- CFTC accuses Binance of “willful circumvention” of federal law
- Binance compliance was “ineffective” under CEO – CFTC.
- The CFTC cites practices first reported by Portal last year
Mar 27 (Portal) – The world’s largest crypto exchange Binance and its CEO and founder Changpeng Zhao were sued by the US Commodity Futures Trading Commission (CFTC) on Monday for allegedly operating an ‘illegal’ exchange and ‘sham’ . compliance program.
The CFTC sued Binance, Zhao and their former top compliance executive for “willful circumvention” of US law “while engaging in a calculated strategy of regulatory arbitrage for their commercial gain.”
Zhao, a billionaire who was born in China and moved to Canada when he was 12, called the CFTC’s complaint “unexpected and disappointing.”
“Upon initial review, the complaint appears to contain an incomplete statement of facts, and we disagree with the characterization of many of the issues alleged in the complaint,” Zhao said in a statement.
The lawsuit comes amid a broader and increasingly high-profile crackdown on crypto companies. For years, US prosecutors and civilian investigators have targeted crypto firms for illegal offerings and failure to follow rules designed to prevent illegal activity. But the pace of such government activities has increased sharply in recent times.
The CFTC said in its complaint on Monday that since at least July 2019 to date, Binance has “offered and executed commodity derivative transactions on behalf of US persons,” in violation of US laws.
Binance’s compliance program has been “ineffective” and the firm, led by Zhao, has told employees and customers to circumvent compliance controls, the CFTC said, citing a series of practices Portal reported for the first time in a row reported by stock market surveys over the past year.
The CFTC also accused Binance’s former chief compliance officer, Samuel Lim, of “facilitating and instigating” Binance’s violations. Lim did not immediately respond to calls and messages from Portal.
A spokesman for Binance, which dominates the global digital assets sector, said the company will continue to “cooperate” with regulators.
Binance has made “significant investments” to ensure it doesn’t have US users on its platform, the spokesman said.
CFTC Chairman Rostin Behnam said in a statement that Binance executives have known for years “that they are violating CFTC rules and are actively working to both keep money flowing and prevent compliance.”
The CFTC is responsible for overseeing the commodity and derivatives markets, including for Bitcoin. Firms, such as brokers, who facilitate trading in such products for US customers must register with the agency.
Portal reported in December that the US Department of Justice has been investigating Binance since 2018 for possible money laundering and sanctions violations. Portal has found that Binance has processed at least $10 billion in payments for criminals and companies trying to evade US sanctions.
Zhao Changpeng, Founder and Chief Executive Officer of Binance, at the Viva Technology Conference in Paris, France June 16, 2022. Portal/Benoit Tessier
Binance’s BNB cryptocurrency, the fourth largest in the world by market size, fell around 4% on the news.
In a tweet Monday afternoon, Zhao wrote “4” — a reference to a previous post listing his “do’s and don’ts” for 2023. The fourth item on the list was “Ignore FUD, Fake News, Attacks”. Acronym for “Fear, Uncertainty, and Doubt”, commonly used in crypto in reference to messages perceived as negative.
‘PIRATE SHIP’
Founded in Shanghai in 2017, Binance is at the heart of the global crypto industry. Core exchange Binance.com processed about $23 trillion worth of trades last year, according to data provider CryptoCompare. The trading volume will hit $34 trillion in 2021, Zhao said last year.
With a holding company based in the Cayman Islands, Binance has never disclosed the location of its core exchange. The CFTC weighed on the holding company and two other Binance entities.
Binance did not require customers to provide information to verify their identity prior to trading and “failed to implement basic compliance procedures for the prevention and detection of terrorist financing and money laundering,” the CFTC said.
The CFTC’s complaint detailed Binance’s efforts to retain US customers even after the company launched a US exchange in partnership with a supposedly independent American firm in 2019 to serve American customers in compliance with US regulations .
Portal previously reported that this American firm, BAM Trading, was actually controlled by Zhao and run by Binance as a de facto subsidiary. The CFTC said that when Zhao hired BAM’s first CEO, he “described Binance as a pirate ship and stated that he wished Binance.US was a naval vessel.”
VIP CUSTOMERS
Although Binance’s global business publicly stated that it restricts US clients from trading on its platform, the CFTC said Binance has explained to its commercially valuable “VIP clients” in the US how to circumvent its compliance controls.
Zhao kept information reflecting Binance’s U.S. customer base secret from some senior executives, the CFTC said. In October 2020, Zhao instructed Binance staff to replace the US value with “UNKWN” for some data fields in Binance’s internal database, it said.
Binance traded on its own platform through about 300 “house accounts” owned directly or indirectly by Zhao, although the exchange had not disclosed this activity in its public terms of service or elsewhere, according to the CFTC. The house accounts are exempt from Binance’s “insider trading” policy, the CFTC said.
A top Binance executive told The Wall Street Journal in February that the company expects to pay fines to settle the US investigation.
The CFTC said it seeks fines, restitution of ill-gotten gains, and permanent trading and registration bans.
Reporting by Tom Wilson in London, Chris Prentice in Washington and Jaiveer Singh Shekhawat in Bengaluru; Additional reporting by Maria Ponnezhath; Edited by Shinjini Ganguli, Alun John, Marguerita Choy and Richard Chang
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