The Commodity Futures Trading Commission (CFTC) is suing Binance CEO Changpeng Zhao and his crypto empire for allegedly violating US trading and derivatives laws. In a complaint filed on Monday, the CTFC accuses Binance of having an “ineffective compliance program” and claims it “knowingly” broke the law.
In addition to suing Zhao, the CTFC also charges Samuel Lim, Binance’s former chief of compliance, for allegedly “aiding and abetting Binance’s violations through intentional conduct that undermined Binance’s compliance program.” The agency claims Zhao, Lim, and other executives “failed to properly supervise Binance’s activities” and “actively facilitated violations of U.S. law” as a result.
Zhao responded a few hours later with a post on Binance’s blog saying, “the complaint appears to contain an incomplete recitation of facts, and we do not agree with the characterization of many of the issues alleged in the complaint.” However, as Liz Lopatto notes in her analysis of the text messages that are cited in the CFTC lawsuit, Binance’s response doesn’t include much in the way of specific denials of the lawsuit’s claims.
The lawsuit also addresses some of the internal conversations brought to light by a report from The Wall Street Journal earlier this month, alleging that Binance “instructed” its customers in the US to use virtual private networks (VPNs) to hide their locations in order to trade on the platform.
While Binance itself doesn’t operate in the US, its Binance.US affiliate, which operates as a separate entity, does. Binance has been criticized in the past as having a business that’s essentially a “black box” due to how secretive Zhao has been about the company’s operations — and where the company is actually based.
“Binance’s reliance on a maze of corporate entities to operate the Binance platform is deliberate; it is designed to obscure the ownership, control, and location of the Binance platform,” the lawsuit states. “Binance is so effective at obfuscating its location and the identities of its operating companies that it has even confused its own Chief Strategy Officer.”
The CTFC’s lawsuit against Zhao and other Binance executives reflects a broader federal crackdown on cryptocurrency in the wake of FTX’s collapse. FTX’s terminal slide started after Zhao announced he would sell off Binance’s share of FTX’s token, FTT. That shook investors, who pulled their money out of FTX. At first, Binance offered to bail out FTX, but Zhao retracted that offer the next day. FTX then filed for bankruptcy.
Last year, the Federal Trade Commission began investigating various crypto firms for possible misconduct, while the Securities and Exchange Commission slapped the Kraken crypto exchange with a $30 million fine for allegedly selling unregistered securities in February. The SEC sued Tron founder Justin Sun for his crypto schemes last week, along with the eight celebrities he paid to promote them.
“For years, Binance knew they were violating CFTC rules, working actively to both keep the money flowing and avoid compliance,” CFTC Chair Rostin Behnam says in a statement. “This should be a warning to anyone in the digital asset world that the CFTC will not tolerate willful avoidance of U.S. law.”
As Liz Lopatto wrote last week:
Coinbase, for instance, is now facing enforcement action from the Securities and Exchange Commission — though it’s unclear exactly how broad that action is. Also, the SEC has sued Justin Sun (and an assortment of celebrities) for selling unregistered securities. Oh, and Terra / Luna villain Do Kwon maybe just got arrested.
What I mean to say is, for a while, it seemed like US financial authorities were taking a laissez-faire approach to fintech. But then the good times stopped rolling.
Update, 7:25PM ET: Added Binance response.