CFTC Sues Binance for Allegedly Evading US Regulations, Setting Up Battle Between Regulator and World’s Largest Cryptocurrency Exchange
The Commodity Futures Trading Commission (CFTC) has sued Binance, the world's largest cryptocurrency exchange, along with its founder and CEO Changpeng Zhao, and its former Chief Compliance Officer Samuel Lim, for allegedly evading US regulations. The CFTC's complaint alleges that Binance put profits over compliance and committed “numerous violations of the Commodity Exchange Act (CEA) and CFTC regulations.” The agency claims that Binance knowingly offered unregistered crypto derivatives products in the US against federal law and did not ask users for mandatory identity verification. It also structured itself to avoid US regulation and even told customers how to dodge its own compliance system for US-based customers.[0]
This is the latest in a series of questionable behaviors by Binance, which has faced scrutiny from regulators in various countries. Last week, Coinbase, the largest US-listed crypto exchange, received a so-called Wells notice from the SEC for possible securities law violations.[1] The developments have unsettled markets, with commentators well aware of crypto firms previously targeted by authorities in the wake of the FTX debacle.[2]
Binance has called the CFTC's lawsuit “unexpected and disappointing” and said it had been working collaboratively with the regulator for over two years.[3] The exchange said it had made significant investments to ensure it did not have US users active on its platform, raising its compliance team to 750 from 100 and spending $80 million to bolster its compliance programs.[4]
However, the CFTC's scrutiny of arrangements that three trading firms had with the exchange has already sent chills across an industry, which relies on US licenses to make markets for securities.[5] The firms weren't identified in the CFTC's lawsuit.[5]
The move sets up a battle between the CFTC, one of the US's smallest financial regulators, and a global company whose CEO is one of the industry's most influential figures.[6] Despite numerous crypto companies going bankrupt in the past year, Binance has thrived and expanded.[6] The Binance developments are transpiring in the backdrop of a regulatory crackdown in the US against the crypto industry, with banking and securities regulators, and even the White House, questioning the value and utility of crypto and urging private-sector entities to use extreme caution before providing services to companies in the industry.[7]
Meanwhile, CNBC previously reported on how Binance's customer service and VIP representatives counseled users in mainland China on how to evade Binance's compliance systems. Mainland Chinese traders were recommended by certain volunteers and employees to utilize virtual private networks and other non-governmental documents.[8] The CFTC filing alleges that Binance engaged in similar activity for its US users.
In an attempt to make it appear legit, Binance underwent a supposed audit in October 2020.[9] According to a series of messages highlighted in the lawsuit, Binance employees were open about how much of a sham the audit was, picking an auditor who would “just do a half-assed individual sub-audit on geo[fencing] to buy us more time.”[9] Lim collaborated with Binance's Officer for Reporting Money Laundering, who expressed her frustration to her superior about the unnecessary obstacles she had to overcome. For instance, she had to fabricate an MLRO report every year to present to the Binance board of directors, which she found absurd.[9] Frequently, the team conversed about how their platform was utilized to enable illegal activities such as money laundering. Despite being notified about such occurrences, they chose to turn a blind eye in order to maintain the continuity of their business on the platform.[9] CZ stated that there are several activities we undertake that are evidently not aligned with the United States.[9]
The CFTC alleges that Binance deliberately lured American investors to use its platform despite its failure to register with US authorities, as is required by law.[10] “For years, Binance knew they were violating C.F.T.C. rules, working actively to both keep the money flowing and avoid compliance,” the agency's chairman, Rostin Behnam, said in a statement announcing the filing of the lawsuit.[11] “This should be a warning to anyone in the digital asset world that the C.F.T.C. will not tolerate willful avoidance of US law.[12]
0. “Crypto giant Binance charged with violating US trading and derivatives laws (updated)” Engadget, 27 Mar. 2023, https://www.engadget.com/crypto-giant-binance-charged-with-violating-us-trading-and-derivatives-laws-170817954.html
1. “The US case against Binance calls out one of the worst-kept secrets in crypto” CNN, 27 Mar. 2023, https://www.cnn.com/2023/03/27/business/binance-cftc-lawsuit/index.html
2. “Bitcoin price retains $27K, but forecast says ‘correction is incoming’” Cointelegraph, 28 Mar. 2023, https://cointelegraph.com/news/bitcoin-price-retains-27k-but-forecast-says-correction-is-incoming
3. “Binance, CEO Sued by US Derivatives Watchdog for Violations (1)” Bloomberg Law, 27 Mar. 2023, https://news.bloomberglaw.com/securities-law/binance-and-cz-sued-by-cftc-over-regulatory-violations
4. “US regulator goes after Binance in newest crypto clash” Yahoo Finance, 27 Mar. 2023, https://finance.yahoo.com/news/us-regulator-goes-after-binance-in-newest-crypto-clash-190826928.html
5. “Binance Crackdown Threatens US Firms Trading Crypto, Alarming Market” Bloomberg, 28 Mar. 2023, https://www.bloomberg.com/news/articles/2023-03-28/binance-crackdown-threatens-us-trading-firms-alarming-market
6. “Binance Sued by CFTC Over Evading U.S. Rules” The Wall Street Journal, 28 Mar. 2023, https://www.wsj.com/articles/cftc-sues-binance-holdings-in-chicago-federal-court-4280ada3
7. “U.S. Regulator Says That Binance Illegally Helped Americans Trade On Its Exchange” Forbes, 27 Mar. 2023, https://www.forbes.com/sites/stevenehrlich/2023/03/27/us-regulator-says-that-binance-illegally-helped-americans-trade-on-its-exchange/
8. “Binance and founder Changpeng Zhao sued over accusations of trading rules violations” NBC News, 27 Mar. 2023, https://www.nbcnews.com/business/business-news/binance-founder-changpeng-zhao-sued-accused-trading-rules-violations-rcna76830
9. “Binance Crackdown Reveals How Rigged The Crypto Game Is” Defector, 28 Mar. 2023, https://defector.com/binance-crackdown-reveals-how-rigged-the-crypto-game-is
10. “Why the CFTC's Binance Lawsuit Is Good News for Coinbase” The Information, 28 Mar. 2023, https://www.theinformation.com/articles/why-the-cftcs-binance-lawsuit-is-good-news-for-coinbase
11. “US accuses world’s largest crypto platform, Binance of illegal operations” Vanguard, 28 Mar. 2023, https://www.vanguardngr.com/2023/03/us-accuses-worlds-largest-crypto-platform-binance-of-illegal-operations/
12. “Binance Is Hiding U.S. Crypto Trading Activity, Regulator Says” The New York Times, 27 Mar. 2023, https://www.nytimes.com/2023/03/27/business/binance-cftc-lawsuit.html
