Binance, the world’s largest cryptocurrency exchange, and its founder Changpeng Zhao have been sued by the U.S. Commodity Futures Trading Commission (CFTC) over allegations of knowingly offering unregistered crypto derivatives products, in violation of federal laws.
Binance operated derivatives trading operation, offered trades for cryptocurrencies
According to the lawsuit filed in the U.S. District Court for the Northern District of Illinois, Binance offered trades for cryptocurrencies including bitcoin (BTC), ether (ETH), litecoin (LTC), tether (USDT), and Binance USD (BUSD), which the suit referred to as commodities. The suit also accuses the company, under Zhao’s leadership, of directing its employees to spoof their location through the use of virtual private networks.
The CFTC is charging Binance with violating laws around offering futures transactions, “illegal off-exchange commodity options,” poorly supervising its business, not implementing know-your-customer or anti-money laundering processes, and having a poor anti-evasion program. The news sent bitcoin’s price down by about 3% within minutes of the disclosure.
Binance created a system to hide its true reach and operations
The CFTC said the exchange created a system to hide its true reach and operations. The filing said, “Binance’s reliance on a maze of corporate entities to operate the Binance platform is deliberate; it is designed to obscure the ownership, control, and location of the Binance platform,” adding that “Zhao answers to no one but himself.” Binance also directed customers in the U.S. to use a variety of methods to evade restrictions on U.S-based customers.
The company directed important customers such as trading firms to set up shell companies in places such as Jersey, the British Virgin Islands, and the Netherlands to avoid restrictions, the filing said, to escape restrictions, and was fully aware of the scale of its U.S. business. The CFTC is requesting the court to enjoin Binance from further violations of the Commodity Exchange Act, as well as civil monetary penalties, trading and registration bans, and disgorgement.
Evidence suggests that Binance deliberately disregarded U.S. laws and requirements
The CFTC alleges that Binance and its management were well aware that their activities were “subject to registration and regulatory requirements under U.S. law and that they deliberately disregarded these requirements.” CFTC Commissioner Kristin Johnson stated that while Binance’s compliance program was ineffective in complying with the law, evidence suggests that it was quite effective at directing U.S. customers on how best to evade Binance’s access controls.
In response to the suit, Zhao tweeted “4,” referencing a previous tweet where he said that would mean to “ignore FUD, fake news, attacks, etc.” The suit 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.
Binance spokesperson stated the company has made significant investments to ensure compliance
A Binance spokesperson said the company has “made significant investments over the past two years to ensure we do not have U.S. users active on our platform,” including growing its compliance team from 100 to 750 people and spending $80 million on know-your-customer and other compliance vendors and tools. The spokesperson said the exchange now maintains “country blocks for anyone who is a resident of the U.S.” and blocks “anyone who is identified as a U.S. citizen regardless of where they live in the world.”
The CFTC’s move against Binance should serve as a warning to the cryptocurrency industry. Regulators are stepping up scrutiny of cryptocurrencies and their exchanges, and as the world’s largest exchange, Binance has become a significant target for regulatory attention. The case highlights the challenges of regulatory compliance in the fast-moving cryptocurrency industry and underscores the risks for investors and traders when dealing with unregulated markets.
Major Tokens Declared as Commodities:
The CFTC’s complaint against Binance has declared major tokens, including litecoin and stablecoins tether and BUSD, as commodities. This move by the CFTC is significant as it raises the question of jurisdiction in the US crypto sector. The Securities and Exchange Commission (SEC) has declared most tokens as securities, while CFTC officials have suggested that bitcoin and ether are commodities.
The CFTC’s move could signal a shift towards increased regulation of the crypto sector. CFTC Chair Rostin Behnam has been pushing for Congress to establish the agency as the primary regulator of crypto trading in the US. The collapse of the FTX exchange has also spurred US lawmakers to consider legislation to regulate the largely unregulated crypto sector.
Regulatory Scrutiny for Binance and Coinbase:
Binance and Coinbase, two of the largest names in the crypto industry, are both facing regulatory scrutiny from different US government agencies. The SEC has warned Coinbase of an upcoming enforcement action, while the CFTC has filed a lawsuit against Binance.
Earlier this month, US senators sent a letter to Binance CEO Changpeng Zhao accusing the exchange of being a “hotbed of illegal financial activity.” The lawmakers demanded information about the company’s structure and balance sheets. The CFTC’s lawsuit against Binance is likely to put additional pressure on the exchange and the crypto industry as a whole.