verifying their identity before trading and “failed to implement basic compliance procedures designed to prevent and detect terrorist financing and money laundering,” the CFTC said.
The CFTC’s complaint described Binance’s efforts to keep American customers even after the company launched a U.S. exchange in 2019 to serve American customers 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. The CFTC said when Zhao hired BAM’s first CEO, he “described Binance as a pirate ship and explained that he wished for Binance.US to be a navy boat.”
VIP CUSTOMERS
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.
Zhao kept information reflecting Binance’s U.S. customer base secret from some senior managers, CFTC said. In October 2020, Zhao directed Binance personnel to replace the U.S. value for some data fields in Binance’s internal database with “UNKWN”, it said.
Although the exchange had not disclosed this activity 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.
A top Binance executive told the Wall Street Journal in February that the company expected to pay penalties to resolve the U.S. investigations.
The CFTC said it is pursuing monetary fines, disgorgement of ill-gotten gains and permanent trading and registration prohibitions.
