Federal regulators sued Binance, the world’s largest cryptocurrency exchange, and two of its senior executives Monday, alleging that in wooing business from US investors, they had chosen to “knowingly disregard” laws governing certain US financial markets.
In a suit filed in federal court in Chicago, the Commodity Futures Trading Commission said Binance’s founder, Changpeng Zhao, and its former chief compliance officer, Samuel Lim, had worked together to attract trading customers who were based in the United States even though Binance did not have permission to operate in the country.
The regulators said Zhao and Lim had relied on an “opaque web of corporate entities” to direct business back to a central operation that Zhao controlled. They even helped US-based crypto traders hide their real locations using shell companies, according to the CFTC.
“For years, Binance knew they were violating CFTC rules, working actively to both keep the money flowing and avoid compliance,” the agency’s chair, Rostin Behnam, said in a statement announcing the filing of the lawsuit. “This should be a warning to anyone in the digital asset world that the CFTC will not tolerate willful avoidance of US law.”
The CFTC is seeking fines, according to Monday’s filing, though no amounts were specified. The regulator wants to bar the company, as well as Zhao and Lim and any direct associates, from participating in the trading of commodities in markets governed by US exchange laws.
In a blog post Monday, Zhao called the complaint “unexpected and disappointing” and said Binance had been “working cooperatively with the CFTC for over two years.” He denied that Binance served US customers.
The suit is the latest in a string of blows to the cryptocurrency industry over the past year, including the collapse of what was the second largest cryptocurrency exchange, FTX, in November. Its founder, Sam Bankman-Fried, faces securities fraud charges by federal prosecutors and regulators.
Although Zhao and Bankman-Fried were considered rivals, there was no real contest for business between the two companies. Binance dwarfed FTX. Yet Zhao was long seen as the more elusive foil to Bankman-Fried, who courted US politicians and regulators. Federal authorities have been investigating apparent lapses in Binance’s anti-money laundering controls as part of a wider inquiry of the cryptocurrency industry.
In its complaint, the CFTC cited significant holes in Binance’s “know your customer” protections — a set of protocols, known as KYC, designed to stop bad actors from using a platform. Inside Binance, employees acknowledged that the company “facilitated potentially illegal activities,” the complaint said.
And even after the exchange began restricting access, the complaint said, certain customers were able to bypass those critical background checks. The complaint quoted text messages showing that Zhao was aware of the loophole.
The CFTC, in its complaint, also said Binance had sought to expand its business by soliciting US customers without ever being “registered with the CFTC in any capacity.” The company “has disregarded federal laws essential to the integrity and vitality of the US financial markets,” the complaint said.
The filing noted that Zhao had avoided designating a corporate headquarters for Binance and cited an internal presentation by Zhao explaining that his refusal to say where Binance was based helped it avoid scrutiny from any particular country’s legal authorities.
The lawsuit appears to be an attempt by the CFTC to assert its authority over the crypto trading world while in something of a competition with the Securities and Exchange Commission. The SEC has particularly been active in bringing enforcement actions against crypto firms for not registering digital assets as investment products before offering them to sale to the public.
Recently, Coinbase, a US regulated crypto exchange, said it had received an official notification from the SEC that the agency was planning on bringing an enforcement action against the company.
The SEC declined to comment on Binance.
The CFTC said that Binance had 60 employees in the United States and was continuing to hire. It said the exchange had recruited US customers by relying on what the company called “Binance Angels” to do its bidding. The lawsuit said the company’s US recruiters were compensated for their efforts by receiving benefits “such as invitations to events and Binance swag.”
The regulator said that about 19 per cent of Binance’s trading revenue had come from US customers.
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