The U.S. Commodity Futures Trading Commission (CFTC) has filed a lawsuit against cryptocurrency exchange Binance and its founder and CEO, Changpeng Zhao, for allegedly offering unregistered crypto derivatives products in the US and knowingly violating federal law. According to the complaint, Binance, the world's largest crypto exchange, has executed commodity derivatives transactions on behalf of US persons since at least July 2019.
The CFTC claims Binance's compliance program was "ineffective" and that, under Zhao's direction, employees and customers were instructed to bypass compliance controls. The regulator also accuses Binance's former Chief Compliance Officer, Samuel Lim, of aiding and abetting the company's violations. CFTC Chairman Rostin Behnam stated, "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 willful avoidance of U.S. law."
The lawsuit alleges that Binance operated a derivatives trading operation in the US, offering trades for cryptocurrencies such as Bitcoin, Ether, Litecoin, Tether, and Binance USD, which the suit refers to as commodities. It also claims that Binance directed employees and customers to use virtual private networks (VPNs) to mask their locations and evade restrictions on US-based customers.
In a press release, CFTC Chief Counsel Gretchen Lowe called Binance's actions "willful evasion of US law," citing internal chats and emails. The CFTC is seeking various penalties, including civil monetary penalties, trading and registration bans, and disgorgement.
The lawsuit has led to a drop in the price of Bitcoin and Binance's exchange token, BNB. Binance has not yet responded to the lawsuit.
The suit further alleges that Binance directed important customers, such as trading firms, to set up shell companies in places like Jersey, the British Virgin Islands, and the Netherlands to avoid restrictions. Binance was fully aware of the scale of its US business, as internal monthly reports sent to Zhao showed that even after controls were supposedly implemented in June 2020, 17.8% of customers were based in the US.
The CFTC's filing cites internal chats between Binance employees, including Samuel Lim, in which Lim appeared to direct an employee to ask US customers to hide their location. The exchange was also allegedly aware that sanctioned entities and individuals from sanctioned regions were trading on its platform. Binance is accused of tasking an employee with the title "Money Laundering Reporting Officer" (MLRO) to write a report claiming its compliance audit was stringent to hide the poor state of its compliance program from business partners like Paxos.
The CFTC is asking the court to enjoin Binance from further violations of the Commodity Exchange Act. A Binance spokesperson told CoinDesk they would respond shortly. Zhao, the founder of the exchange, tweeted "4," referencing a previous tweet where he said that would mean to "ignore FUD, fake news, attacks, etc."
In listing the CEO as a defendant, the suit alleges he was the "direct or indirect owner of entities that have engaged in proprietary trading activity on the Binance platform," and was likewise the "direct or indirect owner of approximately 300 separate Binance accounts" that engaged in prop trading on the Binance trading platform.
The lawsuit was likely expected by Binance. In February, the exchange's chief strategy officer, Patrick Hillman, admitted Binance was being investigated by multiple regulators and expected to pay fines to "make amends" for past regulatory violations. According to the suit, Binance employees, including Zhao, used the Signal app with an "auto-delete functionality" to communicate with each other. The suit implied the CFTC had access to the CEO's phone, saying it was able to collect Signal text chains and group chats from it.
By identifying several major tokens as commodities in the complaint, the CFTC may be staking out new ground in the jurisdictional question at the heart of the U.S. crypto sector: Who is responsible for overseeing crypto trading? The Securities and Exchange Commission (SEC) has made its view clear that most tokens are actually securities, and Chair Gary Gensler often says that every crypto token apart from Bitcoin seems to fit its definition. CFTC officials have often suggested that Bitcoin and Ether are likely commodities, but they're additionally maintaining that Litecoin and the stablecoins Tether and BUSD are as well. The SEC has previously suggested that BUSD is a security in a Wells Notice sent to Paxos.
CFTC Chair Rostin Behnam promised last month that his agency would pursue a "strong year of precedent-setting cases," and he's also been pushing for Congress to more securely set up the CFTC as a leading watchdog for crypto trading in the U.S.
After the collapse of the FTX exchange, U.S. lawmakers said they're eager to move forward on bills to address the largely unregulated crypto sector. Some of them have been focusing specific concern on Binance. Earlier this month, U.S. senators, including Sen. Elizabeth Warren (D-Mass.), sent a letter to Zhao calling his company "a hotbed of illegal financial activity that has facilitated over $10 billion in payments to criminals and sanctions evaders," and saying it's been marked by "increasingly disturbing allegations regarding the legality of its operations." The lawmakers demanded information about the company, its structure, and its balance sheets.
In the absence of former rival FTX, the industry has been left with a shorter list of major exchanges on which to do business, led globally by Binance. Another of the most prominent in the U.S., Coinbase, is similarly facing regulatory scrutiny from the SEC, which has warned the exchange that a significant enforcement action is likely on the way. If U.S. regulators seek to shut both Binance and Coinbase down for violating securities and commodities laws, there's little reason to expect the same accusations wouldn't be leveled at their smaller competitors for conducting the same types of activity.
