CFTC Sues Binance for Illegal Derivatives Exchange, “Numerous Violations”

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The Commodity Futures Trading
Commission (CFTC) has filed a lawsuit against cryptocurrency exchange Binance
and Changpeng Zhao, its Chief Executive Officer, for
“numerous violations of the Commodity Exchange Act (CEA) and CFTC regulations.
The US derivatives market regulator also charged Binance for operating an
illegal digital asset derivatives exchange.

The agency disclosed these on
Monday, noting that it filed the charges before a district court in Illinois.
According to the regulator, Binance acted as “a designated contract market or
swap execution facility” by processing derivatives transactions without being
registered.

The watchdog said it also
charged Binance Holdings Limited, Binance Holdings (IE) Limited and Binance
(Services) Holdings Limited. These entities and others were deployed by Zhao to
run the trading platform via “an intentionally opaque common enterprise.”

CFTC has been investigating Binance since at least 2021 when insider sources told Bloomberg the derivatives regulator was probing the leading cryptocurrency exchange seeking to determine if the exchange was permitting US citizens to trade derivatives without being registered.

In the complaint, CFTC alleged
that starting from July 2019, Binance, after supposedly barring US customers
from trading on its platform, actually instructed them on the best methods to
evade its compliance controls. This process was particularly targeted at the
exchange’s “commercially valuable US-based VIP customers,” CFTC said

Furthermore, for a considerable
amount of time since July 2019, Binance failed to verify the identity of its
customers. In addition, the exchange “failed to implement basic compliance
procedures designed to prevent and detect terrorist finance and money
laundering.”

In its complaint, CFTC also
accused Binance of directing its employees to discuss control evasion with
US-based customers using a messaging application that automatically deletes
chats. This was done to erase evidence of the exchange’s efforts to retain its
customers in the country, CFTC alleged.

“Defendants’ alleged willful
evasion of U.S. law is at the core of the Commission’s complaint against
Binance,” noted Gretchen Lowe, CFTC’s Enforcement Division Principal Deputy
Director and Chief Counsel.

“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,”
Lowe added.

CFTC Slams Charges on Samuel
Lim, Binance’s Ex-CCO

Meanwhile, CFTC said it also
charged Samuel Lim, Binance’s former Chief Compliance Officer (CCO), with
aiding and abetting the cryptocurrency exchange’s violations between 2018 and
2022. The former CCO partook in activities to help
customers circumvent Binance’s compliance controls, the regulator said.

For instance, Lim promoted a
policy that “instructed Binance’s US customers to access the trading facility
through a virtual private network to avoid Binance’s IP address-based controls
or create ‘new’ accounts through off-shore shell companies to evade Binance’s
KYC-based controls,” CFTC explained.

“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,” explained Rostin
Behnam, CFTC Chairman.

Binance and SEC

CFTC’s action against Binance comes days after Coinbase, the largest cryptocurrency exchange in the United States, disclosed that it received a Wells notice from the US Securities and Exchange Commission (SEC), suggesting possible regulatory actions.

Reports also emerged last year that the SEC was probing the relationship between Binance’s US arm and two market makers and trading affiliates, Sigma Chain AG and Merit Peak Limited. SEC over the years has also been taking actions against crypto firms for their crypto offerings which it categorizes as unregistered securities.

The Commodity Futures Trading
Commission (CFTC) has filed a lawsuit against cryptocurrency exchange Binance
and Changpeng Zhao, its Chief Executive Officer, for
“numerous violations of the Commodity Exchange Act (CEA) and CFTC regulations.
The US derivatives market regulator also charged Binance for operating an
illegal digital asset derivatives exchange.

The agency disclosed these on
Monday, noting that it filed the charges before a district court in Illinois.
According to the regulator, Binance acted as “a designated contract market or
swap execution facility” by processing derivatives transactions without being
registered.

The watchdog said it also
charged Binance Holdings Limited, Binance Holdings (IE) Limited and Binance
(Services) Holdings Limited. These entities and others were deployed by Zhao to
run the trading platform via “an intentionally opaque common enterprise.”

CFTC has been investigating Binance since at least 2021 when insider sources told Bloomberg the derivatives regulator was probing the leading cryptocurrency exchange seeking to determine if the exchange was permitting US citizens to trade derivatives without being registered.

In the complaint, CFTC alleged
that starting from July 2019, Binance, after supposedly barring US customers
from trading on its platform, actually instructed them on the best methods to
evade its compliance controls. This process was particularly targeted at the
exchange’s “commercially valuable US-based VIP customers,” CFTC said

Furthermore, for a considerable
amount of time since July 2019, Binance failed to verify the identity of its
customers. In addition, the exchange “failed to implement basic compliance
procedures designed to prevent and detect terrorist finance and money
laundering.”

In its complaint, CFTC also
accused Binance of directing its employees to discuss control evasion with
US-based customers using a messaging application that automatically deletes
chats. This was done to erase evidence of the exchange’s efforts to retain its
customers in the country, CFTC alleged.

“Defendants’ alleged willful
evasion of U.S. law is at the core of the Commission’s complaint against
Binance,” noted Gretchen Lowe, CFTC’s Enforcement Division Principal Deputy
Director and Chief Counsel.

“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,”
Lowe added.

CFTC Slams Charges on Samuel
Lim, Binance’s Ex-CCO

Meanwhile, CFTC said it also
charged Samuel Lim, Binance’s former Chief Compliance Officer (CCO), with
aiding and abetting the cryptocurrency exchange’s violations between 2018 and
2022. The former CCO partook in activities to help
customers circumvent Binance’s compliance controls, the regulator said.

For instance, Lim promoted a
policy that “instructed Binance’s US customers to access the trading facility
through a virtual private network to avoid Binance’s IP address-based controls
or create ‘new’ accounts through off-shore shell companies to evade Binance’s
KYC-based controls,” CFTC explained.

“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,” explained Rostin
Behnam, CFTC Chairman.

Binance and SEC

CFTC’s action against Binance comes days after Coinbase, the largest cryptocurrency exchange in the United States, disclosed that it received a Wells notice from the US Securities and Exchange Commission (SEC), suggesting possible regulatory actions.

Reports also emerged last year that the SEC was probing the relationship between Binance’s US arm and two market makers and trading affiliates, Sigma Chain AG and Merit Peak Limited. SEC over the years has also been taking actions against crypto firms for their crypto offerings which it categorizes as unregistered securities.



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