Crypto exchange Binance sued by US futures regulator
Binance, the world’s largest cryptocurrency exchange, was charged on Wednesday (Tuesday AEDT) by US commodities regulators who allege the company violated regulations and showed American customers how to evade compliance controls.
The Commodity Futures Trading Commission (CFTC) filed a civil complaint in federal court in Chicago, charging Binance and its founder, Changpeng Zhao, with violating the Commodity Exchange Act and CFTC rules, which regulate the crypto derivatives such as futures.
“I have been clear that the CFTC will continue to use all of its authority to find and stop misconduct in the volatile and risky digital asset market,” CFTC chairman Rostin Behnam said in a statement.
Binance chief Changpeng Zhao. Bloomberg
Mr Behnam said Binance has known “for years” that it was violating CFTC rules, working actively to both keep the money flowing and avoid compliance. “This should be a warning to anyone in the digital asset world that the CFTC will not tolerate willful avoidance of US law.”
Gretchen Lowe, CFTC’s enforcement division principal deputy director and chief counsel, said: “Defendants’ alleged willful evasion of US law is at the core of the Commission’s complaint against Binance.
“The defendants’ own emails and chats reflect that Binance’s compliance efforts have been a sham and Binance deliberately chose – over and over – to place profits over following the law.”
In addition to Mr Zhao, the complaint also charges Samuel Lim, Binance’s former chief compliance officer, with aiding and abetting Binance’s violations.
“The complaint charges that Binance Holdings Limited, Binance Holdings (IE) Limited, and Binance (Services) Holdings Limited (together, Binance) operate the Binance centralised digital asset trading platform along with numerous other corporate vehicles through an intentionally opaque common enterprise, with Zhao at the helm as Binance’s owner and chief executive officer.”
US regulators have been stepping up enforcement in the crypto market from the Security and Exchange Commission’s threat to take legal action against Coinbase and its suit against the Tron blockchain network to the apprehension of prominent crypto fugitive Do Kwon.
These moves followed the failure of FTX and the collapse this month of crypto-friendly banks Silvergate Capital and Signature Bank.
In a statement to The Washington Post, Binance said the CFTC’s allegations were “unexpected and disappointing,” as the company had been working with the agency for more than two years.
“Nevertheless, we intend to continue to collaborate with regulators in the US and around the world,” the company said. “The best path forward is to protect our users and to collaborate with regulators to develop a clear, thoughtful regulatory regime.”
The company added that it has made “significant investments” to ensure US users cannot use its platform. Over the past two years, the company said, its compliance staff has grown from 100 people to 750 people, including 80 with law enforcement, regulatory and compliance experience.
Though its offshore exchange is not officially available to US residents, Binance far outstrips its peers, with trading volumes that outstrip the next several competitors combined, according to crypto analytics site CoinGecko.
Binance’s offshore exchange does not operate in the United States because it offers risky financial products, such as crypto derivatives, that are generally prohibited in the country. Binance operates a separate exchange for US residents that offers a smaller menu of products.
Mr Zhao is one of the most prominent figures in the cryptocurrency world. In November, his rivalry with disgraced FTX founder Sam Bankman-Fried came to a head when Mr Zhao cast doubt on FTX’s stability, helping fuel a sell-off in the company’s tokens and setting off a chain of events that led to FTX’s collapse and criminal charges against Mr Bankman-Fried.
Since FTX’s collapse, the crypto industry has faced mounting regulatory pressure. On Thursday, Mr Kwon was apprehended in Montenegro and later charged with fraud in the United States.
The day before Mr Kwon’s arrest, the Securities and Exchange Commission filed a complaint against eight celebrities, including Lindsay Lohan, accusing them of failing to disclose their compensation for promotions.
The US Justice Department has been probing Binance’s activities in recent months, issuing subpoenas to hedge funds who may have communicated with the firm, The Post reported in January.
While the probe does not necessarily mean prosecutors will file charges, experts said that the investigation may involve possible violations of the Bank Secrecy Act, which requires financial institutions to verify their customers’ identities and report suspicious activity, including tax evasion and money laundering.
The civil complaint filed on Monday by the CFTC alleges that Binance allowed users to trade on its platform without verifying their identities, despite a requirement to do so. The company “failed to implement basic compliance procedures designed to prevent and detect terrorist financing and money laundering,” the agency said.
The CFTC alleges that Binance conducted activities outside the United States specifically to avoid regulation. Mr Zhao, who was born in China and later immigrated to Vancouver, has said that the company has had no formal headquarters since 2020.
Regulators also accuse Binance of helping US customers use its offshore site by instructing them to use virtual private networks, or VPNs – programs that can mask a user’s IP address and allow them to access websites restricted in their own country. Mr Zhao was an architect of that “secret plot,” according to the CFTC, which further alleges that Mr Zhao instructed employees to destroy evidence that they had helped investors bypass the controls.
With Bloomberg and Washington Post
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