A US financial regulator has accused Binance and its chief executive Changpeng Zhao of operating illegally in the country, in a lawsuit that seeks fines and an injunction against the world’s largest crypto trading exchange.
The Commodity Futures Trading Commission alleged in a civil complaint filed on Monday that much of Binance’s reported trading volume and profitability have come from “extensive solicitation of and access to” US customers, contradicting the exchange’s claims.
“Binance’s solicitation of customers located in the United States subjected Binance to registration and regulatory requirements under US law. But Binance, Zhao, and Lim have all chosen to ignore those requirements,” the CFTC’s complaint said.
The lawsuit, filed in a federal court in Chicago, is the latest flashpoint between the crypto exchange and US regulators. Parent company Binance Holdings — which is mentioned in the CFTC’s lawsuit — is a Cayman Islands entity that acts as a holding company for the group’s offshore trading platform. The company says it has no formal headquarters and does not serve US customers.
“Today’s enforcement action demonstrates that there is no location, or claimed lack of location, that will prevent the CFTC from protecting American investors,” said Rostin Behnam, the regulator’s chair. “For years, Binance knew they were violating CFTC rules, working actively to both keep the money flowing and avoid compliance.”
Binance called the CFTC complaint “unexpected and disappointing”.
“We have made significant investments over the past two years to ensure we do not have US users active on our platform,” the exchange said.
Following the CFTC’s filing, Zhao wrote “4” on Twitter, a code to his followers instructing them to ignore “fake news” and “attacks”.
The CFTC in its complaint cited internal communications that it said showed Binance knew the platform facilitated potentially illegal activities.
According to the complaint, in one instance in 2019, Binance received information “regarding Hamas transactions”. A Binance employee allegedly dismissed the risk, saying: “Can barely buy an AK-47 with 600 bucks.”
In 2020, according to the complaint, a Binance executive said in a chat message that certain customers, including some from Russia, were “here for crime”. A colleague allegedly replied: “We see the bad, but we close two eyes.”
Zhao and Binance’s senior management “have actively facilitated violations of US law”, the CFTC alleged, including by instructing customers in the US to evade the company’s “purported” compliance controls by directing them to use virtual private networks to shield their location. As of June 2020 — a year after imposing new controls — 17.8 per cent of Binance customers were located in the US, the complaint said.
The regulator also accused Samuel Lim, Binance’s former chief compliance officer, of aiding and abetting the alleged violations.
In 2019, Lim told Zhao that a “huge number” of customers in a particular Binance category “could be US citizens in reality. They have to get smarter and VPN through non-US IP”, according to a chat message quoted in the CFTC complaint.
The CFTC is seeking remedies including monetary penalties, registration and trading bans as well as disgorgement and a permanent injunction against further violations.
Earlier this year US financial crime watchdog FinCEN listed Binance as a counterparty to Bitzlato, another crypto exchange whose founder was charged with transmitting more than $700mn in illicit cryptocurrency funds that fell foul of US money-laundering regulations.
The US Securities and Exchange Commission has also opposed the proposed acquisition by Binance’s US affiliate of the assets of US-based Voyager Digital, a crypto lender that fell into bankruptcy last year.
