Breaking: CFTC sues Binance and CZ for US regulatory violations

By: Dickson Arinze

March 27, 2023 8:25 PM

Alledge violations of trading and derivatives regulations have been leveled against the cryptocurrency exchange and its founder, Changpeng Zhao.

According to Bloomberg, Binance and CEO Changpeng "CZ" Zhao are being sued by the United States Commodities Futures Trading Commission (CFTC) for trading violations. The lawsuit was lodged in American courts. Superior Court of Illinois for the Northern District.

The Commodity Futures Trading Commission (CFTC) alleges that Binance did not comply with its regulatory requirements by failing to register with the derivatives regulator. The CFTC has been looking into the cryptocurrency exchange since 2021. In February, the exchange admitted that it was already cooperating with U.S. regulators in anticipation of potential regulatory action.

Binance has been scrutinized for its compliance with Anti-Money Laundering regulations by the IRS and federal prosecutors, in addition to the Commodity Futures Trading Commission. Meanwhile, the SEC is looking into whether Binance actually did facilitate access to unregistered securities by U.S. traders.

Binance has the highest daily trading volume, at over $8.5 billion.

Since the news, the price of Bitcoin (BTC) has dropped sharply, from $27,781 at 13:45 UTC to $26,755 in just over an hour and a half.

The lawsuit alleges that since at least 2019, Binance processed Bitcoin, Ether, and Litecoin transactions for U.S. people despite the exchange's policy of barring or restricting U.S. consumers. The lawsuit claims that the corporation and its management knowingly broke American law in the following ways:

"During this whole time, Binance, Zhao, and Lim, the platform's former Chief Compliance Officer ("CCO"), have each known that Binance was subject to registration and regulatory requirements under U.S. law since Binance actively sought clients in the United States."

To "keep countries free [of violations of law]" by "not landing.com anywhere," according to an internal Binance memo included in the suit, Binance hid the location of its executive offices and the "identities and locations of the businesses operating the trading platform." For this very reason,.com domain names are currently unusable.

According to the CFTC's lawsuit, Binance has hired at least 60 workers in the United States "and that number continues to climb." Patents and trademarks in the United States are also owned by it. In 2019, Binance opened its Binance.US branch.

The Commodity Futures Trading Commission (CFTC) has filed a complaint against Binance, alleging that the exchange failed to register with the CFTC and committed violations of the Commodities Exchange Act and CFTC regulations, such as failing to implement Anti-Money Laundering and Know Your Customer (AML/KYC) controls as required by law.

Additionally, the defendants failed to appropriately monitor the company's activities and knowingly engaged in activities outside of the United States in an effort to dodge U.S. jurisdiction. Commodities Exchange Act and engaged in other deceptive practices in order to avoid oversight:

"Even after receiving document requests from the CFTC and apparently distributing document preservation alerts to its workers, Zhao and others acting on behalf of Binance have used Signal—with its auto-delete option enabled—to engage in business discussions."

The suits claim that Binance "traded on its own platform through approximately 300 'house accounts' that are all directly or indirectly owned by Zhao" and that the company also "offered leverage to customers trading on the spot market" and that it referred to two categories of its products as "futures" and swaps. Customers were unaware of this action because it was not disclosed by Binance.

Christopher Perkins, a member of the CFTC's Global Markets Advisory Council, said in a statement:

"It's too soon to comment on the CFTC's case against Binance, but we continue to back principles-based regulation of the whole cryptocurrency sector."

Seven charges are being brought by the CFTC: failure to register as a Futures Commission Merchant, Designated Contract Market, or Swap Execution Facility; execution of unregistered futures transactions; provision of illegal commodities options; failure to supervise diligently; failure to implement anti-money laundering and know-your-customer measures; and evasion of law.