US agency sues top crypto exchange Binance and CEO, seeks permanent trading ban – Ars Technica

The US Commodity Futures Trading Commission (CFTC) yesterday sued Binance, the world’s largest cryptocurrency exchange, saying the company and its founder, Changpeng Zhao, are charged with “willfully evading federal law and operating an illegal digital asset derivatives exchange.”

Binance committed “numerous violations of the Commodity Exchange Act and CFTC regulations,” the agency said. In a press release announcing the civil enforcement action, the agency said its lawsuits “seek disgorgement, civil monetary penalties, permanent trading and registration bans, and a permanent injunction against further violations of CEA and CFTC regulations.”

The CFTC alleges that the defendants operated the trading platform “through an intentionally opaque joint venture, with Zhao at the helm as Binance’s owner and CEO.” The agency said the defendants “chose to deliberately disregard applicable provisions of the CEA while engaging in a calculated strategy of regulatory arbitrage to their commercial advantage.” Samuel Lim, Binance’s former head of compliance, was charged with complicity in the breaches.

CFTC Chairman Rostin Behnam said: “For years, Binance knew they were violating CFTC rules and actively worked to both keep the money flowing and avoid compliance. This should be a warning to everyone in the digital asset world that the CFTC will not condone willful evasion of US law.”

A Reuters article said Binance was founded in Shanghai in 2017 but operates with “a holding company based in the Cayman Islands,” and “has never disclosed the location of its core exchange. The CFTC charged the holding company and two other Binance entities.”

Binance Finds Complaint ‘Unexpected and Disappointing’

Zhao reportedly said last year that Binance processed trades worth $34 trillion in 2021. Binance trading totaled $23 trillion in 2022, Reuters wrote, citing data provider CryptoCompare.

Zhao provided a response on the Binance website, saying the CFTC complaint is “unexpected and disappointing… Upon initial review, the complaint appears to contain an incomplete recitation of the facts, and we disagree with the characterization of many of the issues . alleged in the complaint.” While Binance “is not perfect, we hold ourselves to a high standard, often higher than what existing regulations require,” he wrote.

The CFTC’s complaint, filed in the US District Court for the Northern District of Illinois, said US law “requires that, with certain exceptions, commodity derivative transactions must be conducted on exchanges designated by or registered with the CFTC.” The agency noted that derivatives are “financial instruments such as futures, options or swaps that derive their value from something else,” such as a benchmark interest rate, a physical commodity such as oil or wheat, or — as in the Binance case — digital asset commodities such as cryptocurrencies.

Binance did not register with the CFTC, the agency said. “Zhao, Lim and other members of Binance’s senior management have failed to properly monitor Binance’s activities and, in fact, have actively facilitated violations of US law, including by aiding and abetting customers located in the US to evade the compliance checks Binance alleged to implement to prevent and detect violations of US law,” the complaint states.

The CFTC complaint said Binance “instructed US customers to use virtual private networks (VPNs) to hide their location” and “allowed customers who had not submitted proof of their identity and location to continue trading on the platform long after that they announced such behavior was prohibited. .” The complaint said Binance directed VIP customers and “key employees who control trading decisions, trading algorithms and other assets all located in the United States to open Binance accounts under the name of newly created shell companies to avoid Binance’s compliance controls.”

The agency is seeking a comprehensive trade ban

Binance never registered with the CFTC despite actively pursuing US customers, the complaint said:

Despite Binance’s solicitation of and reliance on clients located in the United States to generate revenue and provide liquidity to the various markets, Binance has never been registered with the CFTC in any way and has ignored federal laws essential to the integrity and vitality of the US the finance bank. markets, including laws requiring the implementation of controls designed to prevent and detect money laundering and terrorist financing, in violation of the Commodity Exchange Act.

The complaint seeks permanent injunctions that would greatly restrict the trading activities of Binance, Zhao, Lim and anyone working on their behalf. For example, they would be barred from directly or indirectly dealing in commodity interests “and/or digital assets as defined herein, for the defendants’ own accounts or for any account in which they have a direct or indirect interest.”

They will further be prohibited from “controlling or directing the trading for or on behalf of other persons or entities … in accounts involving commodity interests and/or digital assets.” The requested injunction would prohibit them from “soliciting, receiving or accepting funds from any person for the purpose of buying or selling any commodity interests and/or digital assets,” and, with limited exceptions, from “applying for registration or claiming exemption from registration with the Commission in any capacity, and engage in any activity that requires such registration or exemption from registration with the Commission.”

The CFTC’s requested economic remedies include civil monetary penalties and an order requiring the defendants to “make full restitution by making whole each and every customer or investor whose funds were received or used by them in violation of the provisions of the Act.” The agency requested a jury trial.

Binance claims “best-in-class” compliance technology

Zhao’s response said Binance uses “best-in-class technology to ensure compliance,” including Know Your Customer (KYC) and anti-money laundering systems. “We block US users by nationality (KYC), IP (including commonly used non-US VPN endpoints), mobile operator, device fingerprint, bank deposits and withdrawals, blockchain deposits and withdrawals, credit card holder numbers and more,” Zhao wrote. “We are aware that no other company uses systems more comprehensive or more efficient than Binance.”

Zhao also wrote that “Binance is committed to transparency and cooperation with regulators and law enforcement (LE) … To date, we have handled 55,000+ LE requests, helping US LE freeze/seize more than $125 million in funds in 2022 alone and $160 million in 2023 so far.” According to Zhao’s post, Binance “has the highest number of licenses/registrations globally, 16 and counting, and is well regarded by our user community.” But he did not address the CFTC’s statement that Binance has never registered with the US agency.

CFTC Commissioner Kristin Johnson, one of five commissioners, said in a statement that evidence indicates that Zhao and Lim “were aware that Binance’s activities in the United States were subject to registration and regulatory requirements under US law and that they deliberately ignored these the requirements.”

“According to Zhao, Binance is headquartered where he as an individual is physically located at all times, reflecting a deliberate attempt to limit jurisdiction and avoid the application of regulation,” Johnson wrote. “Such an approach is inconsistent with the CEA, the CFTC regulations, and the regulations of many other jurisdictions around the world.”