The Commodity Futures Trading Commission is suing crypto exchange Binance and its CEO, Changpeng Zhao, for operating an “intentionally opaque” and allegedly illegal enterprise that violated the Commodity Exchange Act while engaging in “a calculated strategy of regulatory arbitrage to their commercial benefit.”
The CFTC also charged former Binance Chief Compliance Officer Samuel Lim with aiding and abetting the company’s violations.
“For years, Binance knew they were violating CFTC rules, working actively to both keep the money flowing and avoid compliance,” the agency’s chair, Rostin Behnam, said Monday. “This should be a warning to anyone in the digital asset world that the CFTC will not tolerate willful avoidance of U.S. law.”
The CFTC alleged that Binance has both offered and executed commodity derivatives transactions for customers in the U.S. since July 2019, and for much of that time didn’t require identity verification for those trading on the platform, despite a legal duty to do so.
After Binance said it would restrict U.S. customers from certain trading, the company allegedly instructed them “on the best methods for evading Binance’s compliance controls” and communicated with U.S. customers on an app set to automatically delete messages, avoiding a paper trail aligned to its U.S. customer retention efforts, the CFTC said.
Additionally, Binance acted as a designated contract market or swap execution facility based on its role in facilitating derivatives transactions, but did not register with the CFTC, the commission alleged.
Gretchen Lowe, CFTC’s enforcement division principal deputy director and chief counsel, alleged that Zhao and others’ own emails and chats reflect the “sham” nature of Binance’s compliance efforts and profits-over-law mindset.
To Binance, however, the filing was “unexpected and disappointing.”
“[W]e have been working collaboratively with the CFTC for more than two years,” a spokesperson told Banking Dive. “Nevertheless, we intend to continue to collaborate with regulators in the US and around the world. The best path forward is to protect our users and to collaborate with regulators to develop a clear, thoughtful regulatory regime.”
Over the past two years, the company has bolstered its compliance team from 100 to 750 people to make sure U.S. users aren’t active on its international platform, the spokesperson said. It’s also spent an additional $80 million on external partners — including know-your-customer vendors, transaction monitoring, market surveillance and investigative tools — which the company taps to support its compliance programs.
Behnam, however, told CNBC on Monday that the CFTC had clear documentation of Binance’s intention to dodge the law, noting, “This seemed to be a pretty clear case of evasion and something that we needed to step in aggressively with and do it as quickly as possible because this was an ongoing fraud, going back to 2019, and ongoing violation of the Commodity Exchange Act.”
Court filings include internal chats allegedly from within Binance. In one message to an employee in February 2020, Lim allegedly said, “On the surface we cannot be seen to have U.S. users but in reality we should get them through other creative means.”
Some Binance customers have fled the platform following the announcement of the lawsuit, pulling 3,400 Bitcoin off the platform in the 24 hours that followed, Cointelegraph reported.
On the firm’s official blog Monday, Zhao said the CFTC’s complaint “appears to contain an incomplete recitation of facts.”
“We intend to continue to respect and collaborate with US and other regulators around the world,” Zhao said.