Key Takeaways:
- CFTC alleged Binance broke US derivatives rules.
- The regulatory body is the latest to investigate Binance’s activities.
NEW DELHI (CoinChapter.com) — The world’s largest centralized cryptocurrency exchange, Binance, became the latest target of the US government. The Commodity Futures Trading Commission (CFTC) filed a lawsuit alleging Binance and its CEO, Changpeng ‘CZ’ Zhao, repeatedly broke US derivatives rules.
In another blow to the exchange, the US government “temporarily” halted the sale of bankrupt crypto lender Voyager Digital Ltd. to Binance. The deal was worth $1.3 billion. The decision would hurt Voyager’s hopes of exiting bankruptcy and repaying its customers since filing for Chapter 11 bankruptcy in 2022.
It seems likely that the government appealed for a halt in proceedings in light of the lawsuit that CFTC slapped on Binance. However, Voyager’s creditor committee, which oversees the customers’ interests in the bankruptcy, stated that it would continue to “aggressively oppose the Government’s efforts.”
Binance’s Compliance Efforts A Sham- CFTC
Meanwhile, CFTC stated that Binance, its CEO CZ, and former Chief Compliance Officer Samuel Lim were complicit in skirting rules, helping customers evade compliance laws, and putting up a compliance plan “just for show.“
The lawsuit, filed in a federal court in Chicago, states that Binance should have registered with CFTC.
CFTC plans to seek severe penalties against Binance, including a permanent trading and registration ban.
“For years, Binance knew they were violating CFTC rules, working actively to both keep the money flowing and avoid compliance. This should be a warning to anyone in the digital asset world that the CFTC will not tolerate willful avoidance of U.S. law.“
CFTC Chairman Rostin Behnam said in a statement.
Since the CFTC is a civil body, it cannot file criminal charges against firms. But, the regulatory body can levy hefty fines and other penalties.
US Trading Firms Working With Binance
Trading Firm A
The complaint alleged that three US trading desks were involved with Binance. Furthermore, CFTC stated Binance helped the trading firms, identified as Trading Firm A, Trading Firm B, and Trading Firm C, to evade compliance controls.
Firm A, a Chicago-based firm, accessed Binance through VPNs to avoid Binance’s IP address-based compliance controls.
Moreover, the firm benefitted from its status as a VIP customer, which allowed Firm A “lower latency access” to Binance’s matching engine.
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Earlier, the firm used Binance with an account registered under the name of one of its executives. However, Binance advised Firm A to switch KYC, and the firm opened a new account in the name of a “wholly-owned subsidiary incorporated in the Cayman Islands.”
In December 2020, the firm again opened a new account in the name of a Netherlands shell entity after being identified as a US person. Finally, around Jan 2022, Firm A started discussions with ‘Prime Broker B‘ after the exchange banned the firm from trading derivatives on the exchange.
Broker B allegedly allowed Firm A “direct exchange access” to Binance.
Trading Firm B
CFTC stated that Trading Firm B, headquartered in New York, was one of Binance’s largest customers. The firm has been a VIP member and received benefits such as low latency connection to the exchange’s matching engines.
In Feb 2020, Binance advised Firm B to move the account to “their HK [Hong Kong] legal entity.”
Instead, Firm B chose to use the personal account of a UK resident employee. Later in September 2020, Trading Firm B requested Binance to transfer its VIP status to the personal account, which the exchange accepted.
In 2022, Binance verified the firm’s corporate account for trading, which a Jersey-based shell company held. Later, the exchange swapped the name on Firm B’s account with the name of the Jersey nominee with all the included benefits.
Trading Firm C
Another New York-based firm, identified as Trading Firm C, conducted its trading activity on Binance through at least 15 independent teams. The firm’s CEO was also in direct communication with Zhao.
Firm C started trading through an account in the name of a Singapore-incorporated subsidiary. Later, the firm migrated its trading activity to an account held by a Cayman Islands-based entity.
Trading Firm C informed Binance that it retained all economic interest in the account through the Cayman Islands entity.
Binance’s Alleged Crimes
CFTC claimed that the exchange and its executives actively worked to skirt the US compliance laws, making superficial efforts to limit trading by US customers. In addition, the regulatory body alleged that Binance failed to implement effective KYC procedures.
Moreover, CFTC highlighted a loophole that Binance exploited, allowing customers to transact without KYC procedures “as long as the customer withdrew less than the value of two BTC in one day.”
Meanwhile, the lawsuit included several emails and chats between Lim and other Binance employees. The records stated that Lim deliberately and repeatedly guided customers to outsmart compliance controls through VPNs and other methods.
Furthermore, the lawsuit included an internal discussion illustrating Binance tolerated shady customers. A discussion in the lawsuit indicated an employee had brought certain transactions to Lim’s attention, suggesting they were “closely associated with illicit activity.”
Interestingly, Lim allowed the customer to open a new account to continue trading on the platform.
CFTC alleged that CEO Zhao operated the exchange without oversight, stating, “Zhao answers to no one but himself.”
Not A First For CFTC
The action against Binance was not a first for CFTC. Between Jan 1, 2015, and Jun 30, 2020, CFTC brought 19 enforcement actions against virtual currency market participants. Firms that CFTC took action against included Venture Capital Investments, My Big Coin Pay, Fintech Investment Group, etc.
Most of the allegations against the defendants included alleged fraudulent schemes, misleading investors, and Ponzi-like schemes.
Furthermore, in FY 2022, 20% of all enforcement actions were related to digital assets. For example, the Commission charged Digitex Futures with illegally offering futures transactions and manipulating Digitex Futures’ native token.
Crypto exchange Bitfinex also came in CFTC crosshairs in 2022 as the regulatory body alleged the exchange was engaged in illegal retail commodity transactions. In addition, the Commission slapped Tether with a $41 million penalty for making untrue and misleading statements regarding the USDT stablecoin.
In Sept 2022, the CFTC took action against a DAO for the first time. The regulatory body alleged that certain automated crypto transactions by the DAO violated compliance laws.
The Commission stated that it would consider the nature of the digital asset transactions rather than the form of DAO to determine if a firm is breaking any commodities or derivatives laws.
