The U.S. Commodity Futures Trading Commission today sued Binance and its founding Chief Executive Officer Changpeng Zhao, as well as former Chief Compliance Officer Samuel Lim.
The CFTC is the agency responsible for regulating the derivatives market. Its newly filed lawsuit, which is structured as a civil complaint, charges Binance, Zhao and Lim with “numerous violations” of the Commodity Exchange Act as well as CFTC regulations. The agency is seeking financial penalties, a permanent trading ban and other remedies.
“For years, Binance knew they were violating CFTC rules, working actively to both keep the money flowing and avoid compliance,” said CFTC chair Rostin Behnam. “This should be a warning to anyone in the digital asset world that the CFTC will not tolerate willful avoidance of U.S. law.”
Binance is the world’s largest cryptocurrency exchange by trading volume. According to TechCrunch, the company is believed to have processed more than $9 billion worth of transactions over the past day or so. Binance claims to have about 90 million users worldwide.
In its lawsuit, the CFTC charges that Binance’s platform is run by dozens of corporate entities structured as an “intentionally opaque common enterprise”. The agency argues the company’s complex corporate structure is meant to help it avoid regulation. The CFTC’s lawsuit names three corporate entities as defendants alongside Zhao and Lim: Binance Holdings Ltd, Binance Holdings (IE) Ltd and Finance (Services) Holdings Ltd.
The CFTC is accusing the company of failing to implement controls for verifying customers’ identities and blocking terror financing and money laundering. Additionally, the lawsuit charges that Binance operated as a designated contract market without registering as such with CFTC as required by law. A designated contract market is an exchange for trading futures or options.
In 2019, Binance stated that it would stop allowing U.S. users to sign up for the international version of its exchange. But according to the CFTC, it continued to work with stateside customers. The agency charges that Binance actively helped “VIP customers” in the U.S. gain access to the international version of its platform.
Binance’s platform has controls designed to block unauthorized access attempts. According to the CFTC, the company told VIP customers in the U.S. to use virtual private network software to circumvent its controls. Moreover, Binance employees reportedly sent customers instructions on how to do so via a messaging app configured to automatically delete their correspondence.
The CFTC charges that the scheme was devised by Zhao, who the agency says is responsible for “all major strategic decisions at Binance.” Lim, who was Binance’s Chief Compliance Officer from 2018 to 2022, is accused of aiding and abetting the company’s financial law violations. The lawsuit states Lim instructed employees to use “creative means” to bypass compliance controls.
“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,” said Gretchen Lowe, the principal deputy director and chief counsel of the CFTC’s enforcement division.
The development comes a few days after Coinbase Global Inc., another major cryptocurrency exchange operator, received a Wells notice from the U.S. Securities and Exchange Commission. The SEC issues such notices to companies when it detects potential violations of securities laws. Coinbase believes the enforcement action relates to its Coinbase Earn, Coinbase Prime and Coinbase Wallet services.