The Commodity Futures Trading Commission (CFTC) has filed charges against Binance, founder and CEO Changpeng Zhao (known as CZ), and former Chief Compliance Officer Samuel Lim with “numerous violations” of the Commodity Exchange Act (CEA) and other regulations.
Filed in the U.S. District Court for the Northern District of Illinois, the civil enforcement complaint charges that Binance Holdings Limited, Binance Holdings (IE) Limited, and Binance (Services) Holdings Limited operate the Binance digital asset trading platform, along with numerous other corporate vehicles through an “intentionally opaque common enterprise.”
To quote the complaint:
“Despite Binance’s solicitation of and reliance on customers located in the United States to generate revenue and provide liquidity for its various markets, Binance has never been registered with the CFTC in any capacity and has disregarded federal laws essential to the integrity and vitality of the U.S. financial markets, including laws that require the implementation of controls designed to prevent and detect money laundering and terrorism financing, in violation of the Commodity Exchange Act…”
The CFTC claims that the defendants allegedly chose to “knowingly disregard applicable provisions of the CEA while engaging in a calculated strategy of regulatory arbitrage to their commercial benefit.”
The CFTC complaint adds that Binance has offered commodity derivatives transactions for US persons from July 2019 through the present, and the platform’s compliance program has been ineffective. The CFTC alleges that Zhao has instructed its employees and customers to circumvent compliance controls in order to maximize corporate profits.
The complaint indicates that Binance did not require customers to provide identifying information before trading, failing to implement basic compliance procedures to prevent and detect terrorist financing and money laundering.
Additionally, the complaint charges Binance, Zhao, and Lim with “willful evasion of the requirements of the CEA.” The CFTC claims that Binance instructed US customers to evade compliance controls.
The enforcement action against Binance and Zhao is one of the largest government actions taken against a crypto entity. Binance has long been the largest digital asset marketplace in the world, operating globally along with a US subsidiary. The CFTC seeks penalties, disgorgement of funds, permanent trading bands, and more. The move could effectively destroy any operations that Binance has in the US.
CFTC Chairman Rostin Behnam said the enforcement action was demonstrative that the CFTC will act without regard to geographical location (or lack of one) when an entity engages with US investors.
“I have been clear that the CFTC will continue to use all of its authority to find and stop misconduct in the volatile and risky digital asset market,” said Behnam. “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. I applaud the diligent and dedicated work of the CFTC’s Enforcement team in bringing this action, and for their hard work in addressing illegal operations in the digital asset space.”
The CFTC claims that Binance’s October 2020 monthly revenue report identified approximately 2.83 million customers’ locations as UNKWN while omitting any reference to US persons, alluding to the possibility these were US-based investors.
Gretchen Lowe, the Enforcement Division Principal Deputy Director and Chief Counsel of the CFTC, said Binance allegedly sought a wilful evasion of US law.
“The defendants’ own emails and chats reflect that Binance’s compliance efforts have been a sham and Binance deliberately chose – over and over – to place profits over following the law. Today’s enforcement action reflects that the CFTC and its Enforcement Division will pursue those digital asset platforms and individuals who flout and actively attempt to circumvent CFTC regulatory requirements. I thank the Enforcement team for their dedication and hard work in bringing this action.”
The CFTC Complaint against Binance is available here.