he US took its most forceful move yet on Monday to crack down on crypto exchange Binance Holdings Ltd. and its chief executive officer Changpeng Zhao.
The Commodity Futures Trading Commission alleged in federal court in Chicago that Binance and its CEO, who is known as CZ, routinely broke American derivatives rules as the firm grew to be the world’s largest trading platform. Binance should have registered with the agency years ago and continues to violate the CFTC’s rules, according to the regulator.
“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,” Gretchen Lowe, chief counsel in the CFTC’s enforcement division, said.
In a statement, Binance called the CFTC’s lawsuit “unexpected and disappointing.” The exchange said it’d been working with the regulator for more than two years and would continue to collaborate with authorities in the US and elsewhere.
“We have made significant investments over the past two years to ensure we do not have US users active on our platform,” Binance said. The company added that it has expanded its compliance team, spent heavily to bolster surveillance and taken significant actions to prevent Americans from using its global trading platform.
In a statement on the Binance Blog, Zhao said the CFTC’s complaint “appears to contain an incomplete recitation of facts, and we do not agree with the characterization of many of the issues alleged in the complaint.” He added that he strictly observes Binance’s policies, including those for anyone with private information such as details on listings.
The CFTC is a civil government agency, so it can’t bring criminal charges against firms or seek jail time for individuals. However, cases from the regulator can result in hefty fines and other penalties against companies and individuals.
In addition to suing Zhao and several Binance entities, the CFTC also alleged that Samuel Lim, Binance’s former chief compliance officer, broke its rules.
The agency said that Zhao, Lim, other senior managers failed to properly supervise Binance’s activities and took steps to violate US laws, including instructing American customers to use virtual private networks, or VPNs, to obscure their location and directing “VIP customers” with US ties — often institutional market participants — to open Binance accounts under the name of shell companies.
Attempts to reach Lim for comment were unsuccessful.
The CFTC also alleged that Binance failed to implement an effective anti-money laundering program. It also didn’t establish necessary safeguards for determining the true identity of customers, the agency said. The complaint says that as of at least May 2022, the company had not filed a single suspicious activity report in the US.
The CFTC also said Binance’s own documents for the month of August 2020 showed that the platform earned $63 million in fees from derivatives transactions, and that about 16% of its accounts were identified as being held by US customers.
“Defendants have disregarded applicable federal laws while fostering Binance’s U.S. customer base because it has been profitable for them to do so,” the CFTC said in its complaint.
The CFTC alleged that the company intentionally destroyed documents. At the same time, Binance makes frequent use of the encrypted messaging app Signal to communicate with US customers, at Zhao’s instruction, the agency said.
Since at least 2021, the CFTC has been probing Binance over whether it failed to keep US residents from buying and selling crypto derivatives. CFTC rules generally require platforms to register with the agency if they let Americans trade those products.
The regulator is one of several US bodies that have been investigating Binance’s activities. The Internal Revenue Service, as well as federal prosecutors, have been examining Binance’s compliance with anti-money laundering obligations, Bloomberg News has reported. The Securities and Exchange Commission has been scrutinizing whether the exchange has supported the trading of unregistered securities.
Binance, which exploded onto the crypto scene in 2017 and almost immediately took on and surpassed larger rivals, saw its market share surge after last November’s collapse of FTX.
Meanwhile, Binance had been publicly signaling that it expected to settle with US authorities probing its business practices, and that it closed compliance gaps that existed in its early years.
In a recent 14-page letter to US senators including Elizabeth Warren, Chief Strategy Officer Patrick Hillmann detailed Binance’s work to build out its compliance program and team, but didn’t provide details on the company’s finances that the lawmakers had requested.
The case is Commodity Futures Trading Commission v. Changpeng Zhao, Binance Holdings Ltd. et al., 23-cv-01887, US District Court, Northern District of Illinois.
— With assistance by Olga Kharif and Justina Lee