US regulator the Commodity Futures Trading Commission (CFTC) is suing Binance CEO Changpeng Zhao and three entities that operate the world’s largest crypto-currency exchange, alleging numerous violations of the Commodity Exchange Act (CEA) and CFTC regulations.
The complaint also charges Samuel Lim, Binance’s former chief compliance officer, with aiding and abetting Binance’s violations.
However, Zhao has vehemently denied these allegations.
Binance is a global company that operates the largest crypto-currency exchange in the world in terms of daily trading volume of crypto-currencies.
It was founded in 2017 by Zhao, a developer who had previously created high-frequency trading software.
Binance was initially based in China, but later moved its headquarters out of China shortly before the Chinese government imposed regulations on crypto-currency trading.
The company also has a presence in South Africa. In August last year, Binance appointed former HSBC South Africa global banking head Hannes Wessels as its country manager for South Africa.
The charges
In a statement, the CFTC says the complaint charges that the firm operates 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.
It notes the defendants allegedly chose to knowingly disregard applicable provisions of the CEA, while engaging in a calculated strategy of regulatory arbitrage to their commercial benefit.
In its continuing litigation against the defendants, the agency seeks disgorgement, civil monetary penalties, permanent trading and registration bans, and a permanent injunction against further violations of the CEA and CFTC regulations, as charged.
“Today’s enforcement action demonstrates there is no location, or claimed lack of location, that will prevent the CFTC from protecting American investors. 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,” says CFTC chairman Rostin Behnam.
“For years, Binance knew they were 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 wilful avoidance of US law.
“I applaud the diligent and dedicated work of the CFTC’s enforcement team in bringing this action, and for their hard work in addressing illegal operations in the digital asset space.”
According to the complaint, Binance has offered and executed commodity derivatives transactions to and for US persons from July 2019 through the present.
As alleged, Binance’s compliance programme has been ineffective and, at Zhao’s direction, Binance has instructed its employees and customers to circumvent compliance controls in order to maximise corporate profits.
The complaint charges that for much of the relevant period, Binance did not require its customers to provide any identity-verifying information before trading on the platform, despite the legal duty that entities like Binance functioning as futures commission merchants (FCMs) collect such information, and failed to implement basic compliance procedures designed to prevent and detect terrorist financing and money-laundering.
The complaint further alleges that even after Binance purported to restrict US customers from trading on its platform, Binance instructed its customers – in particular its commercially valuable US-based VIP customers – on the best methods for evading Binance’s compliance controls.
In addition, the complaint charges Binance with acting as a designated contract market or swap execution facility based on its role in facilitating derivatives transactions without registering with the CFTC, as required.
The complaint also charges the entity defendants with failing to diligently supervise Binance’s activities as an FCM.
The rebuttal
Responding to the allegations, Zhao says in a statement: “Upon an initial review, the complaint appears to contain an incomplete recitation of facts, and we do not agree with the characterisation of many of the issues alleged in the complaint.”
Among other issues, he says Binance has developed best-in-class technology to ensure compliance.
According to Zhao, Binance is the first global (non-US) exchange to implement a mandatory know your customer (KYC) programme, and remains today to have one of the highest standards in KYC and AML [anti-money-laundering].
“We block US users by nationality (KYC), IP (including commonly used VPN endpoints outside of the US), mobile carrier, device fingerprints, bank deposit and withdrawals, blockchain deposits and withdrawals, credit card bin numbers, and more,” he says.
“Binance is committed to transparency and co-operation with regulators and law enforcement – in the US and globally.”
Zhao adds that Binance does not trade for profit or “manipulate” the market under any circumstances.
“Binance ‘trades’ in a number of situations. Our revenues are in crypto. We do need to convert them from time-to-time to cover expenses in fiat or other crypto-currencies. We have affiliates that provide liquidity for less liquid pairs. These affiliates are monitored specifically not to have large profits.”
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