Us Regulator Sues Crypto Exchange Binance and CEO

The U.S. Commodity Futures Trading Commission (CFTC) filed a lawsuit against Binance and its founder, Changpeng Zhao. CFTC accuses the crypto exchange of knowingly offering unregistered crypto derivatives products to U.S. customers in violation of federal law.

The lawsuit alleges that Binance operated a derivatives trading operation in the U.S. for cryptocurrencies such as BTC, ETH, LTC, USDT, and BUSD. The suit also claims that the company, under Zhao’s leadership, directed employees to use virtual private networks to spoof their locations and evade compliance controls.

The CFTC is charging Binance with multiple violations, including offering futures transactions, illegal off-exchange commodity options, failing to register as a futures commissions merchant, designated contract market, or swap execution facility, poor supervision of its business, inadequate know-your-customer and anti-money laundering processes, and lacking a sufficient anti-evasion program.

The news had an immediate impact on the markets, with Bitcoin’s price dropping by about 3% shortly after the announcement. However, it quickly recovered most of the loss as the day progressed. Binance’s exchange token BNB also fell by as much as 6% from its price before the news broke, and other crypto-related stocks experienced declines.

The disclosure of a lawsuit filed by the Commodity Futures Trading Commission (CFTC) against Binance, a major cryptocurrency exchange, caused ripples in the market, resulting in a 3% drop in Bitcoin’s price within minutes. However, the price quickly rebounded and recovered most of the loss as the day progressed. Binance’s exchange token, BNB, also saw a dip of up to 6% from its price before the news was announced, while crypto-related stocks also fell.

CFTS Allegations

The CFTC alleges that Binance created a system to hide its operations and true reach, despite having a U.S. affiliate in Binance. The exchange’s reliance on a complex web of corporate entities is deliberate and is designed to obscure the ownership, control, and location of the platform, according to the filing. The suit further alleges that Binance’s founder, Changpeng Zhao, answers to no one but himself.

The CFTC Chief Counsel, Gretchen Lowe, stated in a press release that Binance’s actions were a “willful evasion of U.S. law,” citing evidence from internal chats and emails. The lawsuit also claims that Binance directed U.S.-based customers to use various methods to bypass restrictions.

Binance is facing a lawsuit for allegedly violating U.S. securities laws and directing customers in the U.S. to use various methods to evade restrictions on U.S.-based customers. The suit claims that Binance instructed U.S. customers to use virtual private networks (VPNs) to conceal their true location, which masks their internet protocol (IP) address.

The use of VPNs to access and trade on the Binance platform by U.S. customers has been an open secret, and Binance has reportedly encouraged their use. Furthermore, the company allegedly directed important customers, including trading firms, to set up shell companies in places like Jersey, the British Virgin Islands, and the Netherlands to avoid restrictions. Binance was fully aware of the scale of its U.S. business, according to the filing.

Binance Troubles

According to court documents, Binance was aware that a significant percentage of its customers were based in the U.S., even after implementing controls in June 2020. However, a spokesperson for Binance has stated that the company has invested heavily in compliance measures over the past two years, including expanding its compliance team and spending $80 million on compliance vendors and tools, to ensure that U.S. users are not active on its platform. The spokesperson also expressed disappointment at the CFTC’s complaint but stated that Binance intends to continue collaborating with regulators to develop a clear and thoughtful regulatory framework that protects its users.

According to a spokesperson for Binance, the exchange now keeps “country blocks for anyone who is a resident of the U.S.,” as well as blocks for “anyone who is identified as a U.S. citizen regardless of where they live in the globe.” According to the spokeswoman, the exchange also blocks U.S. bank accounts, IP addresses, and mobile service providers.

The lawsuit claimed that despite being fully aware that individuals and entities subject to sanctions from sanctioned regions were conducting trades on its platform, Binance took no action. The lawsuit cited chat logs where a Binance employee, Lim, was recorded as saying that “terrorists usually send ‘small sums'” that are barely enough to purchase weapons, and that other customers were “here for the crime.”

Furthermore, the lawsuit alleged that Binance assigned an employee the role of a “Money Laundering Reporting Officer” (MLRO) to create a report claiming that its compliance audit was robust, to conceal the inadequacy of its compliance program from business partners such as Paxos.

Conclusion

In the lawsuit audit, the Binance employee holding the MLRO position expressed her frustration, stating that she needed to create a false annual MLRO report for the Binance board of directors. However, the suit noted that Binance did not have a board of directors. Despite this, Lim reassured her that it was alright and that he could get management to sign off on the fake report.