- March 27, 2023
- 7 minutes read
U.S. CFTC Sue Binance, CEO Zhao For Breaking Trading Laws
Endless lawsuits and alleged law-breaking are the order of the day in the crypto sector. This time, the target of…
Endless lawsuits and alleged law-breaking are the order of the day in the crypto sector. This time, the target of a government lawsuit is Binance, the world’s biggest cryptocurrency exchange, and its founder/chief executive Changpeng Zhao.
The U.S. Commodity Futures Trading Commission (CFTC) has filed a civil lawsuit against Binance and its CEO Zhao, alleging that the company willfully violated trading laws under Zhao’s watch. Samuel Lim, Binance’s former chief compliance offer, was also charged with aiding and abetting the company’s violations.
- The CFTC alleges that Binance, Zhao, and Lim oversaw numerous violations of the Commodity Exchange Act and CFTC regulations. The crux of the lawsuit is Binance offering derivatives trading products to U.S. customers without registering with the CFTC as required.
- According to the CFTC, Binance solicited U.S. customers for derivatives trading without adhering to the country’s regulatory requirements, including those “designed to prevent and detect money laundering and terrorism financing”. The agency claims that Binance continued to court U.S.-based customers to trade derivatives products despite publicly stating its intent to “block” or “restrict” customers located in the country.
According to the CFTC, Binance earned $63mn in derivatives trading fees in August 2020 when 16% of the accounts were held by U.S.-based customers. By May 2021, monthly revenue from derivatives trading had surged to $1.1bn.
The Lawsuit In Simple Terms
According to the Commodity Exchange Act (CEA) passed by the U.S. government in 1936 and amended several times, any company offering derivatives trading products to U.S. customers must register with the CFTC. Publicly, Binance claimed to not allow derivatives trading for U.S. customers, but the CFTC claims that the company solicited American customers covertly and provided guidance to select “VIP” clients on how to evade compliance controls.
The CFTC alleges that Binance, Zhao, and Lim knowingly violated U.S. laws and engaged in several schemes to cover their tracks. For instance, the company launched a separate exchange for American customers called Binance.US in September 2019, and this exchange did not allow derivatives trading.
After launching Binance.US, Binance said it had begun blocking American users from using its main exchange and instead urged them to switch to Binance.US. But, the CFTC claims that the main Binance platform did not actually block U.S.-based IP addresses from logging in, but rather asked them to self-certify that they were not U.S. residents.
According to the CFTC, Binance’s officers, employees, and agents have acknowledged that the company facilitated “potentially illegal” activities, including one case where ex-compliance chief Samuel Lim allegedly said; “Like come on. They are here for crime” and that “we see the bad, but we close 2 eyes.”.
The list of complaints is long, but the crux of the lawsuit is that Binance willfully violated CFTC laws.
- “For years, Binance knew they were violating CFTC rules, working actively to both keep the money flowing and avoid compliance,” CFTC Chairman Rostin Behnam said in a press 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.”
What Does This Indicate For Binance?
Binance is the undisputed king of the cryptocurrency sector. Founded in July 2017, the centralized exchange grew rapidly to process trillions of dollars in trades and reportedly earned over $20bn in revenue in 2021 at the height of the crypto boom. It appears that the company abided by the ethos of “move fast and break things”, but that can cause a lot of problems when you’re involved in moving money across the globe.
The CFTC’s case is Binance’s first major brush with U.S. authorities, and it’s possible that there’s more to come. According to a Reuters report in December 2022, the U.S. Justice Department already had Binance in its crosshairs, with at least half-a-dozen federal prosecutors believing that there was enough evidence to file criminal charges against Binance executives including CEO Zhao.
In March 2023, an official of the U.S. Securities and Exchange Commission (SEC) said that staff at the agency believed Binance.US was operating an unregistered securities exchange. No formal case has been filed by the SEC or Justice Department, and it’s unclear if that will happen. But, there’s a possibility given that the CFTC has made the first move.
- Binance is allowed to defend its case in court against the CFTC or reach a settlement. Consequences can include monetary penalties and agreements to refrain from violating future laws. A similar case was filed against Bitcoin derivatives exchange BitMEX, which resulted in a $100mn fine for the company and $10mn each for the three founders.
- The BitMEX founders were also criminally charged by the U.S. Justice Department and got a mix of monetary penalties, probation, and home confinement but no prison time.