CFTC Sues Binance for Illegal Exchange Operations and Sham Compliance Program

4/2/2023, 10:05 AM
CFTC Sues Binance for Illegal Exchange Operations and Sham Compliance Program
The United States Commodity Futures Trading Commission (CFTC) has filed a lawsuit against Binance, the world's largest cryptocurrency exchange, and its CEO Changpeng Zhao. The lawsuit alleges that Binance and Zhao operated an "illegal" exchange and a "sham" compliance program, which the regulator claims violated US laws. The CFTC is responsible for oversight of commodities and derivatives markets, including Bitcoin. Firms that facilitate US customers' trading of such products are required to register with the agency.

The CFTC has accused Binance and Zhao of engaging in a "calculated strategy of regulatory arbitrage to their commercial benefit." The regulator alleges that Binance offered and executed commodity derivatives transactions on behalf of US persons in violation of US laws from at least July 2019 to the present. Binance's compliance program was "ineffective," and the firm, under the direction of Zhao, instructed employees and customers to circumvent compliance controls, according to the CFTC.

Binance's former Chief Compliance Officer Samuel Lim has also been accused of "aiding and abetting" Binance's violations. The CFTC is seeking monetary penalties, disgorgement of ill-gotten gains, and permanent trading and registration bans. Binance's cryptocurrency BNB, the world's fourth-largest by market size, dropped by about 4 percent on the news.

The lawsuit against Binance comes amid a broader and increasingly high-profile crackdown on cryptocurrency companies. For years, US prosecutors and civil investigators have targeted crypto firms for illegal offerings and failures to comply with rules designed to prevent illicit activity. The pace of such government activity has surged recently, and Binance is not the only company to face regulatory scrutiny.

In December 2022, the US Justice Department began investigating Binance for possible money laundering and sanctions violations. Reuters reported that Binance had processed at least $10bn in payments for criminals and companies seeking to evade US sanctions. This investigation is ongoing, and Binance has not yet faced charges related to money laundering or sanctions violations.

Binance's compliance failures may have contributed to its success as a crypto exchange. The CFTC alleges that Binance traded on its own platform through some 300 "house accounts," directly or indirectly owned by Zhao, although the exchange had not disclosed this activity in its public terms of use or elsewhere. The house accounts were exempt from Binance's "insider trading" policy, the CFTC said. Binance did not require customers to submit information verifying their identity before trading, and it "failed to implement basic compliance procedures designed to prevent and detect terrorist financing and money laundering," according to the CFTC.

Binance's response to the lawsuit has been to deny the allegations and to promise to "collaborate" with regulators. The firm has made "significant investments" to ensure it does not have US users on its platform, according to a spokesperson. However, the CFTC alleges that Binance retained US customers even after launching a US exchange in 2019 to serve American customers in compliance with US regulations. Binance told its commercially valuable US-based "VIP customers" how to evade its compliance controls, according to the CFTC.

In conclusion, the CFTC's lawsuit against Binance and its CEO Changpeng Zhao represents a significant development in the ongoing regulatory crackdown on cryptocurrency companies. The allegations of an "illegal" exchange and a "sham" compliance program, if proven, would be serious violations of US laws. The lawsuit also highlights the challenges that regulators face in enforcing rules in a fast-moving and global industry. Binance's response to the lawsuit and the outcome of the ongoing investigations will be closely watched by the cryptocurrency industry and regulators alike.