The world’s largest cryptocurrency exchange Binance and its CEO, Changpeng Zhao, was sued by the U.S. Commodity Futures Trading Commission (CFTC) on Monday.
The US Commodities Futures Trading Commission (CFTC) sued Binance and its CEO and founder Changpeng Zhao on Monday for operating an “illegal” exchange and a “sham” compliance program, according to the regulator.
The CFTC charged Binance and its CEO Zhao, and the company’s former senior compliance officer with “willful evasion” of US law, “while engaging in a deliberate strategy of regulatory arbitrage to their financial profit.”
Zhao, a billionaire born in China and raised in Canada from the age of 12, described the CFTC’s allegation as “unexpected and upsetting.”
“Upon initial assessment, the lawsuit appears to have an insufficient recitation of facts,” Zhao said in a statement. “We do not agree with the characterization of many of the concerns mentioned in the complaint.”
The case comes amid a broader and increasingly visible crackdown on cryptocurrency firms. For years, US prosecutors and civil investigators have targeted cryptocurrency firms for illegal offerings and failures to comply with anti-illicit activity legislation. Nonetheless, the rate of such government activity has recently increased.
According to the CFTC’s complaint filed against Binance and its CEO Zhao on Monday, Binance “offered and executed commodity derivatives transactions on behalf of US persons” from at least July 2019 to the present.
The CFTC said Binance’s compliance program was “ineffective,” and the firm, led by Zhao, instructed employees and customers to circumvent compliance controls, citing a number of practices first reported by Reuters in a series of investigations into the exchange last year.
Binance’s former Chief Compliance Officer Samuel Lim was also accused by the CFTC of “aiding and abetting” Binance’s offenses. Lim did not immediately respond to Reuters’ calls and emails.
Binance, which dominates the global digital asset sector, said it will “collaborate” with regulators in the future.
According to the representative, Binance has made “substantial investments” to ensure that there are no US users on its platform.
According to CFTC Chairman Rostin Behnam, Binance executives knew for years that “they were violating CFTC rules, working actively to both keep the money flowing and avoid compliance.”
The CFTC is in charge of overseeing commodity and derivatives markets, including Bitcoin. Companies such as brokers that assist the trading of such items by US customers must 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. According to Reuters, Binance has processed at least $10 billion in payments for criminals and organizations attempting to avoid US sanctions.
Binance’s cryptocurrency BNB, the world’s fourth largest by market cap, fell roughly 4% in response to the news.
Zhao posted “4” in a tweet on Monday afternoon, referring to a previous post detailing his “Do’s and Don’ts” for 2023. The fourth item on the list was “Ignore FUD, fake news, assaults,” an acronym for “fear, uncertainty, and doubt” that is frequently used in crypto in regard to negative news.
THE ‘PIRATE SHIP’
Binance, which was founded in Shanghai in 2017, is at the core of the global cryptocurrency sector. According to statistics provider CryptoCompare, the core Binance.com exchange handled trades worth approximately $23 trillion last year. Last year, Zhao predicted that trading volumes would reach $34 trillion by 2021.
Binance, which has a holding company in the Cayman Islands, has never confirmed the location of its primary exchange. The CFTC charged the holding company as well as two other Binance subsidiaries.
Binance did not require consumers to submit identification information before trading and “failed to execute fundamental compliance processes designed to prevent and identify terrorist financing and money laundering,” according to the CFTC.
The CFTC’s complaint revealed Binance’s efforts to retain U.S. customers, even after the business built a U.S. exchange in 2019 in conjunction with a purportedly independent American firm to service American clients in accordance with U.S. regulations.
Reuters previously reported that this American firm, BAM Trading, was in fact controlled by Zhao and managed by Binance as a de-facto subsidiary. The CFTC stated when Zhao hired BAM’s initial CEO, he “described Binance as a pirate ship and explained that he aspired for Binance.US to be a naval boat.”
VIP CLIENTS
Despite the fact that Binance’s worldwide company publicly stated that it was prohibiting US consumers from trading on its platform, the CFTC alleges that Binance instructed its commercially valuable US-based “VIP customers” on how to circumvent its compliance procedures.
According to the CFTC, Zhao withheld information about Binance’s US user base from several senior executives. Zhao told Binance workers in October 2020 to replace the U.S. value for various data fields in Binance’s internal database with “UNKWN,” according to the company.
According to the CFTC, Binance traded on its own platform through over 300 “house accounts” directly or indirectly held by Zhao, despite the fact that the exchange had not disclosed this activity in its public terms of use or elsewhere. The CFTC stated that the home accounts were exempt from Binance’s “insider trading” policy.
In February, a top Binance official told the Wall Street Journal that the business intended to pay penalties in order to conclude the US probes.
According to the CFTC, it is requesting monetary fines, disgorgement of ill-gotten gains, and permanent trading and registration prohibitions.
(Reporting from London by Tom Wilson, Washington by Chris Prentice, and Bengaluru by Jaiveer Singh Shekhawat; additional reporting by Maria Ponnezhath; Editing by Shinjini Ganguli, Alun John, Marguerita Choy, and Richard Chang.)
