US regulator sues top crypto exchange Binance, CEO | Crypto

The world’s largest crypto exchange Binance and its CEO and founder Changpeng Zhao are being sued by the Commodity Futures Trading Commission (CFTC) in the US for running what the regulator claims was an “illegal” exchange and a “sham” compliance program.

The CFTC sued Binance, Zhao and its former top executives for “willful evasion” of US law compliance “while engaging in a calculated strategy of regulatory arbitrage for their commercial benefit”.

Zhao, a billionaire who was born in China and moved to Canada at age 12, called the CFTC’s complaint “unexpected and disappointing.”

“Upon initial review, the complaint appears to contain an incomplete recitation of facts, and we disagree with the characterization of many of the issues alleged in the complaint,” Zhao said in a statement.

The lawsuit comes amid a broader and increasingly high-profile attack on crypto companies. For years, US prosecutors and civilian investigators have targeted crypto firms for illegal offerings and failure to comply with rules designed to prevent illegal activity. But the pace of such government activity has increased recently.

The CFTC said in its complaint on Monday that from at least July 2019 until today, Binance “offered and executed commodity derivative transactions on behalf of US persons” in violation of US law.

Binance’s compliance program has been “ineffective” and the firm, led by Zhao, told employees and customers to bypass compliance checks, the CFTC said, citing a series of practices first reported by Reuters news agency in a series of investigations into the exchange last year.

The CFTC also accused Binance’s former Chief Compliance Officer Samuel Lim of “aiding and abetting” Binance’s breach. Lim did not immediately respond to calls and messages from Reuters.

A spokesperson for Binance, which dominates the global digital asset sector, said the firm would continue to “cooperate” with regulators.

Binance has made “significant investments” to ensure it does not have US users on its platform, the spokesperson said.

CFTC Chairman Rostin Behnam said in a statement that Binance executives knew for years “they were violating CFTC rules, and actively worked to both keep the money flowing and avoid compliance.”

The CFTC is responsible for overseeing commodity and derivatives markets, including Bitcoin. Firms such as brokers that facilitate US customers’ trading of such products are required to register with the agency.

Reuters reported in December that the US Department of Justice had been investigating Binance since 2018 for possible money laundering and sanctions violations. Binance has processed at least $10 billion in payments for criminals and companies seeking to avoid US sanctions, Reuters has found.

Binance’s cryptocurrency BNB, the world’s fourth largest by market size, fell about 4 percent on the news.

In a tweet Monday afternoon, Zhao wrote “4,” referring to an earlier post that listed his “Do’s and Don’ts” for 2023. The fourth item on the list was “Ignore FUD, Fake News, Attacks,” an acronym for “fear, uncertainty and doubt” often used in crypto in relation to news that is perceived as negative.

Founded in Shanghai in 2017, Binance sits at the heart of the global crypto industry. Its core Binance.com exchange processed about $23 trillion worth of trades last year, according to data provider CryptoCompare. Trade volumes will reach $34 trillion by 2021, Zhao said last year.

With a holding company based in the Cayman Islands, Binance has never disclosed the location of its core exchange. The CFTC charged the holding company and two other Binance entities.

Binance did not require customers to submit information verifying their identity before trading and “failed to implement basic compliance procedures designed to prevent and detect terrorist financing and money laundering,” the CFTC said.

The CFTC’s complaint detailed Binance’s efforts to retain US customers even after the company, in partnership with an allegedly independent US firm, launched a US exchange in 2019 to serve US customers in compliance with US regulations.

Reuters previously reported that this US firm, BAM Trading, was actually controlled by Zhao and managed by Binance as a de facto subsidiary. The CFTC said when Zhao hired BAM’s first CEO, he “described Binance as a pirate ship and explained that he wanted Binance.US to be a navy boat”.

Although Binance’s global operations publicly said it restricts US customers from trading on the platform, the CFTC noted that Binance told its commercially valuable US-based “VIP customers” how to avoid the compliance checks.

Zhao kept information reflecting Binance’s US customer base secret from some senior executives, the CFTC said. In October 2020, Zhao instructed Binance personnel to replace the US value for some data fields in Binance’s internal database with “UNKWN,” it said.

Binance traded on its own platform through about 300 “house accounts,” directly or indirectly owned by Zhao, although the exchange had not disclosed this activity in its public terms of use or elsewhere, according to the CFTC. The house accounts were exempt from Binance’s “insider trading” policy, the CFTC said.

A top Binance executive told the Wall Street Journal in February that the company expected to pay fines to resolve the US investigations.

The CFTC said it is seeking monetary penalties, forfeiture of ill-gotten gains and permanent trading and registration bans.