Binance is hiding US crypto trading activity, regulator says

Federal regulators sued Binance, the world’s largest cryptocurrency exchange, and two of its top executives on Monday, alleging that in courting US investors it had chosen to “willfully ignore” laws governing certain US financial markets.

In a lawsuit filed in federal court in Chicago, the Commodity Futures Trading Commission said that Binance’s founder, Changpeng Zhao, and its former chief compliance officer, Samuel Lim, had worked together to attract trading clients that were based in the United States, even though Binance did the. do not have permission to operate in the country.

Regulators said Mr. Zhao and Mr. Lim had relied on an “opaque web of corporate entities” to steer the business back to a central operation that Mr. Zhao controlled. They even helped US-based crypto traders hide their real locations by using shell companies, according to the CFTC

“For years, Binance knew it was violating CFTC rules and actively worked 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. “This should be a warning to everyone in the digital asset world that the CFTC will not tolerate willful avoidance of US law.”

The CFTC is asking for fines, according to Monday’s filing, although no amount was specified. The regulator wants to bar the company, as well as Mr. Zhao and Mr. Lim and any direct associates, from engaging in commodity trading in markets governed by US exchange laws.

In a blog post on Monday, Zhao called the complaint “unexpected and disappointing” and said Binance had “worked in cooperation with the CFTC for over two years.” He denied that Binance served US customers.

The civil suit is the latest in a series of strikes against the cryptocurrency industry over the past year, including the collapse of what was the second largest cryptocurrency exchange, FTX, in November. The founder, Sam Bankman-Fried, is accused of securities fraud by federal prosecutors and regulators.

Although Mr. Zhao and Mr. Bankman-Fried were considered rivals, there was no real competition between the two companies. Binance dwarf FTX. Still, Mr. Zhao was long seen as the more elusive foil to Mr. Bankman-Fried, who courted American politicians and regulators. Federal authorities have been investigating apparent lapses in Binance’s anti-money laundering controls as part of a broader investigation into the cryptocurrency industry.

In its complaint, the CFTC cited significant gaps in Binance’s “know your customer” protections — a set of protocols, known as KYC, designed to stop bad actors from using a platform. Inside Binance, employees acknowledged that the company “facilitated potentially illegal activities,” the complaint said.

And even after the exchange began limiting access, the complaint said, some customers were able to bypass those critical background checks. The complaint cited text messages that showed Zhao was aware of the loophole.

The CFTC also said in its complaint that Binance had attempted to expand its business by soliciting US customers without ever being “registered with the CFTC in any capacity.” The company “has ignored federal laws essential to the integrity and vitality of the U.S. financial markets,” the complaint said.

The filing noted that Zhao had avoided naming a headquarters for Binance and cited an internal presentation from Zhao explaining that his refusal to say where Binance was based helped it avoid scrutiny from a particular country’s legal authorities.

The lawsuit appears to be an attempt by the CFTC to assert its authority over the crypto trading world while in something of a contest with the Securities and Exchange Commission. The SEC has been particularly active in bringing enforcement actions against crypto firms for not registering digital assets as investment products before offering them for sale to the public.

Just the other day, Coinbase, a US-regulated crypto exchange, said it had received an official notification from the SEC that the agency plans to initiate an enforcement case against the company.

The SEC declined to comment on Binance.

The CFTC said Binance had 60 employees in the U.S. and was continuing to hire. It said the exchange had recruited US clients by relying on what the company called “Binance Angels” to do its bidding. The lawsuit said the company’s US recruiters were compensated for their efforts by receiving benefits “such as invitations to events and Binance swag.”

The regulator said about 19 percent of Binance’s trading revenue had come from US clients.

David Yaffe-Bellany contributed reporting.